Thursday 29 September 2016

Sterling could fall as much as 20pc against dollar if UK gives green light to Brexit

Goldman Sachs' warning is the starkest indicator as currency plummets, writes Eshe Nelson

Eshe Nelson

Published 28/02/2016 | 02:30

UK Chancellor of the Exchequer George Osborne. Photo: Reuters
UK Chancellor of the Exchequer George Osborne. Photo: Reuters

Sterling headed for its worst week in almost six years as anxiety the UK will leave the European Union pushed the currency to it lowest level since 2009.

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Sterling has tumbled 3pc against the US dollar since last Friday, on course for its worst week since May 2010 when an inconclusive general election led to the formation of the UK's first post-war coalition government. It also approached its weakest level in 14 months versus the euro.

The UK would face a "profound economic shock" if it voted to leave the world's largest single market in the June 23 referendum, Chancellor of the Exchequer George Osborne told the BBC on Friday. The finance chief backs staying part of the EU alongside fellow Conservative, Prime Minister David Cameron.

"Potentially we have four months of political uncertainty which is detrimental to the currency," said Jane Foley, a senior currency strategist at Rabobank International in London.

"There's a perception gaining ground that sterling has a previous history of falling hard on significant momentous political events, so it remains very vulnerable."

While the issue is hurting everything from consumer confidence to the housing market, a Brexit is by no means assured. A study published this week showed most voters are sceptical about the advantages of the bloc, but reluctant to leave.

The pound was little changed at around $1.3968 - having dropped to $1.3879 on Wednesday, the lowest since March 2009. It was at 78.92p per euro, a day after sliding to 79.29 - again, the weakest level since December 2014.

Options markets signal that traders are positioning for a further drop. The premium for contracts protecting against a decline in the pound versus the dollar, compared with those insuring against a rally, widened to 3.8 percentage points on Thursday, the most since May 2010, according to six-month risk-reversals. The rate was 3.7 percentage points on Friday.

"There's a point where you have to decipher whether market pricing of a Brexit has gone too far or not," Nomura International currency strategists Jordan Rochester and Yujiro Goto wrote in a note. "With FX option pricing implying high probabilities of a further 10pc to 15pc fall in pound- dollar, it feels like in the short term we've perhaps reached a peak of 'Brexit Pessimism'."

A level of $1.39 may come to be seen as having been "a good long-term buying opportunity for a country that, in a high likelihood, will vote to stay in the EU," the Nomura analysts wrote.

Sterling is set for weekly losses against each of a group of 31 major world currencies tracked by Bloomberg. The declines haven't gone unnoticed by supporters of remaining in the EU, with one group citing in its campaign material the Goldman Sachs Group warning that sterling may fall by as much as 20pc against the dollar if Britain quits the economic union.

"People postponing investment decisions or consumer spending - that's going to be the real risk as we run into June 23," Jeremy Stretch, the London-based head of foreign-exchange strategy at Canadian Imperial Bank of Commerce, said on Friday. "The UK has a large current-account shortfall that relies on foreign investment inflows. If those inflows are not forthcoming then inevitably that does suggest that sterling will continue to remain under pressure," he said, warning about a "period of instability" in the run-up to the vote.

Bloomberg

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