Pound Traders Bet Against U.K. ‘Laissez-Faire’ Response to Virus

(Bloomberg) --

Currency traders aren’t buying the U.K. government’s efforts to tackle the coronavirus.

The pound has slumped more than 8% in the past six days and sentiment in the options market has turned the most negative on its prospects this year. Gauges of volatility have surged, as the U.K. looks slow in following other countries in limiting travel and social gatherings.

That shows investors are betting against countries where they think the virus will escalate next in coming weeks, with the U.K. government having pledged less cash to fight the virus or prop up companies than peers such as France. Nordea Bank Abp picked out Britain, the U.S. and Sweden as having the potential for an “underlying exponential” spread of the virus.

“If this ‘laissez-faire’ approach proves to be wrong, then the pound and krona may prove to be the worst places to hide, as Sweden and U.K. could be seen as the ‘pariahs’,” said strategists at Nordea, including Martin Enlund.

While other European countries adopted early measures such as closing schools and bars, the U.K. Prime Minister Boris Johnson took until Monday to announce what he called “draconian” new steps to fight Covid-19, including demands for citizens to avoid all “non-essential” contact with other people.

The pound headed for its sixth day of losses on Tuesday, its longest losing streak since May, falling as much as 2.2% to a six-month low of $1.2003. Buying protection against swings over the next month is at the most expensive since October.

The moves are a turnaround from early this month, when the currency picked up and hedging costs were at a discount versus peers. That was a reflection of the early coordination between the government and Bank of England to address the economic effects of the virus. Since then other central banks have made even steeper emergency rate cuts.

• 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

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