Looking for a Pound Hedge? Nordic Volatility May Be Your Answer

(Bloomberg) -- Some of the best hedges against the next wave of pound risk may be Scandinavian currency options, according to Credit Agricole SA.

As sterling volatility remains elevated ahead of fresh political headwinds around the U.K. parliament’s Jan. 15 vote on Theresa May’s Brexit deal, buying similar gauges on the Swedish krona and Norwegian krone offer cheaper “proxy hedges,” according to the bank. Short-dated volatilities in the Nordic currencies were among the most correlated with the pound during the upheavals of 2016 and 2018, strategist Valentin Marinov wrote in a note.

Looking for a Pound Hedge? Nordic Volatility May Be Your Answer

“We expect Brexit uncertainty to keep pound crosses’ volatilities supported,” Marinov wrote. “Our historical analysis further suggests that long volatility positions in the Swedish krona and Norwegian krone crosses could be attractive proxy hedges if Brexit fears escalate again next week.”

Facing opposition from even her own party members, May’s highly unpopular Brexit deal is expected to fail next week in the House of Commons. As time runs out before the March 29 deadline, Parliament rejecting the deal would weigh down sterling to lows around $1.25, according to Marinov.

One-month pound-dollar volatility is currently around 12.4 percent, while similar gauges in the euro-krona and euro-krone pairs are much lower at 6.36 percent and 6.97 percent, respectively. In the spot market, the pound fell 0.3 percent Tuesday to $1.2734 after the U.K. government confirmed the meaningful vote schedule.

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