Pound's Rally If Voters Reject `Brexit' Predicted to Be Fleeting

  • Pioneer, Julius Baer see maximum 4% jump on vote to stay in EU
  • Options traders are the most bearish on pound since data began

Don’t bank on a sustained rally in the pound if the U.K. votes to remain in the European Union.

That’s the view of an increasing number of strategists and investors who point to other reasons for the U.K. currency to stay weak, from the nation’s record current-account deficit to speculation interest rates will stay low for the foreseeable future.

The pound has already fallen more than 3 percent versus the dollar this year, the most among 16 major peers tracked by Bloomberg, amid doubts about Britain’s membership of the world’s largest single market. Pioneer Investments, which predicted sterling’s slide in the second half of 2015, and Julius Baer Group Ltd., the second most-accurate currency forecaster, see a bounce of no more than 4 percent after a “remain” vote on June 23, and for any gains to quickly evaporate.

“If the referendum says we stay in the EU, then we think the reward for the pound, or the support for the pound, will be very muted,” said David Kohl, the head of foreign-exchange research at Julius Baer in Frankfurt. “A week after the referendum, it will be quickly forgotten as you maintain the status quo. The downside is very high.”

Kohl sees the pound rallying by between 1 percent and 3 percent after a vote to remain, followed by a drop to $1.36 within a week. It will end the year at $1.37, he forecasts, down almost 4 percent from its level of $1.4217 as of 10:25 a.m. New York time.

Sterling ‘Disaster’

With opinion polls showing as many as one in three people undecided about how to vote in the referendum, the pound’s value is on a knife edge. A ComRes/FXCompared survey last month showed most Britons are worried about the effect on the currency. And the pound has even become a campaign weapon, with pro-Europeans citing a potential crash in the exchange rate in their campaign literature.

QuickTake Will Britain Leave the EU?

Sterling has dropped even more against other currencies, and on a trade-weighted basis is down almost 7 percent in 2016 to close to the lowest in 2 1/2 years.

A decision to leave the EU would lead to “a short-term disaster and long-term damage” for the pound, Manuel Andersch, a Munich-based strategist at Bayerische Landesbank, told Bloomberg TV’s “The Pulse” last week. His bank beat Julius Baer to the top spot in Bloomberg’s first-quarter currency rankings.

Most Bearish

Options prices suggest traders are more pessimistic about sterling than any of its Group-of-10 peers -- not just in the wake of the June referendum, but over the next year.

The net cost of three-month contracts hedging against sterling losses increased this week to 4.7 percentage points, the most since Bloomberg began compiling the risk-reversals data in 2003. There are similar premiums for protection over six and 12 months.

“On a ‘Brexit’ announcement, a 20 percent move by the pound is very achievable,” said Paul Lambert, the London-based head of currencies at Insight Investment Management Ltd., a Bank of New York Mellon Corp. unit that manages about $540 billion. “If we vote to stay in, then it’ll be a function of the extent to which the Bank of England” starts to sound more hawkish about rate increases, he said.

Other Problems

A vote to remain in the EU would bring forward expectations of a currency-boosting rate increase, but only to the first quarter of 2018, Bloomberg Intelligence economists estimate.

And the U.K. economy, and its currency, face other challenges. Britain’s current-account deficit widened to 7 percent of gross domestic product in the fourth quarter, the most ever, which may dent sterling’s traditional appeal as a haven. The International Monetary Fund cut its U.K. growth forecast on Tuesday, warning of “severe” damage to the world economy if the nation quits the EU.

Pioneer Investments, which oversees $243 billion, foresaw the slide in the pound almost a year ago, when it recommended selling sterling until it fell to $1.45 -- a level it eventually reached in January. Now, it predicts a rally of 3 percent to 4 percent immediately after a remain vote, before a retreat to end the year at about $1.40.

“The uncertainty will keep the BOE on hold,” said Andreas Koenig, the head of European foreign exchange at Pioneer in Dublin. “It’s difficult to find a very positive environment for sterling.”

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