Pound Traders Struggle to Unpick Headlines and Hypotheticals

(Bloomberg) --

The pound may be back from the precipice, but it’s still some way from sunlit uplands.

A formal request to delay Brexit has all but removed the risk of a sterling crash triggered by a no-deal scenario in the coming week. Instead, it’s left the pound in limbo and exposed to a tangle of political quarrels on both sides of the English Channel.

Where it goes from here depends in part on how long the European Union grants the U.K. beyond the mooted departure date of Oct. 31. Clarity on that may come by Tuesday. But it also depends on what happens in the interim -- and a vote Monday on whether to have an election this year plays into that.

With so little clarity, it’s small wonder sterling saw its first weekly decline against the dollar since late September.

“This is the sort of mess investors don’t like,” said Kacper Brzezniak, a portfolio manager at Allianz Global Investors. “Even though in the short term we have avoided a no-deal, that keeps a cap on sterling. We are going to try and avoid trading on hypotheticals and too many headlines. You want to miss out the noise and focus on longer-term outcomes.”

Here’s where it gets complicated. EU leaders don’t want to decide on the length of Britain’s Brexit extension until after U.K. politicians have voted on Prime Minister Boris Johnson’s proposal for a general election on Dec. 12. But the opposition Labour Party leader Jeremy Corbyn says he will only back a snap poll if he has assurance that the threat of a no-deal Brexit is removed -- something the ruling Tory party has refused to do.

So while short-term risks in the options market have diminished, as the chart above shows, there’s still a degree of trepidation priced in for the end of the year. The pound itself is stuck in no-man’s land. It lost about 1.1% against the dollar this week after a rally of more than 5.6% the three previous weeks.

For some money managers, a brighter future with a stronger pound is in sight.

“We think a three-month extension is the most likely outcome here and, despite significant opposition within the Labour Party, an election on Dec. 12,” BlueBay Asset Management’s chief investment officer Mark Dowding wrote in an e-mailed note Oct. 25. “We continue to be relaxed with current positioning long sterling and short U.K. gilts as the prospect of a no-deal Brexit is virtually off the table.”

UBS Wealth Management take a similar view and is strategically bullish sterling, even as “the Brexit process still leaves many options open,” according to Thomas Flury, its head of currency research.

Allianz’s Brzezniak is less upbeat, saying he’s looking for opportunities to sell sterling rallies as his longer-term view is one of weakness.

“The uncertainty is huge -- we don’t even know if we will get an election, when it will be,” he said. “We are in a bit of a stalemate and markets don’t tend to like stalemates too much.”

--With assistance from Vassilis Karamanis.

To contact the reporter on this story: Anooja Debnath in London at adebnath@bloomberg.net

To contact the editors responsible for this story: Paul Dobson at pdobson2@bloomberg.net, Michael Hunter

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