Prepare for the Pound to Become Even More Volatile
Prepare for the Pound to Become Even More Volatile
(Bloomberg) -- Traders are bracing for further turbulence in the pound as the risk increases of a chaotic U.K. exit from the European Union.
A measure of expected swings over the next three months, covering the Oct. 31 Brexit deadline, has surged to near the highest this year after Queen Elizabeth II approved Prime Minister Boris Johnson’s request to suspend Parliament for almost five weeks. That sets up a battle with lawmakers trying to block no-deal and the currency is likely to react to every political headline.
“The next two weeks in Parliament are likely to be even more brutal,” said Jeremy Stretch, head of Group-of-10 currency strategy at Canadian Imperial Bank of Commerce in London. A no-deal Brexit is “firmly back onto the radar, impacting volatility.”
Three-month pound-dollar volatility has climbed above 13.5%, the highest since Jan. 3, when no-deal risk was also rising ahead of a parliamentary vote on the Brexit deal. That level is the most among Group-of-10 peers and puts it in the same camp as emerging-market currencies such as the Mexican peso.
What Bloomberg Intelligence says: “It’s premature to call a low on sterling, despite cheap valuations and extreme short positioning,” said Bloomberg Intelligence’s chief G-10 FX strategist Audrey Childe-Freeman. “Movements this week validate our view that the pound remains highly Brexit-headline-driven and binary. Non-directional trades via long sterling volatility continue to be most effective”
Traders and companies that haven’t hedged their sterling exposure for the October deadline now face having to pay up in the options market. The relative cost of hedging sterling over three months is at its most expensive in more than three years.
Volatility and hedging costs had collapsed after the last Brexit deadline was extended in April, but this time Johnson is vowing to leave the EU “do or die.” This week’s trading has seen sterling keep reversing direction.
The pound climbed above $1.23 Tuesday on optimism after the positive tone struck by European leaders at a Group-of-Seven meeting, before sliding Wednesday and breaking below $1.22 Thursday. The currency could tumble to $1.10 if the U.K. leaves the EU without a deal, according to a Bloomberg survey of analysts.
--With assistance from Vassilis Karamanis.
To contact the reporter on this story: Charlotte Ryan in London at cryan147@bloomberg.net
To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net, Neil Chatterjee, William Shaw
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