HSBC: Do not read too much into what is going on with the pound today

Investors and voters should be careful about reading too much into movements in the pound on Thursday as Britain votes on whether the country should remain in the European Union, and not assume that the way sterling is moving is indicative of the referendum’s outcome.

“We believe that sharp price moves in GBP-USD on the day of the UK referendum will be, at best, merely a noisy signal of the outcome or totally uninformative,” HSBC strategist David Bloom said in a recent note to clients.

The pound has gained around 1.2% so far on Thursday, jumping after an Ipsos Mori poll at 11:00 a.m. BST (6:00 a.m. ET) showed voting intentions of 52%-48% in favour of Remain, following a pattern seen in recent weeks. Largely speaking the pound has rallied when polling data has suggested a Remain win, and dropped sharply when Leave has taken the lead.

Trading on such information on a day when very little tangible about the referendum will be released before polls close — due to reporting restrictions — would be foolish, HSBC argues. “The prudent approach on the day will be to resist the temptation to trade in response to any such price moves as the risk-reward trade-off is likely to be very unappealing.”

HSBC continues (emphasis ours):

The natural inclination of the market will be to ascribe a superhuman ‘wisdom of crowds’ intelligence to such price moves and thus interpret the price action as giving a strong signal of the referendum result. This temptation is likely to be particularly strong in this referendum given the reports of unnamed financial institutions commissioning their own, private, exit polls.

HSBC notes that it sees four key reasons that the pound may move sharply today. They are as follows:

  1. “The private exit polls have produced evidence which, whilst close, appears ‘statistically significant’.”
  2. “The private exit polls have produced overwhelming evidence.”
  3. “The price action has been driven by non-speculative flows.”
  4. “The price action has been driven by speculators; however, these speculators have no extra information and are simply making a call on the referendum outcome.”

“Whilst all four of these options are plausible explanations, only option 2 indicates an attractive trade opportunity. Sadly, this is the least likely of the four options,” HSBC says.

A large number of currency traders seem to be heeding HSBC’s advice on the day, with Jeremy Cook, the Chief Economist and Head of Currency Strategy at World First tweeting earlier: “Sterling liquidity thinner than a slim bag of spaghetti in a hall of mirrors.” The lack of liquidity in the market suggests that traders are having the day off in preparation for a mammoth session once the referendum’s result is confirmed, or at least, are not trading as much as usual.

Exactly what will happen to the pound on either a Leave or a Remain vote is uncertain, though analysis from banks suggests that the pound could drop as much as 15% in the event of a so-called Brexit and rally 5 to 10% in the event of a Remain vote. Sterling has rallied strongly in the past few days on positive polling data for the Remain camp. On Monday the currency gained more than 2.4% against the dollar to have its best single session since October 2008.

Polls across the UK are open until about 10 p.m. local time, and the first results are expected just a couple of hours later. The outcome of the referendum is expected to be clear early on Friday morning. You can follow Business Insider’s Live blog throughout the day.

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