Pound’s slide seen as prelude to more declines

Bloomberg

After the pound’s worst week since Britain’s 2009 recession, traders are betting there’s more pain to come.
Sterling plunged 3.8 percent versus the dollar this week after the referendum on Britain’s European Union membership was set for June 23. The cost of six-month options suggests traders are the most bearish on the U.K. currency since 2010.
“It’s difficult for the pound to make any headway at all — unbalanced growth, a trade and current-account deficit and the headwinds of Brexit,” said Gavin Friend, a strategist at National Australia Bank Ltd. in London. “We can easily see cable between $1.30 and $1.35 prior to June 23. You would be expecting sterling to come a bit lower on a trade-weighted basis as” markets also continue to price out an interest-rate increase by the Bank of England.
The pound dropped between 2 percent and almost 6 percent against each of its Group-of-10 peers this week amid concern a vote to quit the EU would repel foreign investment needed to support the U.K.’s current-account deficit. Economists surveyed by Bloomberg predicted that, if Britain voted to leave the world’s largest single market, sterling would fall to lows against the dollar last seen in the 1980s. The pound’s 3.8 percent drop in the week brought it to $1.3864 as of 5:15 p.m. Friday in London. It reached $1.3854, the lowest level since March 18, 2009. The U.K. currency weakened 1.9 percent to 78.80 pence per euro since Feb. 19.

Declines Accelerated
While the referendum has accelerated the pound’s declines, the currency had been falling versus the dollar since the middle of last year, leading into the Federal Reserve raising interest rates in December. Signs of a slowdown in global growth and low inflation have also undercut the pound, as they helped hold back the BOE from tightening monetary policy.
The central bank’s governor, Mark Carney, warned his peers against getting enmeshed in a currency war by pushing interest rates too low, saying targeting weaker exchange rates only causes problems for the world economy.

Price Swings
For the pound, traders are bracing for more declines and greater price swings. Risk-reversals show the premium for options protecting against a decline in the U.K. currency in six months versus the dollar, compared with those insuring against an increase, reached as much as 3.8 percentage points, the most since 2010.
The same measure for three month options, which cover part of the run-up to the referendum, reached 1.72 percentage points, the most since May.
Sterling “can travel a long way in a crisis,” Bank of New York Mellon Corp. strategist Simon Derrick said this week.