Pound Sinks Below $1.39 as Traders Brace for More Volatility

One Path of Sterling Depreciation
  • Sterling Holds Three-Day Drop to lowest level since March 2009
  • 29 of 34 economists see drop to $1.35 or below on leave vote

The pound sank below $1.39 for the first time since March 2009 on Wednesday, while a gauge of anxiety in currency markets showed traders are preparing for even more extreme moves.

Options traders are paying the most to protect against price swings in six months’ time compared with historical volatility since Lehman Brothers Holdings Inc. collapsed during the 2008 credit crisis. Twenty-nine out of 34 economists in a Bloomberg survey said the pound will drop to $1.35 or below within a week if the U.K. votes to leave the European Union -- levels last seen in 1985.

“Just above $1.40 was a key support and we broke that,” Daragh Maher, New-York-based head of U.S. currency strategy at HSBC Holdings Plc, said in a Bloomberg Television interview. “The worry factor seems to be building. The market has gotten very short sterling. We have four months to this vote and I don’t think we’re going to have any clarity particularly on the outcome, if the market gets itself even more and more wound up and worried, then sterling will remain tactically vulnerable on the downside.”

Sterling was little changed at $1.3932 as of 7:55 a.m. in Tokyo, after dropping 0.7 percent on Wednesday, when it slid to as low as $1.3879. It was at 79.08 pence per euro from 79.09 in New York, where it touched 79.25, the weakest since December 2014.

The dollar was little changed at $1.1017 per euro and 112.07 yen.

Last week, Prime Minister David Cameron announced a June 23 date for the referendum. Then London Mayor Boris Johnson backed the campaign to leave the EU, and the pound dropped as traders became increasingly concerned about Britain’s health in a post-EU world, including how it would fund a current-account deficit that’s supported by foreign investment. The currency had already been declining amid waning expectations for the Bank of England to raise interest rates.

HSBC Forecast

HSBC said the pound could fall as much as 20 percent if the U.K. exits the EU, while Morgan Stanley sees a smaller drop, to $1.30 by year-end, regardless of the referendum outcome. 

Sterling would move toward parity with the euro in the event on an exit from the world’s-largest single market, HSBC also said.

In the immediate aftermath of a vote to leave, trading in the pound will be very difficult, according to Peter Rosenstreich, head of market strategy at Swissquote Bank SA.

“In the first 48 hours even getting a price on the sterling is going to be difficult, so I think where it actually ends up is still very much up in the air,” he said in a Bloomberg TV interview.

The difference between implied volatility and realized volatility in the pound-dollar exchange rate at the six-month tenor reached its highest level since October 2008 at 5.6 percentage points on Wednesday.

SEB AG said Wednesday that it closed its bet on the pound weakening against the dollar, one of its top trades for 2016, after the currency fell below $1.40. The trade generated a 7 percent profit after the recommendation to sell on Dec. 12, according to a note from Richard Falkenhall, a currency strategist at the bank.

While the pound may fall further against the dollar, the declines won’t be broad-based this year, according to Hamish Pepper, a foreign-exchange strategist at Barclays Plc. On a trade-weighted basis, sterling has fallen to the lowest level since December 2013.

“We are not forecasting any further sterling depreciation on a trade-weighted basis, we’re expecting for there to be an appreciation of the pound in the coming year,” Pepper said. “The weakness against the euro is unjustified. This is beyond a risk that’s just for the U.K., this is a risk for Europe generally.”

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