Currency traders are betting that the pound will fall to record lows against the euro if Britain votes to leave the European Union, eclipsing the drops witnessed during the 2008 crash and the 1992 Black Wednesday crisis.
Brexit stresses are seeping into virtually every corner of the global foreign-exchange market.
Of 16 major currencies tracked by Bloomberg, all but three have seen a jump in the cost to hedge against big declines as Britain’s referendum on whether to stay in the European Union approaches. The pound posted the biggest increase, closely followed by its continental neighbors amid speculation a vote on Thursday to leave would encourage other countries to reconsider their own membership.
The jump in options costs is a sign that foreign exchange is reverting to what’s known as a ‘risk-on, risk-off’ market, where moves have less to do with local fundamentals and are more driven by global sentiment. It also reflects how the UK campaign has become increasingly internationalized in recent days, with policy makers from Japan, Switzerland and the US joining Bank of England Governor Mark Carney in decrying the potential consequences of a Brexit on markets and economies.
“When you have a risk-off trigger that’s big enough, there tends to be contagion – it’s just the way it is,” said John Hardy, Denmark-based head of foreign-exchange strategy at Saxo Bank A/S, who in February warned about the risks the vote posed for the euro. He sees sterling ending the year more than 2 percent weaker at $1.40.
Markets opened today Monday in a risk-on mode, as polls showing the “Remain” campaign gathering momentum spurred the pound toward its steepest advance in three months. The euro also rallied, along with the currencies of Norway, Sweden, Malaysia and South Korea, while the yen retreated.
“The pattern we’ve established so far will probably intensify” on a vote to leave, Hardy said, “so you’ll see the Swiss franc being the strongest from safe-haven-seeking as an immediate reaction, and the euro less so because the questions for Europe will suddenly loom very large.”
For most currencies, the jump in options costs began about two weeks ago, when the 23 June referendum hove into view, accompanied by a series of opinion polls which, for the first time, showed the “Leave” camp consistently ahead. Some surveys this weekend showed “Remain” with a slight lead.
Among the 16 major currencies, the only ones not to have seen an increase in bearish bets are Brazil’s real – which has been rallying as the nation overcomes its own political upheavals – the yen and the Swiss franc. The last two are traditional havens, whose costs of hedging losses have tumbled, just as the others’ surged to the highest in months or even years.
Sterling jumped 1.5 percent to $1.4567 as of 10:20 a.m. in Tokyo. That pared its decline this year to 1.2 percent. It remains the second-worst performer among major currencies. The yen slid 0.6 percent, while the euro surged 0.7 percent. The Swedish and Norwegian currencies each climbed more than 1 percent.
Campaigning on both sides was temporarily suspended at the end of last week after the killing of British MP Jo Cox.
The pound has been bounced around by opinion polls throughout the referendum campaign, dropping as much as 6.1 percent year-to-date at the end of February, before briefly wiping out its 2016 decline twice last month as surveys suggested the “Remain” camp was gaining ground.
Sterling reached a more than two-month low on Thursday -in a week when five polls in 24 hours showed the “Leave” camp pulling ahead. Yet the result remains too close to call.
“We’re seeing risk-off developments in currency markets,” said David Kohl, head of foreign-exchange research in Frankfurt at Julius Baer Group Ltd., the second most-accurate currency forecaster, which predicts a modest sterling rally if the UK remains in the EU. “After a leave vote, you could see a lot of crosses going to parity: euro-franc, probably euro-dollar and even pound-dollar – and that means a 30 percent drop in sterling.”