New Brexit Cliff Edge Is Met With a Meh in Markets

(Bloomberg) -- Want the lowdown on European markets? In your inbox before the open, every day. Sign up here.

If there is any stress surrounding the U.K.’s imminent exit from the European Union, you couldn’t tell by looking at how investors are trading the pound.

Even with less than 10 days to go before the departure, sterling is still the best-performing major currency this year. While reports suggest that Prime Minister Theresa May won’t seek a long delay to leave the EU, option traders are unruffled, with a gauge of expected swings in the pound around the end of June -- seen as a new potential cliff edge -- holding near the lowest in six months.

The calm reaction shows investors have become inured to numerous deadlines that have come and gone in the months of negotiations. The lack of market pressure also means that lawmakers are unlikely to feel any added sense of urgency to resolve the already-protracted deadlock.

“There is still uncertainty over the length of the delay and therefore potential timing of key Brexit events,” said Lee Hardman, an analyst at MUFG Bank Ltd. “Volatility could pick up if end of June becomes the new cliff edge, but there are also reports that the U.K. government may have to decide by mid-April on whether a longer extension will be required, which would then put a dampener on short-term volatility. It’s all up in the air really.”

The pound’s implied volatility over two weeks, covering the March 29 exit, has fallen this week. Contracts over four months, which would cover a new departure date if there’s a three-month delay, are trading at the lowest since September.

Risk reversals, which indicate market positioning and sentiment, are in favor of pound puts, showing that investors are acknowledging the risk of a fall in sterling. Yet over four months they are near the least negative level since January.

The pound slipped 0.3 percent to $1.3233 by 11:20 a.m. in London, as traders wait for the announcement of a letter from May to Brussels to request an extension. Still, it’s up 3.8 percent this year.

Asset managers and pension funds have been adding to long pound positions, mainly versus the euro, while hedge funds are buying call options to benefit from a possible rally, according to three traders in Europe, who asked not to be identified because they are not authorized to speak publicly.

• NOTE: Vassilis Karamanis is an FX and rates strategist who writes for Bloomberg. The observations he makes are his own and are not intended as investment advice

--With assistance from Charlotte Ryan.

To contact the reporter on this story: Vassilis Karamanis in Athens at vkaramanis1@bloomberg.net

To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net, Neil Chatterjee

©2019 Bloomberg L.P.