Blog

Sterling soars due to weekend polls

• Posted by Shyam Gokani in Uncategorised
• June 20, 2016
• No Comments

Sterling soared 2 percent against the dollar this morning, putting it on track for its biggest one-day gain for more than seven years, as worries eased that Britain might vote to leave the European Union at a June 23 referendum.

Campaigning for the vote resumed on Sunday after a three-day hiatus following the killing of a pro-EU lawmaker. Three opinion polls at the weekend showed the “Remain” camp gained momentum, but the overall picture was still of an evenly split electorate.

Sterling’s volatility diminished as surveys taken after the murder of pro-EU lawmaker Jo Cox showed “Remain” gaining lost ground. A poll from Survation taken June 17-18 for the Mail on Sunday newspaper showed “Remain” backed by 45 percent and “Leave” by 42 percent, reversing positions from Survation’s previous poll. The pound gained at the end of last week after campaigning for this Thursday’s referendum was suspended following Cox’s death.

As bookmakers shifted their odds to reflect about a 25-percent chance of a Brexit on Monday, down from about 40 percent on Thursday, the cost of hedging against big price swings in the exchange rate dropped sharply.

One-week sterling/dollar implied volatility, derived from an option that covers the ballot and the results, fell to about 38 percent, down from a record high of about 50 percent on Friday.

Sterling rose by as much as 2.1 percent to hit a three-week high of $1.4673 before easing to $1.4652, putting it on track for its biggest one-day rise since the volatile depths of the global financial crisis in March 2009.

“The polls have helped reassure the markets in terms of the extent of Brexit risk that needs to be priced,”.

“The momentum has changed, and perhaps this is the first sign of what a lot of the polling experts had been suggesting, which is that the ‘don’t know’ portion was going to be crucial and historically there tends to be a shift towards the status quo in the final days before a referendum – I think that’s what the market is reacting to.”

The Brexit issue has dominated sterling’s movements since late last year, driving a decline of about 8 percent on a trade-weighted basis since mid-November.

Britain’s hefty current account deficit – 7 percent of output in the last quarter of 2015 – makes the economy, and the currency, extra vulnerable to any pull-back in investment flows.

Prime Minister David Cameron entered the final week of campaigning ahead of the referendum with an accusation that his opponents are trying to deceive people into voting to leave. Campaigning had been suspended for two and a half days following Cox’s murder, Sunday saw both sides return to the fray.

A survey by YouGov Plc for the Sunday Times, a third of which was conducted before the attack, showed “Remain” at 44 percent and “Leave” with 43 percent. The pollster said it doubted the rise in backing for the EU was tied to Cox’s killing and suggested it may relate more to concerns about what Brexit would mean for the economy.