Pound Sentiment Improves in Traders' Positioning for Brexit Vote

(Bloomberg) -- The weight of money is inexorably shifting toward a more positive outcome for the pound amid the seemingly unsolvable Brexit tangle.

A gauge of relative demand for bullish or bearish options on sterling has climbed to the highest since April even as the U.K. Prime Minister Theresa May’s Brexit plan faces almost certain defeat in a House of Commons vote Tuesday. The currency has rallied almost 4 percent from its January low and touched a two-month high of $1.2930 on Monday.

The pound may extend its rebound to above $1.30 should the Brexit deadline be delayed from the end of March, said Yuji Kameoka, chief foreign-exchange analyst at Daiwa Securities Co. in Tokyo. A defeat for May on Tuesday could potentially lead to a second referendum, which may see U.K. scrapping the plan altogether, and that would also be pound positive, he said.

Here are five charts showing how traders are positioning on the pound:

The advance in so-called risk reversals indicates demand for sterling call options relative to puts has risen amid a rally in the underlying exchange rate. While still just bearish for one-month options, the move implies investors are assigning a smaller probability to a no-deal Brexit outcome amid speculation the March 29 deadline for the U.K. to leave the European Union may be set back, allowing more time for an agreement to be reached.

Options prices signal a 44 percent chance that the pound will strengthen 3 percent in the coming month, data compiled by Bloomberg show.

Still, for anyone looking to hedge the pound’s moves at the last minute, it will be a costly exercise. One-day volatility has climbed to touch 27.58 percent, the highest since the U.K. elections in June 2017.

The growing positive sentiment saw cable climb above its 100-day moving average this week for the first time since November. A decisive break of that technical level, which capped a series of rallies in September through November, may pave the way for an advance to the 200-DMA, currently at $1.3108.

Part of the reason funds are buying call options is that many are seeking to hedge positions that are still bearish.

A Citigroup Inc. index of pound positioning was about minus 30 on Monday, suggesting currency funds are still net short on sterling, though the amount of bearishness has declined from much as minus 68.5 in August. That is consistent with U.S. Commodity Futures Trading Commission data that showed leveraged funds held net short positions on the pound in the latest data for Dec. 18 before the U.S. government shutdown.

The pound’s volatility skew, the difference in demand for calls versus puts across tenors, shows how investors have been unwinding these short pound positions in the past week, given the interest to bet on a rebound.

--With assistance from David Finnerty.

To contact the reporters on this story: Masaki Kondo in Singapore at mkondo3@bloomberg.net;Michael G. Wilson in Sydney at mwilson176@bloomberg.net;Vassilis Karamanis in Athens at vkaramanis1@bloomberg.net

To contact the editors responsible for this story: Tan Hwee Ann at hatan@bloomberg.net, Nicholas Reynolds, Neil Chatterjee

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