LONDON, June 20 (Reuters) – Sterling surged by more than 2 percent against a trade-weighted basket of currencies on Monday, its biggest one-day gain in almost eight years, as worries eased that Britain might vote to leave the European Union at a referendum in three days’ time.
Campaigning for the vote resumed on Sunday after a three-day hiatus following the killing of a pro-EU lawmaker. Three opinion polls at the weekend showed the “Remain” camp gained momentum, but the overall picture was still of an evenly split electorate.
As bookmakers shifted their odds to reflect about a 25-percent chance of a Brexit on Monday, down from about 40 percent on Thursday, the cost of hedging against big price swings in the exchange rate dropped sharply.
One-week sterling/dollar implied volatility, derived from an option that covers the ballot and the results, fell to about 38 percent, down from a record high of more than 50 percent on Friday.
The Bank of England’s trade-weighted sterling index soared by 2.3 percent to 87.2 – its biggest rise since the volatile depths of the global financial crisis in October 2008. It had fallen to as low as 84.3 last week after several polls put the “Leave” camp ahead.
“This is really an unwind of what we saw over the past two weeks, where we saw a sharp shift in the polls to ‘Leave’. As the polls have shifted back over the weekend, sterling has responded positively,” said BNP Paribas global head of FX strategy Steven Saywell.
“It’s one game in town at the moment for sterling.”
Sterling rose by as much as 2.4 percent against the dollar to hit a three-week peak of $1.4708, leaving it on track for its biggest one-day rise versus the greenback since December 2008.
The pound also climbed more than 2 percent to hit a 2-1/2-week high of 77.285 pence per euro. That was the biggest gain since March 2009.
“The momentum has changed,” Bank of Tokyo-Mitsubishi UFJ’s European head of global markets research, Derek Halpenny, said. “Historically there tends to be a shift towards the status quo in the final days before a referendum – I think that’s what the market is reacting to.”
STERLING SHORTS CUT
Data from the Commodity Futures Trading Commission released on Friday showed net short positions against sterling were down from a three-year high in the week up to last Tuesday, though sterling was falling then and Brexit fears were on the rise.
“I can’t imagine that in today’s environment there’s a huge amount of speculative appetite going into the vote,” Halpenny added.
The Brexit issue has dominated sterling’s movements since late last year, driving a decline of about 8 percent on a trade-weighted basis since mid-November.
Britain’s hefty current account deficit – 7 percent of output in the last quarter of 2015 – makes the economy, and the currency, extra vulnerable to any pull-back in investment flows.
“Following the large sterling moves over last two days and limited risk premium priced in at this point, sterling now looks more vulnerable to negative surprise from the polls,” ING strategist Petr Krpata wrote in a note to clients.