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Good morning,

Referendum watch – 2 days to go: Irrational exuberance

Sterling had its best day in 7 years yesterday against the US dollar, rising by 2.3% as the chances of a Brexit were hurriedly priced out of markets. Last Thursday Oddschecker, an aggregator of betting odds, calculated a 44% chance of a vote to leave the EU emerging victorious this Thursday, that has now fallen to 25% as bookies reported overwhelming demand by punters to back the Remain option.

Sterling has been following these bookies odds like a lovesick teenager and, as we noted yesterday, these numbers should not be treated as gospel and the prospect of an outlier outcome, as we saw in last year’s General Election remains mispriced. There is a divergence between the polls and the betting with the former showing a mixed picture, a landscape that is too close to call and the other opining that Leave are as good as done.

The pound has picked which indicator it wishes to follow and I think that will mean further volatility as we get closer to the vote as the polls continually show confusion. Overnight we have seen three polls announced; a phone poll from ORB that had Remain as 7% leaders, a Yougov online poll that had Leave as winning by 2% and a poll by Nat Cen that had Remain as 6 points in the lead. This is going to go down to the wire.

We have one Com Res poll today which has typically been released at some point in the evening; the last iteration had Remain a single point ahead. I have to think that this price action has one more leg left in it; in other words, we have one more swing in sentiment before we go to the polls although as money drifts to the sidelines the incentive for traders to overcommit lessens by the second.

Yellen to testify to the Senate

Normally a Fed Chair’s Humphrey Hawkins testimony – a semi-annual appearance in front of both the House and Senate – is the guiding event of the week. The Brexit vote has put paid to that rather convincingly but last week’s Federal Reserve meeting, statement and press conference has also taken some of the sting out of the tail of Yellen’s chat this afternoon.

It would be a real surprise if Yellen really switched tone at all from last week’s thoughts given the nerves running through global markets at the moment. We expect therefore that she will continue to focus on an increased need for stable, dependable inflation within the US economy and that while the most recent jobs report was far from ideal, that a single data point cannot and should be over interpreted as the beginning of a collapse of the labour market.

USDJPY has continued to show that investors are unhappy with what that poor payrolls number means for interest rate expectations but the weakness in USD/strength of the JPY are also a Brexit phenomenon. To attempt to separate them is to attempt to separate oil and water.

Germany’s highest court to vote on Draghi weapon

Today will see the German Supreme Court make a decision on whether the European Central Bank’s OMT program – buying up the debt of Eurozone nations who had been bailed out through the financial crisis – was legal or not. This program began 4 years ago so one could easily say that the ship has sailed on this one. Should they reject the legality of the program then an important support of the ECB’s reaction function to the plight of some Eurozone nations has been removed.

We do not believe that the vote goes against the program but any conditions attached by the German court will naturally limit the ECB’s ability to get stuck in should they need.

The Day Ahead

Apart from the above, the data calendar is quiet.

Have a great day.

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