Home Forex Market News Pound’s Volatility Surges by Most Since 2008 as Scots Vote Looms...

Pound’s Volatility Surges by Most Since 2008 as Scots Vote Looms

A gauge of future price swings for the pound against the dollar jumped by the most in almost six years as a survey showed support for Scottish independence is rising before this month’s referendum.

One-month implied volatility, used to help price derivatives that protect against moves in the exchange rate, surged 21 percent, the biggest increase since October 2008. The U.K. currency weakened against both the dollar and the euro for the first time in five days after the poll by YouGov Plc for the Times and Sun newspapers showed a narrower lead for those favoring remaining part of the U.K.

“There is no doubt that the jitters ahead of the referendum are weighing on the pound, and the latest poll didn’t help,” said Jane Foley, a senior currency strategist at Rabobank International in London. “It creates uncertainty and people are increasing their use of options to protect themselves.”

Implied one-month volatility in sterling against the dollar rose to 6.1775 percent at 1:40 p.m. London time, according to data compiled by Bloomberg, the largest one-day surge since Oct. 24, 2008. It reached 6.35 percent, the highest since March 17.

Until today, currency markets had largely ignored Scotland’s vote on independence, with a three-month measure of implied volatility against the dollar falling the most among Group-of-10 nations in August. While sterling weakened 0.7 percent in the past month, it’s still up 6.9 percent on a one-year basis, according to Bloomberg Correlation-Weighted Indexes that track 10 major currencies.

Sterling Risks

“A yes vote would create both economic and political uncertainty,” said Ian Stannard, head of European foreign-exchange strategy at Morgan Stanley in London. “This could deter foreign investor inflows, and even longer-term foreign direct investment, which have been a major supportive factor for the pound.”

Morgan Stanley estimates that the pound could fall by as much as 10 percent on a trade-weighted basis if Scotland votes for independence.

The U.K. currency fell 0.5 percent today to $1.6526 after sliding to $1.6501 on Aug. 25, the lowest level since March. It weakened 0.5 percent to 79.41 pence per euro.

Latest Poll

Little more than two weeks before the Sept. 18 ballot on independence from the U.K., the “No” vote against independence dropped to 48 percent from 51 percent in the last survey two weeks ago, the YouGov poll showed. That compared with 42 percent who said they’ll vote Yes, up two percentage points. Ten percent said they’ve yet to make up their mind.

Stripping out undecided voters, the poll found 53 percent of respondents would vote against independence and 47 percent in favor. The six-point deficit narrowed from 14 points in the last YouGov poll conducted Aug. 12-15.

The two largest British bookmakers cut the odds for Scotland voting for independence as the gap in opinion polls narrowed. William Hill Plc put the chances of a “yes” vote at 11-4, meaning a bet of four pounds would win 11 pounds plus the return of the stake, reducing the odds from 4-1 last week. A bet on voters rejecting independence gets 1-4. Ladbrokes Plc showed the same odds on its website.

Gilts declined alongside Treasuries and German bunds as stocks and the dollar advanced before data today that analysts forecast will show an expansion in U.S. manufacturing.

Bond Yields

“Yields are up across the board in gilts, bunds, and Treasuries and seem to be part of much better risk appetite to start the post-summer trading, as equities and the U.S. dollar have been bid,” said Richard Kelly, a senior strategist at Toronto-Dominion Bank in London. “It feels like the market is trying to shake off the funk we had over the last month as it worried about poor data.”

The yield on 10-year gilts climbed five basis points, or 0.05 percentage point, to 2.43 percent, the biggest increase in two weeks. The rate on five-year notes increased four basis points to 1.76 percent.

Yields also rose as the Debt Management Office sold 4 billion pounds of gilts maturing in July 2020. The bond drew bids 1.59 times the debt on offer and was sold at a yield of 1.939 percent.

Gilts returned 4.1 percent in the past three months, compared with a 1 percent gain in Treasuries, according to Bloomberg World Bond Indexes. German bonds rose 3.2 percent.

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