Brexit angst leaves almost no currency untouched with days to go

A campaigner arranges #Lexit The Left Leave Campaign leaflets on a table in Manchester, UK, on June 11.
A campaigner arranges #Lexit The Left Leave Campaign leaflets on a table in Manchester, UK, on June 11.PHOTO: BLOOMBERG

(Bloomberg) - Brexit stresses are seeping into virtually every corner of the global foreign-exchange market. Of 16 major currencies tracked by Bloomberg, all but three have seen a jump in the cost to hedge against big declines as Britain's referendum on whether to stay in the European Union approaches.

The pound posted the biggest increase, closely followed by its continental neighbors amid speculation a vote on Thursday to leave would encourage other countries to reconsider their own membership.

The jump in options costs is a sign that foreign exchange is reverting to what's known as a risk-on, risk-off market, where moves have less to do with local fundamentals and are more driven by global sentiment.

It also reflects how the UK campaign has become increasingly internationalized in recent days, with policy makers from Japan, Switzerland and the US joining Bank of England Governor Mark Carney in decrying the potential consequences of a Brexit on markets and economies.

"When you have a risk-off trigger that's big enough, there tends to be contagion - it's just the way it is," said John Hardy, the Hellerup, Denmark-based head of foreign-exchange strategy at Saxo Bank A/S, who in February warned about the risks the vote posed for the euro.

He sees sterling ending the year more than 2 per cent weaker at US$1.40.

"The pattern we've established so far will probably intensify" on a vote to leave, Hardy said, "so you'll see the Swiss franc being the strongest from safe-haven-seeking as an immediate reaction, and the euro less so because the questions for Europe will suddenly loom very large."

For most currencies, the jump in options costs began about two weeks ago, when the June 23 referendum suddenly hove into view, accompanied by a series of opinion polls which, for the first time, showed the "Leave" camp consistently ahead.

Some surveys this weekend showed "Remain" with a slight lead. Among the 16 major currencies, the only ones not to have seen an increase in bearish bets are Brazil's real - which has been rallying as the nation overcomes its own political upheavals - the yen and the Swiss franc. These last two are traditional havens, whose costs of hedging losses have tumbled, just as the others' surged to the highest in months or even years.

"We saw this move of people being more prepared when we saw this flip in the polls," said Ulrich Leuchtmann, Frankfurt-based head of currency strategy at Commerzbank AG.

A Brexit vote "would create pressure on all the less-liquid currencies like the Swedish krona, Norwegian krone and the eastern European currencies." Leuchtmann, whose sees the pound rallying to US$1.47 by year- end from about US$1.44 at the end of last week, said in an interview Wednesday that he hadn't fielded a single client query that day that wasn't related to Brexit.

The premium on one-month contracts to sell the pound versus the US dollar over those to buy widened 2.7 percentage points from June 3 to June 14, when it peaked at 8.9 percentage points. That's the biggest premium based on end-of-day prices since Bloomberg started collecting the risk-reversals data in 2003. The gap slipped back to 8 percentage points on Friday.

Sterling is the second-biggest loser among major currencies this year, weakening more than 2 per cent versus the US dollar. The euro posted the next-biggest jump in the premium on bearish options - a 2.2 percentage-point jump to a 4 1/2-year high of 3.3 percentage points last Tuesday.

The pound has been bounced around by opinion polls throughout the referendum campaign, dropping as much as 6.1 per cent year-to-date at the end of February, before briefly wiping out its 2016 decline twice last month as surveys suggested the "Remain" camp was gaining ground.