Sterling plunges to 2018 lows as Brexit unease builds
LONDON: The pound was engulfed in a heavy selloff yesterday, skidding to its lowest levels against the dollar and euro in almost a year as markets ramped up bets on Britain leaving the EU without an agreement with Brussels.
London-based traders reported a significant increase in investor hedging against a possible freefall in sterling in the event of a ‘no-deal’ Brexit, which could damage the economy by raising trade barriers with the UK’s biggest export market. The exodus began after UK trade minister Liam Fox said on Sunday there was up to a 60 percent chance the country could leave the European Union next March without any new trade deals in place. The currency move has snowballed since.
There was no obvious trigger for yesterday’s big moves lower, but rather a building sense of investor anxiety as the clock ticks down towards a series of EU-Britain meetings starting in September with no agreement in sight.
“What we are seeing is broad sterling weakness, a very aggressive weakening trend,” said Peter Kinsella, strategist at Commonwealth Bank of Australia. Sterling tumbled against the euro, dollar yen and Swiss franc. The slide against the euro, the biggest one-day fall since end-May, left the pound below 90 pence for the first time in nine months.
Three-month sterling implied volatility, a gauge of expected swings in a currency, surged to its highest since March . The vol, as the measure is known, was headed for its biggest one-day jump since November.
Part of the hedging trade was being driven by companies. “A lot of companies can’t wait for the (Brexit) negotiations outcome in October, so of course are trying to hedge against a drop in the pound,” said Christophe Barraud, an economist at Paris-based brokerage Market Securities.
Sterling slumped 0.6 percent versus the euro to 90.175 pence. The pound fell to as low as $1.2859 against the dollar.
No rates rescue
Analysts said the pound was also being hit by a growing realization that, after last week’s Bank of England’s policy meeting, UK interest rate increases were likely to be as limited as one a year and contingent on a smooth Brexit. The BoE raised rates from crisis-era lows last week, but few investors saw the increase as a vote of confidence in the economy with so much political uncertainty ahead.
“Some are thinking in the market that the BoE raised in order to given them ammunition to cut rates in the face of a ‘no deal’,” said Neil Jones, head of hedge fund FX sales at Mizuho Bank. “The next move could be a cut rather than another hike.”
Options markets supported the idea that there would be little relief in the coming months for sterling. — Reuters