Sterling touches 2016 high as options markets continue to price in extreme volatility

Sterling touched a 2016 high against the dollar and surged almost 2 percent against the yen on Thursday after a series of last-minute opinion polls and bookmaker odds pointed to Britain voting to stay in the European Union. Options markets continued to price in extreme volatility in exchange rates over the next 24 hours and the pound handed back some of its gains in afternoon trade in what dealers said were very low volumes.
But polls from Ipsos MORI, Populus, ComRes and YouGov taken before the start Britain's EU referendum on Thursday have all shown a last-minute rise in support for remaining in the 28-country bloc. That drove sterling as much as 1.5 percent higher in morning trade in London, topping $1.49 for the first time this year before a dip after US traders came on line. It had gained 0.75 percent on the day at $1.4815 by 1544 GMT.
"We saw a strong rally this morning and sterling probably just got ahead of itself," said Derek Halpenny, European Head of Global Markets Research at Bank of Tokyo-Mitsubishi UFJ in London. "There's still an appetite not to run risk through the start of the result process." The pound, and to a lesser extent the euro, have been buffeted since February by opinion poll results which have swung from predicting a clear victory for the government-led "In" camp to a narrow vote for a "Brexit".
Odds on a Brexit outcome at the Betfair betting exchange have slumped from 40 percent last Thursday before the killing of pro-EU lawmaker Jo Cox to as low as 12 percent on Thursday. But the final polls remained within the margin of error. "I do think a 'Remain' vote is more likely, but not with the degree of certainty that appears to be now priced," said Adam Cole, head of G10 currency strategy at RBC Capital Markets.
"The early results are potentially going to be very confusing. If this is the starting point (with which) we go into the 10 o'clock (pm) polls and the results, there's a lot of scope of volatility, to the downside." Sterling is up around 4 percent this week but the options market still show record levels of uncertainty about its fate over the next 24 hours. Overnight sterling-implied volatilities were quoted as high as 125 percent, levels at which traders said it was effectively impossible for fund and corporate buyers to trade. That had dropped to between 60 and 70 percent by mid-afternoon on Thursday, levels still dwarfing even those seen in the aftermath of the 2008 financial crisis.
Voting will end at 2100 GMT (2200 BST), with results expected early on Friday. Pollster YouGov will publish a poll of how people have voted shortly after polling stations close, hoping to repeat its successful prediction of the 2014 Scottish independence vote. Banks have warned clients about volatile trading conditions around the results which may lead to large gaps in prices. Barclays stopped accepting new "stop loss" orders as of 0600 GMT, an extremely rare move for one of the big six banks that dominate the world's biggest financial market.