The pound fell to an eight-week low today while the cost of hedging against big swings in its exchange rate against the euro over the coming month hit a record high, this happens with 48 hours remaining on Britain voting whether to remain in the European Union.
Betting markets suggest the possibility of the option to remain in the EU is high but some recent polls have shown a lead in the Brexit option, causing anxiety amongst investors.
The “volatility index” – a measure of investors’ uncertainty – has hit levels last seen in the 2008 financial crisis.
The pound was down 0.2% against the dollar at $1.4226. Against the euro, sterling was down 0.6% at €1.2605 and weakened by 1 % against the Japanese yen to just over 151.
A senior analyst at IronFX Global, Charalambos Pissouros expected that incoming polls would move the pound more aggressively than before. If the new polls continue to show a tight race between the two campaigns as the voting day approaches, resulting in even more uncertainty and thus, volatility in sterling is likely to heighten further.
Hedge funds and asset managers are increasingly seeking to protect their exposure to UK markets through derivatives.
Data suggests speculators are adding to bets against the pound with short positions at their highest in at least three years.
A lot of analysts reckon a vote to leave the EU on June 23 would jolt Britain’s economy and send sterling tumbling by 15-20%, while a vote to stay would be likely to drive the currency sharply higher.
The Brexit issue has dominated the market since late last year, driving a decline of more than 10% in sterling on a trade-weighted basis between the middle of November and the middle of April.
The equivalent sterling / dollar one-month implied volatility rocketed to 28.15 percent, close to its 2008 peak of around 29 percent.
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