One-month sterling volatility — a measure of how much the British pound is expected to fluctuate in the coming month — has hit its highest level of all-time, as currency traders get increasingly jittery about the prospect of Britain voting to leave the European Union.
On Monday, the pound’s volatility against the euro soared to that historic level, reaching 26%, more than the previous all-time high of around 25%, reached during the global financial crisis.
The BPVIX — a key tracker of sterling volatility — has been surging in recent months as traders have become increasingly jittery about the result of the referendum. It has more than tripled since January.
Sterling has been particularly sensitive in recent weeks, frequently moving by 1% or more (a substantial move for a currency) after the release of polling data about voting intentions ahead of the referendum. For instance, the pound has slumped on Monday after polls over the weekend showed the Leave campaign in pole position ahead of next week’s vote. As a result of these moves, the VIX has jumped massively. Here’s how it looks so far in 2016:
Polls and betting patterns show that the likelihood of Brexit is increasing as the referendum date draws closer, and currency traders are among those most worried about the impact of Brexit. If Britain does vote to leave the European Union, predictions about what could happen to the pound have been stark. A survey from Bloomberg, released on Monday, showed that economists expect sterling to drop to between $1.30 to $1.35 after a vote to leave the EU. That would push the pound to its lowest level since 1985.
Furthermore, economists are predicting a single day move of around 8% after Brexit. That would be the biggest single day move in history, far surpassing movements during the financial crisis and on Black Wednesday in 1992, when the British government decided to let the pound float freely.
Bloomberg’s survey isn’t the first predictor of sterling doom post-Brexit, with the Bank of England expecting a big fall in the currency. The scariest prediction we’ve seen so far comes from Joe Rundle, the head of trading at ETX Capital, who told Business Insider his firm is planning for “a 20% fall in Sterling and a 20% rise in dollar, so a 40% move” as soon as a vote for Brexit is confirmed.
As BI reported in May, trading firms like ETX are trying to stop customers making risky trades in the run-up to June’s European Union membership referendum in a bid to ensure firms don’t go out of business if there are wild swings in the market following the result.
Should Britain remain, Bloomberg’s survey suggests that sterling could rally as much as 5%, however, Kathleen Brooks, research director at Gain Capital argues that once the referendum is out of the way, the pound won’t necessarily rally massively:
In the long term, a rebound on the back of a vote to remain within the EU may not materialise in any meaningful sense. The UK’s currency is coming under attack because of a number of things unrelated to the referendum including our large budget deficit and relatively lacklustre economic performance.
The referendum is merely shining a light on the UK economy, warts and all. The spotlight has revealed the UK’s economic weaknesses, which is helping to accelerate the decline in the pound and other UK-based risk assets. This should be worrying for pound bulls, as things may not return to “normal” even if we vote to remain part of the EU.
While the pound will suffer hugely in the aftermath of a Brexit, a recent note from Deutsche Bank argues that the impact of Brexit on UK stocks would be limited, and suggests that stocks in continental Europe would actually suffer more. Here’s what analysts led by Sebastian Raedler said in the note: “In case of a Leave vote, we see around 10% downside for European equities at first (though this could be offset by a swift policy response). We think UK equities are set to outperform Europe in this case, given likely GBP weakness.”