The run on the pound on ‘Black Wednesday’, September 16 1992, cost the UK government more than £3 billion in a single day.
The Thatcher government had entered the European Exchange Rate Mechanism, a system designed to promote trade within Europe by stabilising the relative values of its currencies, two years earlier. Under that system, the government committed to intervene in the pound if the exchange rate dropped below 2.773 Deutsche Marks to the pound.
With economic conditions in the UK deteriorating, it did, and the government had to withdraw from the ERM after throwing money into the markets in an unsuccessful bid to prop the pound up. The event seriously damaged the Conservatives’ economic credibility. Wednesday June 22 could be another black one, with the UK’s referendum on EU membership creating enormous uncertainty about the country’s economic future.
The markets used to know how to trade major political events like this — in their terminology, ‘price-in’ the risk — and they have certainly tried this time around. The pound sold off earlier in the year in anticipation of the UK leaving the European Union, an event that they clearly see as damaging to the country’s economic future.
The UK runs a large current account deficit; in essence, it imports more goods and services than it exports. That deficit was £96.2 billion, or 5.2 per cent of the total GDP of the country, in 2015, according to the Office for National Statistics — the highest it has ever been.
If you look at the betting houses, they’re still calling for a 65 per cent chance that the UK will remain in the EU
Foreign investment is needed to plug that gap, but the uncertainty around the UK’s ongoing position within the European free trade area means that companies are holding back. This, along with the fiscal deficit — the gap between government spending and revenue — is a toxic combination that could sink the currency of a weaker economy, even before the doubt created by the referendum.
At the moment, the polls are hovering at 50:50, with neither the ‘leave’ nor ‘remain’ camps building any meaningful lead, but the woefully inaccurate predictions of pollsters at the last general election — most predicted a hung parliament, not a Conservative majority — have worried analysts. Whichever way the vote falls, markets could move significantly; no one wants to be on the wrong side of the event.
Some hedge funds have reportedly commissioned their own exit polls in key locations in order to get the jump on their competition. Others are looking to the gambling odds, which have a habit of getting major events right.
“People are wary of things that have happened in the past where you’ve had polls that have been completely wrong,” says Joel Kruger, FX strategist at LMAX exchange. “As much as the polls are evenly split at the moment, if you look at the betting houses, they’re still calling for a 65 per cent chance that the UK will remain in the EU. I tend to look at those as a better indication of where the money is, versus the polls.”
Betting markets may actually be a better reflection of the real likelihood of a Brexit, according to David Bell, professor of economics at the University of Stirling. “People who are putting their money on a particular outcome clearly have a bigger incentive to get it right,” he says. “They are able to use all of the information that’s out there, including opinion polls.”
