Angst over Brexit leaves almost no major currency untouched

June 20: Brexit stresses are seeping into virtually every cornerof theglobalforeignexchange 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 neighbours 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 internationalised 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 riskoff trigger that’s big enough, there tends to be contagion— it’s just the way it is,” said John Hardy, Denmark-based head of foreignexchange strategy at Saxo Bank, who in February warned about the risks the vote posed for the euro. Following a sterling surge on Monday, his prediction puts the UK currency more than 4% weaker by year-end at $1.40.

“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 safehaven-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 June 23 referendum suddenly hove into view, accompanied by a series of opinion polls which, for the first time, showed the “Leave” camp consistently ahead.

By Monday, surveys signaled the “Remain” campaign was regaining momentum, sending the pound to its biggest advance since the financial crisis and spurring a global rally in higher-yielding currencies.

Among the 16 major currencies tracked by Bloomberg, 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.

“We saw this move of people being more prepared when we saw this flip in the polls” toward a “Leave” result, said Ulrich Leuchtmann, Frankfurt-based head of currency strategy at Commerzbank AG. A Brexit vote “would create pressure on all the less-liquid currencies like the Swedish krona, Norwegian krone and the easter n European currencies.”

Leuchtmann, who sees the pound ending the year at $1.47, said in an interview Wednesday that he hadn’t fielded a single client query that day that wasn’t related to Brexit. Sterling climbed 2 percent on Monday to $1.4638 as of 11 a.m. in London -- the biggest gain since December 2008. Bloomberg