It’s finally here: the day when Britain decides on its 43-year membership of the European Union. And whichever side wins, the pound will be the focus of attention in financial markets around the world.
The U.K. currency may have rallied in four of the past five days, but gauges of the risk of significant declines and price swings are either at, or close to, record highs. The 30 percent drop predicted by Julius Baer Group Ltd. on a Brexit vote -- and even the 20 percent and 11 percent declines foreseen by George Soros and Goldman Sachs Group Inc. -- would count among the very steepest for sterling in U.K. history.
It’s been a year of extremes for the pound, and the past few days have been no exception. Sterling dropped to a two-month low a week ago as polls showed the “Leave” campaign surging ahead, before wiping out its year-to-date loss as pro-Europeans regained the initiative. As for the result due Friday, high-street betting patterns may have suggested a “Remain” result was virtually in the bag, yet recent surveys suggested national opinion was split almost down the middle.
“If we get a vote to leave, the reaction in the pound market will be voracious -- it would be a very, very historic moment for sterling,” said Paul Lambert, London-based head of currencies at Insight Investment Management Ltd., a Bank of New York Mellon Corp. unit that manages about $540 billion. “Liquidity would be the biggest problem in the immediate aftermath. Options markets certainly indicate a move of 20 percent lower in sterling over days and weeks would certainly be possible.”
While recent sterling moves imply Britain will opt to stay in the EU, a “Remain” result would mean a “relief rally” of 3 percent to 4 percent, Lambert said. The last time the U.K. currency rose anything like that much was in October 2008, when it climbed 5 percent over two days.
Prime Minister David Cameron, Bank of England Governor Mark Carney and the International Monetary Fund’s Christine Lagarde are among global leaders to warn about the risks to the U.K. of quitting the EU, which is the world’s biggest single market and buys about half of Britain’s goods and services.
Most economists in a Bloomberg survey earlier this month predicted the pound would fall below $1.35 the day after a “Leave” vote. A plunge of that size on a single day -- 9 percent from Thursday’s level of about $1.48 -- would be the biggest ever, surpassing daily slides seen during the 2008 financial crisis and on Black Wednesday in 1992.
That’s when the U.K. was forced out of Europe’s exchange-rate mechanism, prompting a run that saw the pound fall 30 percent in about five months and making Soros’s reputation. The 85-year-old billionaire money manager said this week sterling may slump more than 20 percent if Britain votes to quit the EU.
Julius Baer, the second most-accurate currency forecaster in Bloomberg’s latest rankings, is even more pessimistic, predicting a drop of about 30 percent after a decision to leave. Goldman Sachs warned clients last week that the pound may fall about 11 percent in trade-weighted terms if an exit vote created similar turmoil to the Lehman Brothers Holdings Inc. collapse.
These declines compares with the 55 percent slide sterling suffered from the end of 1980 through February 1985, shortly before the world’s richest nations signed the Plaza Accord, designed to weaken the dollar and haul the U.S. economy out of a recession.
As Britons head to the voting booths, traders are protecting themselves against violent price swings in the aftermath of the result. Implied one-week volatility for pound-dollar surged to an all-time high of 49.7 percent on June 17 and rose as high as 48.8 percent on Thursday, when overnight volatility also hit a record.
The premium on one-week options to sell sterling versus the dollar, over contracts to sell, jumped to a record 15.5 percentage points on Thursday, data compiled by Bloomberg show. That compares with a 5 percentage-point peak before the 2014 referendum on Scottish independence.
Kei Katayama, a Tokyo-based money manager at Daiwa SB Investments Ltd., which oversees about $50 billion, said his fund increased its sterling positions to "neutral," from “underweight.” He gave his reasoning as the killing of pro-“Remain” lawmaker Jo Cox, and market speculation that it made a vote for the status quo more likely.
“If Brexit happens, the British pound will fall,” said Katayama, predicting a 5 percent to 10 percent drop the day after a vote to leave. “It will be massive.”
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