Pound Volatility Intensifies for Sixth Week as Brexit Vote Nears

Trader expectations for price swings in the pound climbed for a sixth week to a fresh seven-year high as anxiety about a potential British exit from the European Union gripped investors.

The gauge of one-month volatility goes beyond the June 23 referendum to encompass the aftermath of the vote. Sterling headed for its second weekly decline versus the dollar with less than two weeks before the U.K. decides on whether to remain in the world’s biggest single market. 

The pound tumbled as much as 1.1 percent on June 6 after polls signaled a lead for voters who support leaving the 28-nation bloc. It climbed as much as 1.5 percent the following day as later polls suggested more support for the ‘Remain’ camp and amid speculation a mistyped transaction had triggered automatic orders to avoid losses.

“The day of the vote and results is not likely to be the end of the volatility,” said John Goldie, a senior dealer at Argentex LLP, a currency advisory company in London. “Regardless of outcome, there will likely be a sharp move in rates followed by a period where markets are finding their new normal. The volatility won’t disappear overnight.”

Sterling was little changed at $1.4445 as of 10:04 a.m. in London, having declined 0.5 percent this week. The U.K. currency was at 78.25 pence per euro.

Brexit Risk

The risk of a so-called Brexit is prompting speculation that major central banks are delaying policy changes until after the June 23 vote -- either to avoid tightening prematurely, in the case of the Federal Reserve, or to keep stimulus available should it be needed later, as with the European Central Bank. Fed Chair Janet Yellen warned this week a Brexit would have “significant economic repercussions,” a concern echoed by counterparts including Reserve Bank of India Governor Raghuram Rajan.

“Volatility staying high means it’s not just Brexit itself but the fallout from the vote that markets are looking at,” said Masashi Murata, a vice president at Brown Brothers Harriman & Co. in Tokyo. “The ECB will likely pump in cash if there is a Brexit.”Implied 

Worst Performer

The pound has been a gauge of sentiment throughout the referendum debate. It slid to a seven-year low of $1.3836 in February, and remains the worst-performing Group-of-10 currency this year.

A measure of three-month pound-dollar volatility climbed to 15.82 percent. It reached 16.40 percent in April, the highest since 2010.

Volatility beyond the referendum is still high as traders assume “that a Brexit vote would not just bring a very short-term shock but ongoing weakness,” said Steven Barrow, head of G-10 strategy at Standard Bank Group Ltd. in London. “While, if ‘Remain’ wins, if there’s lots of Brexit hedging to unwind, sterling might not just ratchet higher but continue to rise for weeks, possibly months, as the hedges come off.”
source: Bloomberg