Brexit uncertainty drives sterling index to 28-month low

(updates prices, adds YouGov (LSE: YOU.L - news) poll)

By Anirban Nag

LONDON, April 6 (Reuters) - Sterling fell to its lowest in more than two years against a basket of currencies on Wednesday, as investors showed increasing concern about a June 23 referendum to decide whether Britain should leave the European Union.

An ICM opinion poll released on Wednesday showed 44 percent of voters wanted to remain in the EU and 43 percent wanted to leave, making the result impossible to predict.

A YouGov poll also released on Wednesday found 39 percent backed remaining in the EU, 38 percent wanted to leave and 23 percent were either undecided or planned not to vote.

Data last week showed Britain's current account deficit grew to 7 percent of GDP in the final quarter of 2015, a reminder of how exposed Britain would be if foreign investors are deterred by a decision to quit the EU, a so-called Brexit.

"The closeness of opinion polls means that there is a large risk that Brexit could happen," said Peter Frank, currency strategist at BBVA (Amsterdam: BA6.AS - news) .

"This scenario risks a huge slide in sterling. Foreign direct investment and portfolio flows are needed to recycle the UK's record trade and current account deficits. A Brexit vote ... could halt such sterling-supportive net capital inflows."

Business research provider HIS said on Wednesday it saw a 35 to 40 percent chance of Brexit, with the impact on the British economy determined by "how amicable, constructive and successful the UK's negotiations were with the EU".

Though bookies' odds have not shifted much over the past month - the put the chances of an exit at one in three - analysts say the closer the vote gets, the more the pound will be vulnerable to Brexit uncertainty.

Sterling fell more than 1 percent against the dollar to a five-week low of $1.4006, before recovering to trade at $1.4085, still down 0.5 percent on the day. It (Other OTC: ITGL - news) was down 0.5 percent at 80.74 pence against the euro, having fallen to 81.05 pence per euro, its lowest since June 2014.

All of which saw the trade-weighted sterling index drop to its lowest since December 2013, having lost 7.7 percent this year.

"Last week, we saw that the adjustment to the downside for the pound in the event of Brexit may need to be even bigger, given that the current account deficit in the UK was even larger than many people had feared," said Bank of Tokyo-Mitsubishi UFJ currency strategist Lee Hardman.

"The UK is increasingly reliant on external financing and it's a big risk if we add a Brexit to the mix, because the UK will find it more difficult to finance that deficit," he said.

Reflecting the increased uncertainty, there is demand from investors and companies to hedge currency exposure. As a result, the implied volatility on three-month sterling/dollar options, covering the period of the referendum, has jumped to well above 15 percent, the highest since May 2010.

The UK sovereign credit default swaps premium - seen as a sign of stress or investor concern about sovereign risk - has also shown the biggest percentage increase of any developed economy in first quarter of 2016. (Additional reporting by Jemima Kelly; Editing by Larry King)