Things became a bit more difficult for Prime Minister David Cameron as popular London Mayor Boris Johnson came out in support of a potential “Brexit” from the European Union.
The news caused the sterling to fall to its lowest point since 2009.
Patrick Graham of Reuters had the day’s news:
Sterling sank against the dollar on Monday as the defection of London Mayor Boris Johnson to the “Brexit” camp added to concerns that a British departure from the European Union is a real risk.
After a positive reaction to Prime Minister David Cameron’s sealing of an EU deal on Friday with which to fight a referendum on June 23, the move by Johnson along with a handful of other senior ruling Conservatives drove a wave of selling in Asia.
The pound hit a 3-week low against the dollar of $1.4175 as European markets came on line, down 1.5 per cent down on the day. If maintained, that would mark its biggest one-day fall in 11 months.
Sterling also fell sharply against euro, losing around 1 per cent to 78.08 pence per euro..
Bets on sterling weakness over the next six months reached their highest in more than four years.
“The out camp were struggling to get a figurehead who was popular and Boris has given them that boost,” said Alvin Tan, a strategist with French bank Societe Generale in London.
“I think there is genuine worry that Britain might vote to leave and the uncertainty is going to rise into the referendum. Apart from the fall in cable, the implied volatility in sterling has moved up sharply.”
Christopher Whittall of The Wall Street Journal explained how markets are reacting to a potential Brexit:
Leaving the U.K. would likely hit sterling on several fronts, said David Page, a senior economist at AXA Investment Managers. That would include significantly lower economic growth for the U.K., capital flight, less foreign direct investment and the Bank of England keeping its easy-money policies in place for longer.
“Whenever you have political uncertainty, it tends to be the currency that takes the most impact,” he said.
Recent opinion polls generally put those campaigning to preserve the U.K.’s EU membership in the lead, but the gap has narrowed in a number of surveys. Most investors say the U.K. is likely to remain in the EU, but acknowledge that nervousness over the vote will weigh on markets in coming months.
Traders have been ramping up bets against the pound ahead of the referendum announcement. The pound is off 4.3% against the dollar this year and 5.8% against the euro.
Last week, the cost of buying options contracts to protect against a big move in the pound this summer hit its most extreme level, by one measure, since Europe’s sovereign debt crisis.
Meanwhile, the relative cost of buying protection against a falling pound, as opposed to the currency rising, hit its highest level since the global financial crisis of 2008.
The moves recall trading in currency markets ahead of Scotland’s referendum on its membership of the U.K. in 2014.
“Now that the main players have set out their stall, there’s plenty of time for this to generate political uncertainty, particularly if the polls narrow further. That has the capacity to undermine all U.K. assets,” said Tom Clarke, a London-based portfolio manager at asset manager William Blair.
So far, selling the pound has been the favored bet for investors concerned about the EU referendum.
Michael Wilkinson of The Telegraph ran a live blog discussing the implications of a potential Brexit:
12:38
No10 tells Boris: No second referendum
Number 10 has dismissed Boris Johnson’s apparent suggestion there could be a second referendum if Britain votes for Brexit on June 23.
The Prime Minister’s official spokesman repeatedly said that David Cameron believes “a vote to leave is a vote to leave” when pushed on the idea that a No vote could not be final.
In his Daily Telegraph column, Mr Johnson raised the possibility that Britain will not ultimately leave the EU in the event of an Out vote.
He said EU history “shows they only really listen to a population when it says No” and called for a cooperative relationship “on the lines originally proposed by Winston Churchill: interest, associated, but not absorbed; with Europe – but not compromised”.
Asked about the idea of a second referendum, a Number 10 spokesman said “there are only two choices for the British people, that’s remain or leave”.
The spokesman indicated that Mr Cameron will use Article 50, the formal EU process for an exit, if Britain votes to leave. That would trigger a two-year countdown for Brexit and formally begin negotiations for withdrawal.
Ben Riley-Smith, Political Correspondent
12:30
Post-Brexit, how 1,200 British eurocrats could be jobless
If the UK leaves then there will have to be “discussions and negotiations” over whether British eurocrats are allowed to keep their jobs. It is causing a great deal of worry. The eligibility criteria makes clear that only EU nationals can work in the Commission, putting the fate of around 1,200 eurocrats in doubt. (If they do get laid off, they’ll received 70 per cent of their salary for five years – not too shabby.)
Matthew Holehouse, Brussels Correspondent
12:27
Brexit: English will remain official language of EU
English will remain an official language of the European Union in the event of Brexit, a senior source says.
The constant shuffling between Brussels and Strasbourg pumps an estimated 20,000 tonnes of carbon into the atmosphere.
12:25
EU official accuses Boris of ‘blackmail’
One EU diplomat has today accused Boris Johnson of “blackmail”. He said it would be impossible for his country to offer Britain anything more.
A clause in the deal says that the Cameron deal will expire in the event of a no vote to prevent “bidding”.
“This is it. The final offer. It’s take it or leave it. It was a sufficiently difficult negotiation that we are not prepared to go beyond this.”
12:18
Boris’s wife Marina: ‘I’m a major major fan’
Marina Wheeler, the wife of London Mayor Boris Johnson, was in Westminster this morning to be sworn in as a QC at a ceremony in the 1,000 year old Westminster Hall at the Palace of Westminster.
Asked if she was proud of Mr Johnson, she told The Telegraph she was a “major major fan”, adding: “It is important for debate and discussion.”
Christopher Hope, Chief Political Correspondent
