Traders Hold Off Bets in Volatile Market as Results Favor Brexit

  • Sterling heads for biggest drop on record, yen rises past 100
  • ‘There is limited trading going on,’ Mizuho’s Yoshii says

Bond and currency traders are holding off from making large wagers as partial results from Britain’s European Union referendum intensified concerns the U.K. will exit, creating a liquidity drought that’s exaggerating price moves.

As investors navigate a potential Brexit, worsening liquidity means any transaction -- no matter how small -- is hitting the market disproportionately hard. Sterling headed for its biggest drop on record as results from the referendum showed a stronger-than-expected vote for the “Leave” campaign. The currency traded in a range of of more than 15 U.S. cents as Oddschecker put the vote to exit the EU at 93 percent, from 23 percent on Thursday. The yen, a refuge in times of turmoil, surged past 100 per dollar in a few minutes at one point, before reversing direction almost immediately.

“It’s a panic move amid a very thin market with few on the other side of the trade,” said Ayako Sera, a Tokyo-based market strategist at Sumitomo Mitsui Trust Bank Ltd. “Optimism evaporated as the current outcome shows a slight lead in the leave camp.”

U.K. polling indicated a close race and early results from northeast England Friday showed greater support for leaving the EU than academics had forecast. Bank of England officials have warned about the risk of a “Leave” victory for the nation’s economy, while the Federal Reserve left interest rates unchanged last week and cited a potential British exit as a factor in its decision.

‘Very Nervous’

Sterling tumbled 9 percent to $1.3537 as of 12:39 p.m. in Tokyo, after sliding to as low as $1.3466, the weakest level since 1985. Friday’s plunge compares with the 4.1 percent drop on 1992’s Black Wednesday, when the pound was forced out of Europe’s exchange-rate mechanism -- the previous worst daily drop on record.

The yen appreciated to 99.02 per dollar, its strongest in since November 2013, before trading at 101.71.

“While it is too early to tell the result, yen moves are very volatile,” said Tohru Sasaki, JPMorgan Chase & Co.’s Tokyo-based head of Japan market research. “It suggests the market is very nervous about the outcome.”

The lack of liquidity in trading of Malaysia’s ringgit is amplifying price moves, says Angus Salim Amran, Kuala Lumpur-based head of markets at RHB Investment Bank Bhd. The ringgit surged as much as 0.7 percent before tumbling more than 2 percent.

Australia & New Zealand Banking Group Ltd. joined lenders including UBS Group AG and Societe Generale SA in cautioning clients that its ability to provide the usual levels of currency liquidity as well as pricing could be constrained, according to a memo seen by Bloomberg. Chicago Mercantile Exchange Inc. will take “emergency action” to modify price limits on futures contracts “based on the strong likelihood of increased price volatility expected to result” from the vote, it said in a note on its website.

Light Positions

Treasuries surged, adding to the biggest first-half gain for U.S. government securities in six years. The Bloomberg U.S. Treasury Bond Index has returned 3.8 percent so far in 2016, the steepest January-to-June performance since 2010.

Liquidity is thin in the Treasury market, said Hajime Nagata, a bond investor in Tokyo at Diam Co., which manages $165.4 billion.

“Volatility and price movement is very high,” he said. "Market participants’ positions are light. After we see the results, people will move.”