Pound Tumbles, Volatility Jumps After Polls Show Brexit Momentum 

• ITV poll shows Brexit ahead 45% to 41%; TNS has 43% to 41%
• One-month volatility at seven-year high before June 23 vote

The pound slumped to a three-week low after polls showed more Britons favor exiting the European Union, reviving concern a June 23 referendum will throw global markets into turmoil and undermine confidence in the 28-nation trading bloc.

Sterling weakened against all 10 developed-market peers after two surveys showed more voters were willing to vote to leave the EU than those wishing to stay. A gauge of the currency’s expected swings against the dollar during the next month surged to a seven-year high.

The Bank of England has said uncertainty surrounding the referendum vote is damping U.K. growth, while global institutions including the International Monetary Fund and the Organisation for Economic Cooperation and Development are warning of dire fallout if Britain votes to quit the EU. Federal Reserve Bank of Chicago President Charles Evans said the referendum is undermining confidence in the outlook at a time when the international economy is already losing momentum.

“A ‘Leave’ vote would expose a host of uncertainties,” said Sue Trinh, head of Asian foreign-exchange strategy at Royal Bank of Canada in Hong Kong. “It would be more negative for the euro and the EU since the issue will drag on for other members.”

A YouGov poll for television network ITV found 45 percent would choose ‘Leave,’ compared with 41 percent picking ‘Remain.’ A separate survey by global market research company TNS showed 43 percent for ‘Leave’ and 41 percent for ‘Remain.’

The pound dropped 0.9 percent to $1.4383 as of 6:54 a.m. in London on Monday after sliding to $1.4353, the lowest level since May 16. One-month implied volatility in the pound-dollar pair surged to 21.6 percent, the highest since February 2009.

The pound has been a barometer of sentiment throughout the referendum debate, sliding to a seven-year low of $1.3836 in February before rallying as surveys in May and April showed the ‘Remain’ camp leading.

The euro weakened against the dollar Monday on concern a U.K. exit would damage trade and encourage other members to renegotiate their relationships with the EU. The single currency slid 0.2 percent to $1.1342.

Cameron Pressured

“If a ‘Leave’ vote comes to fruition, the pound is going to get hit very, very hard because of the uncertainty around trade, around foreign direct investment,” said Chris Weston, chief markets strategist in Melbourne at IG Ltd. “You wouldn’t want to be too long euro assets in a Brexit, because, while the pound is the initial proxy to sell, I suspect there are worse risks to Europe longer term.”

The polls increase the pressure on Prime Minister David Cameron in a battle that has split the ruling Conservative Party. Chancellor of the Exchequer George Osborne has stepped up warnings of the economic consequences of a pullout from the EU.

Cameron hit back Monday with a joint letter signed by senior figures from other political parties accusing the Leave campaign of perpetrating an “economic con-trick” on the public. That warning came a day after former Prime Minister John Major took to the airwaves to condemn the “squalid” Brexit campaign and dismissed its most prominent supporter, former London Mayor Boris Johnson, as a “court jester.”

‘Heightened Uncertainty’

A Brexit could lead to a “protracted period of heightened uncertainty,” triggering financial-market volatility and hurting economic output, the Washington-based IMF said in a report last month. It may also erode London’s position as a financial center and cause “sharp” falls in house and equity prices. Uncertainty is already hitting investment and hiring decisions and economic activity, it said.

“I don’t think Brexit will materialize, and the pound may relief rally after the referendum result,” said Jason Wang, chief executive officer of Singapore-based family office Stamford Management Pte. He said he would sell the pound on any rally as the U.K.’s economic and political outlook remains bleak.

The currency is set to recover to $1.47 by the end of the third quarter, according to the median estimate in a Bloomberg survey, more than 2 percent stronger than current levels.

Risk Reversals

The pound is the only currency among the Group of 10 that has weakened against the dollar this year. The premium for one-month contracts protecting against a decline in the sterling versus the dollar, compared with those betting on an advance, surged to 6.7 percentage points last week, the most in risk-reversals data compiled by Bloomberg going back to 2003. The premium was at 6.36 percentage points Monday.

U.K. Defence Secretary Michael Fallon said Saturday Asian defense ministers were also concerned a U.K. departure from the EU would undermine security worldwide. He was speaking in Singapore where he is attending the annual Shangri-La security dialog.

“If there’s any one currency investors may want to go short on besides paring long-dollar positions, that would be sterling,” said Vishnu Varathan, an economist at Mizuho Bank Ltd. in Singapore. “Sterling very much remains on the back foot.”

Source: Bloomberg

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