Why are pounds sterling called "knicker"?

From this reference:

knicker: distortion of 'nicker', meaning £1. See entry under 'nicker'. See also 'pair of knickers'.

And

nicker - a pound (£1). Not pluralised for a number of pounds, eg., 'It cost me twenty nicker..' From the early 1900s, London slang, precise origin unknown. Possibly connected to the use of nickel in the minting of coins, and to the American slang use of nickel to mean a $5 dollar note, which at the late 1800s was valued not far from a pound. In the US a nickel is more commonly a five cent coin. A nicker bit is a one pound coin, and London cockney rhyming slang uses the expression 'nicker bits' to describe a case of diarrhea.

And of course ;-)

pair of nickers/pair of knickers/pair o'nickers - two pounds (£2), an irresistible pun.

The OED says it's origin is unknown, but suggests it could be originally horse racing slang and the first quotation from 1871 is in this context.

One of the other meanings of nicker is a neigh or neighing sound, originally Scottish, and imitative of horses or donkeys, and is from at least the 17th century. It also meant a laugh or a snicker.