Sterling ETFs unstable in run up to referendum

Jun 23rd, 2016 | By | Category: Alternatives / Multi-Asset

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Sterling exchange traded funds continue to be volatile in the run-up to the Brexit referendum following further warnings from the Bank of England (BoE) that the outcome is the largest immediate risk facing UK financial markets.

£ ETFs volatile following BoE monetary policy meeting

Sterling ETFs are volatile following BoE monetary policy meeting

In the run up to last Thursday’s BoE monetary policy meeting before the referendum today, the pound dropped toward a two-month low versus the dollar and crashed to a three-year low versus the Japanese yen.

The pound touched $1.4091 on 14th June, its lowest level since 14th April, but was up on Wednesday 22nd to close at $1.4683.  Against the yen sterling weakened as much as 2.2% last week to ¥147.33, the lowest level since June 2013.

In recent weeks, the Brexit referendum has dominated the currency markets. A two-week measure of GBP/USD volatility, based on option prices, peaked at the highest level on record last week after a succession of five polls within 24 hours showed that the public were leaning towards leaving the EU, rather than staying in the union.

This volatile currency performance has been borne out in sterling-focused exchange traded products.

The ETFS Short USD Long GBP ETF (USGB) is down 2.1% year-to-date (YTD) and has crashed nearly 9% over the last 12 months, while the ETFS Short EUR Long GBP ETF (URGB) is down around 5% YTD and has dropped 8.5% since this date last year.

Betting on sterling against the Japanese yen has proven to be the sorest loss for currency investors. The ETFS Short JPY Long GBP ETF (JPGB) is down 23.2% over the past year and more than 15% YTD.

At the BoE meeting on 16 June, the bank kept interest rates at 0.5% – the same level since 2009 – and warned that a vote to leave the EU could cause the value of the pound to fall, “perhaps sharply”.

The BoE also said that households would delay spending, which would cause lower demand and rising unemployment.

“The outcome of the referendum continues to be the largest immediate risk facing UK financial markets, and possibly also global financial markets,” the Monetary Policy Committee statement read.

Either investing in other currencies versus sterling, or hedging out currency exposure when investing in UK equities, might be two options for ETF investors to consider over the next week. (The UBS ETF MSCI UK hedged EUR UCITS ETF (UKEUBH) costs 0.30% – but it is down 3.6% year to date.)

The BoE has made increasingly strong statements against Brexit this year, and the wording of its statements, which is closely scrutinised, has a strong impact on capital markets. In May, BoE governor Mark Carney said that Brexit could “lead to a recession” in the UK as the central bank downgraded its growth forecasts.

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