Sunday 4 December 2016

Sterling hits seven-year low over UK vote fears

Published 25/02/2016 | 02:30

The aftermath of Prime Minister David Cameron's announcement of a June 23 referendum on 'Brexit' has driven the worst three days for the world's fourth most traded currency since the depths of the financial crisis in 2009
The aftermath of Prime Minister David Cameron's announcement of a June 23 referendum on 'Brexit' has driven the worst three days for the world's fourth most traded currency since the depths of the financial crisis in 2009

Sterling sank to a seven-year low yesterday as companies and investors rushed to insure themselves against the chances of a British exit from the European Union that HSBC said could knock off a fifth of the value of pound.

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The aftermath of Prime Minister David Cameron's announcement of a June 23 referendum on 'Brexit' has driven the worst three days for the world's fourth most traded currency since the depths of the financial crisis in 2009.

Another wave of selling in London yesterday morning drove it to less than $1.39, within 4 cents of levels not seen since it sank to parity to the dollar in the mid-1980s.

Britain's biggest bank, HSBC, warned that sterling could lose up to 20pc of its value against the dollar and UK economic growth could be up to 1.5 percentage points lower next year if Britons vote to leave the European Union.

The hit to growth could be even more severe if the Bank of England raises interest rates to counter the sharp fall in sterling, HSBC added.

"There are very few people willing to take the other side of the move lower," said Josh O'Byrne, a strategist at Citi.

"Knowing now that the vote will be in June, there is a greater incentive for those that haven't hedged GBP exposure to do so."

The latest poll showed the "In" camp only narrowly ahead at 51pc, versus 39 percent for "Out", with 10pc undecided. Other polls have been even closer.

Sterling fell to $1.3878 with analysts saying the 2009 low of against the dollar a real prospect. It fell 0.6pc to its weakest in 16 months against the euro.

The cost of currency derivatives, which allow companies, big institutional investors and hedge funds to protect future revenues, jumped to their highest in more than four years.

Analysts at Investec said they continue to believe that a so-called Brexit will not happen, in which case, sterling should strengthen again after the referendum on June 23.

"If we're wrong, the uncertainty that a decision to leave would generate would clearly hurt many Irish exporters and likely lead some firms to defer investment decisions in the short term," one analyst said.

"In the longer-term, the enduring impact of Brexit on Ireland will be likely framed by the trading relationship agreed between the UK and the rump-EU.

"In the near term, we would likely see more downside pressure on sterling, which would be negative for Irish exporters to the UK."

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