Pound Volatility a Bargain for Investors Eyeing Brexit Breakout

(Bloomberg) -- With the pound adrift in a directionless spot market bogged down by Brexit fatigue, strategists see opportunity in cheap volatility.

State Street Bank & Trust is neutral on sterling but finds betting on swings over six months attractive, as that covers the Oct. 31 deadline for the U.K. to leave the European Union. Longer-dated sterling volatility is “undervalued” for Adam Cole, chief currency strategist at Royal Bank of Canada, given the persistent Brexit risks and domestic political uncertainty.

Pound Volatility a Bargain for Investors Eyeing Brexit Breakout

The British currency has been stuck mostly in a $1.29-$1.31 range this quarter as cross-party talks, aimed at finding common ground for an exit deal with the EU, have dragged on without result. U.K. labor data could fuel some spot-market action in the coming week, but a sustained move is seen as unlikely with the Bank of England expected to stay on hold until Brexit is resolved.

“The Easter break gave people a chance to take a break from Brexit and I think they’re finding it hard to re-engage” in the market, said Timothy Graf, head of EMEA macro strategy for Europe at State Street Bank & Trust. “However, once you do get some meaningful news,” the pound “would have that potential to jump 1% in your face and I don’t think anyone can predict which direction,” he said.

Contracts betting on implied volatility over six months have slid to 7.87%, from 12.78% at the end of last year, even as speculation mounts that the U.K. could see a second Brexit referendum or even an early election. One-year volatility also touched its lowest since January 2018 last month.

RBC’s Cole prefers the one-year gauge, as “it’s not hard to construct scenarios where cable trades back up to $1.50, or down to $1.10 and positioning for this in options is starting to look attractive.”

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