Options Most Bearish on Pound Since 2008 Before Scots Referendum

Options traders are stocking up on protection against declines in the pound, reflecting risk they see of a selloff in the British currency should Scotland choose tomorrow to become Europe’s newest nation state.

Traders are the most bearish on sterling versus the euro since the 2008 financial crisis. The pound fell to a nine-month low last week after a poll showed nationalists in the lead for the first time this year. While polls last night showed the anti-independence Better Together group back in the lead, the gap was closing. One-week volatility in the currency jumped to the most since 2010 yesterday.

With voting booths opening tomorrow morning, the question of which currency an independent Scotland would use is weighing on the pound, as there’s no guarantee Britain could count on the new state to pay all its share of the national debt. Prime Minister David Cameron rejects Scottish First Minister Alex Salmond’s preferred option of a currency union.

“If they were to vote for independence I would expect to see the pound weaken fairly sharply because it’s not the end of the uncertainty,” David Stubbs, a global market strategist at JPMorgan Asset Management in London, said in an interview on Bloomberg Television’s “Countdown” with Mark Barton and Caroline Hyde. “It is a currency issue.”

Pound Options

The premium for one-month options to sell sterling against the dollar versus those allowing for purchases reached 3.77 percentage points today, the most since May 2010, the 25-delta risk reversals show. It shrunk to 3.46 percentage points as of 4:01 p.m. London time. The premium that traders are paying for pound put options versus the euro, which likewise rise in value when sterling falls, rose as high as 3.29 percentage points today, the most since December 2008, and retreated to 2.88.

“The risk is greater to the downside on a ‘yes’ than to the upside” on a vote to maintain the union, Kit Juckes, a global strategist at Societe Generale SA in London, wrote in a client note today. That “is reflected in one-month risk-reversals which yesterday reached levels that are even more extreme than in 2008,” he wrote.

Sterling rose for a second day against the dollar today as a report showed U.K. unemployment fell more than economists predicted to the lowest in six years and minutes of the Bank of England’s Sept. 3-4 meeting showed two of the officials in the nine-member Monetary Policy Committee voted to raise the benchmark interest rate from a record low 0.5 percent.

The pound gained 0.1 percent to $1.6300 at 11:28 a.m. in London, and advanced 0.1 percent to 79.54 pence per euro.

When the latest findings were included, a poll of polls compiled by John Curtice, professor of politics at Strathclyde University in Glasgow, put the “no” lead at two percentage points -- 51 percent to 49 percent for the “yes” side. Since dropping to $1.6052 on Sept. 10, the pound has rallied about 1.5 percent as the momentum shifted back to the “no” camp.

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