Halister News

(Bloomberg) -- Favor steepeners in 10s30s GBP swap spread curve and Dec16/Dec17 short sterling and selling sterling versus dollar to 1.35 ahead of U.K. referendum on EU membership June 23, analysts at TD Securities led by Richard Kelly write in client note.

• Expect result to be much less decisive than in 1975 referendum where 67.2% voted to stay a member, with 65% turnout
• The May 5 local elections could prove pivotal catalyst in shifting odds as results may reflect greater turnout from those supporting the leave campaign
  • Scottish referendum shows many undecideds make not make up minds until final week before vote
• If U.K. votes to leave:
  • Would expect BOE to ease policy, even as the fall in sterling would be inflationary; will likely wait and cut by 50bps in August as rate-setters would want to weigh the economic impact
  • Would follow a rate cut with EU100b to EU200b of QE, depending on how significantly uncertainty impacts households
• In interim period, BOE’s response is less clear, although will address any liquidity shortages in bank funding, sterling or dollar swaps with other G-7 banks
• GBP may fall as much as 20% vs USD and 10% vs euro, with a fall of 7%-10% in the day or two after the vote
• Short-sterling would likely price out any rate rises for at least 5 years and could leave curve negatively sloped until BOE’s view on negative rates is made clear
• Gilts will continue pre-vote outperformance vs USTs; although flight to safety of bunds and ECB QE complicates things
• If votes to stay:
  • BOE may lift rates in November, although economic uncertainty in run-up to polling day increases chance of later move
• Markets would immediately re-price the rate path, bringing forward first rate increase and pricing higher pace of rises; Dec16/Dec 17 short sterling should steepen
• How far sterling moves will depend on positioning ahead of vote as the 1.5% rally in GBP after the Scottish referendum and the 4% rise after the May 2015 general election show
  • The long-term consequence of “remain” on the pound should be negligible