Sterling near 3-week lows, cost of hedging volatility soars

[LONDON] Sterling edged up from a three-week low against the US dollar on Monday, while the cost of hedging against sharp falls in the coming two months soared, amid a slew of warnings about the impact of a potential Brexit.

Most recent polls ahead of Britain's June 23 referendum on European Union membership show the outcome is still too close to call. The latest telephone poll from ICM showed the "Remain" camp holding an eight-point lead over its "leave" rivals, while an online poll published at the same time put the "leave" camp four points ahead.

And though bookmakers' odds on a Brexit have widened to around 28 per cent, from 32 per cent last week, warnings about the potential impact of a vote to leave have intensified over the past week.

Finance minister George Osborne said on Monday a British vote to leave the EU would constitute "a one-way ticket to a poorer Britain". That followed similarly anti-Brexit comments from the IMF and the Bank of England last week. BOE governor Mark Carney said a vote to leave could spell slower growth, higher inflation and even recession.

Sterling fell to as low as US$1.4333 after Mr Osborne's comments, its weakest since April 22, before recovering to trade at US$1.4408 after the latest polls. That left the pound up 0.3 per cent on the day but around 2 per cent down compared with two weeks ago.

Against the euro, it was 0.2 per cent up at 78.625 pence.

"There remains a sense of complacency on the assumption that voters will 'see the light' and 'do the rational thing' by voting to remain," said Mark Dowding, co-head of Investment Grade Debt at BlueBay Asset Management.

"We are becoming aware that voter turnout rates will likely be much higher amongst potential 'leave' voters than 'remain'voters, meaning there is a risk that the UK could 'sleep-walk'into Brexit with as little as 25 per cent of the voting population actually casting a vote to do so."

BREXIT HEDGING

Options market pricing showed a jump in sterling/US dollar two-month implied volatility to 18.513 per cent, the highest since March 2009.

"Two-month implied vols have been better bid over the past week," said Credit Agricole currency strategist Jennifer Hau.

"That, coupled with lower market liquidity around the referendum date, probably exacerbated the move ... Maybe it's because we're approaching the referendum date." Ms Hau added that she expected sterling/ US dollar one-month implied volatility, which is trading at around 10 per cent, to jump by about 10 percentage points when it rolls into the month covering the referendum next week.

British government bonds modestly outperformed German debt on Monday, with the yield that premium benchmark gilts offer over 10-year Bunds briefly dropping to its lowest since March 23 at 122.7 basis points.

10-year yields fell to their lowest in a month at 1.354 per cent at 0931 GMT, but later in the day were two basis points up on Friday's close at 1.40 per cent.

Mr Carney said on Sunday it was unclear in which direction interest rates would move if Britain voted to leave the EU on June 23, and added that in general he thought it "highly unlikely" that the BOE would cut rates below zero.

REUTERS