Sterling sank by the most in more than a year on Monday after a poll predicted for the first time this year that Scotland will vote for independence, prompting the biggest surge in market volatility since Britain's last general election. Currency markets have been rushing since the start of last week to price in the risk - previously all but disregarded - that Scots might vote for independence in a September 18 referendum.
A YouGov survey for the Sunday Times was the first to put the "Yes" camp ahead, by 2 percentage points. That drove the pound's biggest fall in trade-weighted terms since July 2013. Market bets on volatility before and immediately after the vote also soared, to their highest since May 2010. But they also suggested those moves might drop off in the weeks after a vote for independence.
"The vote looks too close to call and there is a huge amount of uncertainty about what will happen economically if the Union is broken up," said Dennis de Jong, managing director of trading platform UFX. The pound has been on a downward track since the middle of July. However, that was largely because it had peaked in its run higher since last year and the dollar had rebounded.
Sterling also fell 1.3 percent against the euro on Monday, taking it back to levels last seen in June. Some suggested the pound - down 10 cents against the dollar since mid-July - had begun to look oversold, and by 1124 GMT it had steadied at $1.6137, above a 10-month low of $1.6104.
"There may be more medium-term money managers who don't normally look at sterling who come in today and decide to sell a bit," said Adam Myers, European head of FX strategy at Credit-Agricole in London. "But once that is over, the pound looks very good value at these levels." By mid-morning in London, dealers had already racked up volumes worth 70 percent of sterling's busiest trading day so far this year, according to Reuters Matching data.
In contrast, the yen, dollar and euro and other major currency pairs showed minimal moves in morning trade in Europe. The options market showed the most bias for sterling to fall in more than two years and the currency market's single biggest player, Citibank, recommended selling the pound with a target of $1.6025. They said last week the pound could fall to $1.56 or lower if Scotland votes "Yes".
One-month volatility on sterling has doubled to its highest in more than a year in the past week. A rise in risk reversal options has raised the cost of hedging against a possible "Yes". One risk is that investment might largely halt as companies await the creation of a new Scottish state, leading to poor growth throughout Britain, European economists from Morgan Stanley said. Along with many analysts, they also worried that the departure of the Scots, who polls show are more pro-Europe than their English neighbours, could help clear the way for a vote later this decade for Britain to leave the EU.
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