Foggy Brexit Leads Top Wealth Fund to Avoid Chasing Pound Rally
(Bloomberg) -- It’s too early to express optimism on the outcome of Brexit by buying sterling, according to the world’s biggest wealth manager.
The pound is 2019’s best-performing major currency and gained the most in almost two years Wednesday, yet UBS Global Wealth Management continues to advise investors “not to chase the rally.” Options gauges of swings in the pound have flipped to signal traders expect more imminent turmoil, with the risk of a no-deal Brexit not completely ruled out.
The U.K. currency soared to a nine-month high after Britain’s Parliament voted late on Wednesday against crashing out of the European Union without a deal. Traders’ initial optimism dampened slightly overnight, ahead of another vote on whether to delay Brexit with just fifteen days to go until the scheduled exit date.
“There is still a large gap in the Parliament that Theresa May has to bridge to make her deal pass,” said Daniel Trum, a strategist at the UBS Group AG wealth arm. “Time is getting tight and it’s still not impossible to see things escalating in a rather unfortunate manner towards a general election or government crisis.”
Sterling has gained about 4 percent this year to around $1.3245 as traders cut the risk of a chaotic no-deal Brexit. While UBS’ base case is that an agreement will eventually be reached after an extension to the March 29 deadline, it sees the currency slipping in the next three months to $1.28 and 90 pence per euro.
“We are currently neutral on sterling and see tactical long sterling positions only becoming attractive again at or below $1.24, or at or above 92 pence per euro,” said Maximilian Kunkel, a strategist at the UBS wealth arm, which has $2.26 trillion of assets under management.
Price swings in the currency surged this week, with one-month implied volatility around 200 basis points higher than the one year measure. That compares to the longer-term gauge being about 100 basis points higher just a few weeks ago.
“This tells us that the market is anticipating a great deal of noise and realized volatility in the immediate weeks ahead, but expects a calmer environment to prevail in the longer-term,” said currency strategists at Credit Suisse Group AG including Shahab Jalinoos.
Even after the currency’s rally Wednesday, a gauge of trader positioning from Citigroup Inc. shows short bets on sterling at their highest levels since December. Market participants predict short bets will rise even further as Britain continues to battle to agree on a Brexit deal.
The next event risk is a U.K. parliamentary vote Thursday on whether to extend the Article 50 process, the official mechanism of Britain’s exit. The key element for markets will be whether lawmakers back an amendment to take a second referendum off the table, according to BNP Paribas SA.
“Last night was a positive surprise,” said strategist Sam Lynton-Brown. “We don’t have a long recommendation right now which reflects that while we have that high conviction medium term view the market may be as positive as it should be in the short term.”
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