Pound in worst day since banking crisis as Brexit fears bite

The British pound took a hammering as 'Brexit' looks a little more credible with London Mayor Boris Johnson's vocal support. — File pic
The British pound took a hammering as 'Brexit' looks a little more credible with London Mayor Boris Johnson's vocal support. — File pic

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LONDON, Feb 23 — The pound fell the most since the UK’s 2009 banking crisis after London Mayor Boris Johnson, one of the nation’s most popular politicians, said he’ll campaign for Britain to leave the European Union in a June referendum.

Sterling dropped to its lowest level in almost seven years against the US dollar, and weakened at least one per cent against all its 16 major peers. The move reversed a gain made on Friday when Prime Minister David Cameron secured a deal on membership terms with EU leaders in Brussels.

Gauges of pound volatility versus both the dollar and euro surged to the highest levels since 2011 as Conservative MP Johnson’s backing of a so-called “Brexit” pitted him against the prime minister, who said he would fight to keep Britain in the bloc at the June 23 vote.

“The pound is tumbling after the deal clinched by Prime Minister Cameron at the EU summit failed to alleviate fears about Brexit,” said Valentin Marinov, head of Group-of-10 currency strategy at Credit Agricole SA’s corporate and investment-banking unit in London.

“The fact that prominent members of the Conservative Party announced they will campaign for Britain to leave the EU likely underscored investors’ concerns that Brexit risks could increase from here despite the deal.”

The pound dropped 1.9 per cent to US$1.4126 as of 4.26pm in London, set for the biggest decline since March 2009. It earlier reached US$1.4058, the lowest since March 18 of that year, the day a report showed UK unemployment climbed above two million for the first time since 1997.

Higher volatility

Sterling weakened one per cent to 78.03 pence per euro. Although the announcement of the date removes one aspect of ambiguity for traders, they now face months of polls and campaigning that may boost volatility further.

With traders already pushing back bets on the timing of a Bank of England interest-rate increase, the prospect of Britain leaving the world’s largest single market had been causing further concern, helping push down the pound against all of its Group-of-10 peers this year.

The options market signalled more losses ahead for the pound. The premium for options protecting against a decline in the pound versus the dollar, compared to those insuring against an increase, were the most since 2010, according to six-month risk-reversals.

“Sterling is the one liquid asset to trade views on the outcome,” said Alan Wilde, head of fixed income and currencies at Baring Asset Management in London. “I expect much higher volatility over the next four months and consequently the range sterling may trade, depending on opinion polls and prevailing issues, will be much wider.”

Cameron addressed lawmakers yesterday. Economists at HSBC Holdings Plc, Britain’s largest bank, said the make up of the UK could be called into question if it votes to leave the EU but Scotland or Wales want to stay.

Moody’s Investors Service said a Brexit would be negative for the nation’s credit rating, as the economic costs would outweigh any benefits.

“The pound’s weakness is a product of uncertainty of the UK’s ongoing membership of the union, not the timing of the poll,” said David Page, a senior economist at AXA Investment Managers in London. “Weakness is likely to reflect any increased perception of the likelihood to leave and as such is likely to be a constant feature over the coming months.”

Goldman Sachs Group Inc said earlier this month if Britain quits the EU the pound may fall to US$1.15-US$1.20 — levels last seen in 1985. HSBC said in January a forecast for a jump to US$1.60 by year-end relied on the nation remaining in the 28-member group.

Not all UK assets are suffering from the uncertainty of the referendum. The FTSE 100 Index of stocks climbed 1.5 per cent yesterday. While JPMorgan Chase & Co says an exit would be “quite negative” for the market, it doesn’t expect it to leave.

The bank just turned overweight British equities after being underweight for three years, citing attractive valuations and a lower commodity exposure. Meanwhile UK 10-year government bonds outperformed US Treasuries, advancing for a third day.

While Danske Bank A/S sees the UK staying in the EU, analysts still forecast the pound to depreciate to 80 pence per euro in the next three months, a level not reached since December 2014.

“Even if an exit isn’t likely, uncertainty and concerns about it will continue and weigh on sterling,” said Kengo Suzuki, chief currency strategist at Mizuho Securities Co. in Tokyo.

“On the economic front, there isn’t much to undermine the currency, but the uncertainty over a potential exit will cap sterling, keeping it in a US$1.40 to US$1.50 range.” — Bloomberg

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