Brexit camp’s anti-immigration push caps sterling

Sterling’s steady recovery from 7-year lows is in jeopardy as the Leave campaign edges ahead by pressing its anti-immigration message.

It might not be palatable to everyone, but in British politics, often, the 'immigration angle' works.

Ask the Leave campaign.

Up until the beginning of the month, poll after poll gave Remain a consistent lead, even if it was a modest one. The Brexit campaign's luck began to change on the last day of May, with an ORB poll suggesting 46% of voters would choose the ‘Leave’ option compared to 51% who said they’d Remain. The gap had been cut by almost two thirds in a week.

The big shift came hot on the heels of the most up-to-date figures on immigration to the UK. These revealed that immigration was likely to add a record 4 million people to Britain's population. 
It also appeared that Brexiters had kept immigration as an ‘ace up their sleeve’ up until that point. The topic only became a concerted line of attack late in May. That's when key ‘Leave’ campaigners Boris Johnson and Michael Gove began lambasting Prime Minister David Cameron over his failure to contain the number of people settling in the UK to tens of thousands rather than millions.

In many senses the Remain camp has been on the back foot ever since, and this has been reflected in sterling.

Leave's more determined push on immigration and Remain's dwindling poll lead also coincided with the end of a recovery trend by the pound against the dollar from prices in March that had not been seen since 2009. 
Between early March and the end of April, the pound rose almost 8% against the dollar. But it failed to hold on to gains in its most widely traded pair and against all other major currencies.

Likewise, a day has seldom passed since early June without Leave pressing the immigration button hard. Their efforts have borne fruit: the best Brexit odds---3/1---first emerged last week.

Even shockingly weak US monthly employment figures on Friday failed to draw a line under the pound's decline. On Monday morning, sterling tumbled as much as 150 price points (about one per cent) against the dollar, after ICM's second poll in 48 hours showed Leave ahead by a couple of percentage points.  Over the weekend, the Leave camp may have received some apparently unsolicited help from UKIP leader Nigel Farage. Whilst not an official Leave member, and even occasionally a vehement critic, when asked whether incidents like the sex attacks reported in Germany on New Year’s eve could occur in Britain, his reply was predictably on message: “It depends if we vote for Brexit or not. It is an issue.”

By Tuesday morning, the pound had recouped much of the loss sustained in the first few hours of the week, tracking renewed dollar weakness after Fed Chair Janet Yellen omitted any reference to the timing of a potential interest rate rise in a speech on Monday. Sterling was also assisted by a YouGov poll overnight showing Remain back in the lead, by just 1 point.

But the pound's round trip of more than 150 points versus the dollar underscored its sensitivity to Leave's effective deployment of its immigration message, paving the way for further eye-catching volatility during the next fortnight. 

The big question for ‘Leave’ strategists is whether they can sustain their improved prospects, or whether they had simply seen a ‘protest’ vote that will evaporate closer to 23rd June. Around 20% of voters have yet to decide which way they will vote, according to most recent polls.

For traders of sterling, that key question goes hand-in-hand with another: whether a clear line of support that has contained cable’s decline since the middle of last month will give way. The level is close to $1.43, the closing price of the week ending on Friday 13th May ($1.4361 to be precise) when the pound lost 1.3% week-on-week. The rate’s lowest price during the week that followed was only fractionally weaker, confirming c.$1.43 as a level the market regards as pivotal. 

In currencies and other financial markets, typically, when the ability of such levels to 'support' prices ends, declines quicken.

In other words, if the Leave campaign continues to make headway by deploying 'immigration', there is a high risk that sterling’s decline will accelerate.

‘Leave’ are likely to keep pressing hard on the immigration nerve during the final two weeks of campaigning, particularly at or soon after the key events listed below (all times are in British Summer Time).

• 7th June, 9pm: Prime Minister David Cameron, Nigel Farage - ITV Referendum Debate.
• 8th June 8, 7pm: Chancellor of the Exchequer George Osborne to be interviewed by BBC political journalist Andrew Neil
• 15th June, 6.45pm: BBC Question Time Special (part 1) with Michael Gove, Justice Secretary
• 16th June, 8pm-10pm: The ITV Referendum Debate with Boris Johnson, Nicola Sturgeon and others
• 17th June, 8.30pm: Iain Duncan Smith, former Work & Pensions Secretary who backs Brexit, to be interviewed by Andrew Neil
• 17th June, 8.30pm: Nigel Farage and Hilary Benn, Labour’s shadow foreign secretary, also likely to be quizzed at key campaign events
• 19th June, 6.45pm: BBC Question Time special (part 2) with PM Cameron
• 21st June, 8pm: the BBC’s EU referendum “Great Debate” to be held at Wembley Arena

Key takeaways 

• We expect sterling to remain sensitive to the use of 'the immigration issue' by the Brexit campaign.
• We expect the pound's sensitivity to the issue to be particularly visible if the topic scores highly in swaying voter sentiment further toward a 'Leave' vote during the key events listed above. 

To be clear, we are not suggesting that all traders agree with the Leave camp's views on immigration. Simply that sterling will reflect the topic's long-standing effectiveness for galvanising large swathes of British voters.