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In this publication: Brexit polls show that the ‘Leave’ camp has taken over the lead. This has weighed on sterling, but we think there is more downside if uncertainty grows. We place the stop loss at 1.48160606-FX-Conviction-update.pdf (282 KB)
We re-enter GBP short versus US dollar
The latest UK EU referendum polls have showed that the ‘Leave’ camp has taken over the lead over the ‘Remain’ camp. This resulted in a weakening of sterling. Despite the downside pressure on sterling, the spot market looks relatively calm while the FX options market is more in a state of panic. The demand to hedge against falls in sterling has risen sharply to levels not seen since 2004 (the preference for puts over calls has risen to extreme levels) and the referendum is still more than three weeks away.
With the uncertainty growing, we think that there will be further downward pressure on sterling ahead of the referendum. Therefore, we have put on a sterling short versus US dollar again (in our previous position the stop loss/profit protection was hit). Why enter sterling short versus US dollar and not versus euro, yen or Swiss franc? If market fears of a possible contagion towards the eurozone would arise, the euro will likely be under pressure as well. In addition, if investor sentiment were to deteriorate sharply, global safe haven currencies would benefit. We think that the US dollar has more upside versus sterling than the yen as the latter has already rallied. We would place the stop loss above the previous highs at 1.4800. We will lower the stop loss if GBP/USD moves lower ahead of the referendum.