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Sterling has been the tip of the market spear during the ebb and flow of Brexit anxiety. A point that will soon be driven home for global markets, policymakers and the portfolios of domestic and international investors.

In or out, the result of the UK referendum on EU membership will trigger a substantial shift in the value of Cable — the shorthand used by traders to refer to the pound’s value against the dollar and a throwback to the era when shifts in the exchange rate were transmitted across the Atlantic via an undersea cable.

Over the decades, the foreign exchange market has experienced seismic events, marked by massive shifts in currencies that have generated supercharged profits for traders: including the yen’s huge one-day appreciation during the financial turmoil of 1998; the US dollar’s rapid appreciation after the failure of Lehman Brothers in 2008, while sterling tops the list courtesy of 1992’s Black Wednesday.

Once more, the currency market eyes Cable as a candidate for a major trading opportunity, with other currencies also expected to swing sharply as the referendum dust settles.

Reflecting the coin toss nature of the result, sterling has weakened towards a key historical threshold and currently holds the dubious accolade of being the worst performing G10 currency this year. During the post-Bretton Woods era of free floating currencies, the pound has spent little time below the $1.40 mark.

Now, as sterling loiters just above that level, the foreign exchange market awaits one of two outcomes: either a robust, relief-infused rally if the UK stays or in the event of a Brexit — and fuelled by a Bank of England easing of interest rates and possibly the resumption of QE — a test of much weaker levels not seen since Margaret Thatcher was in Downing Street and Ronald Reagan sat in the White House.

Of all the major financial markets, F/X stands out for being global, stretching across a trading day that opens in New Zealand and concludes in New York. When the polls close next Thursday evening at 10pm, during the market’s usual graveyard shift, trading desks in London will remain staffed, while New York traders won’t be heading for the bar.

The big question for many is whether sterling’s slide this year has already priced in the risk of a Brexit. About $6bn of trades are betting against sterling, the largest in three years, according to data from the Commodity Futures Trading Commission. Positioning via the options market — a major component of currency trading — suggests a heavy bias against the pound.

In the event of a Brexit, the market’s first big run will be at $1.3836, the low for the year hit in late February when the referendum date was announced.

Judging by the purchase in recent months of put options, contracts that richen in value as a currency falls, many are betting on a significant slide for sterling. Positioning data show a cluster of sterling put contracts with strikes at $1.37, $1.35, $1.30 and even lower. This dry kindling of put options stacked below $1.40 explains why some strategists believe $1.20 beckons in short order should the UK electorate decide to leave.

In turn, the yen and swiss franc will attract haven buying, while the dollar is also seen benefiting from rising risk aversion. For the euro, doubts over the integrity of the EU project after a Brexit are likely to pressure on the single currency.

A remain vote, however, should temper any escalation in currency wars for a while, and sterling will probably experience an intense, albeit shortlived, rise. The sizeable negative bets against the pound will require covering, pushing up the currency as traders buy it back. Momentum will also accelerate thanks to the clusters of call options that appreciate in value should Cable rise above $1.46 and approach $1.50.

In a reminder of how a currency can swing violently, the pound’s brief foray below $1.40 in February was followed by a rebound that peaked at $1.4770 in early May.

Little wonder measures of sterling volatility are currently at or near record levels against the euro and the dollar. As the votes are counted next week, F/X traders will deliver global markets’ first verdict as the result emerges, with sterling setting the pace.

michael.mackenzie@ft.com

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