No-Deal Brexit Possibility Suddenly Comes Alive for the Markets

LONDON (Capital Markets in Africa) – Investors are ripping up their Brexit playbooks as the chance of a no-deal exit flares once again.

Sterling is the worst-performing major currency this week as U.K. Prime Minister Theresa May gambles on getting her plan over the line with just over a week to go before the exit. Option traders are betting on further losses and increased currency swings, while fund managers are seeking help from constitutional experts to assess the potential fallout.

The political turmoil shows no sign of easing despite the looming departure, with French President Emmanuel Macron saying if May’s plan fails to get Parliamentary approval again it would “guide everyone to a hard exit.” The pound could slump more than 8 percent from current levels if the U.K. left the European Union without a deal, according to a Bloomberg survey.

“It would be horrific for sterling, it would drop like a stone,” said Jane Foley, head of currency strategy at Rabobank. “We’re now a week away, the law as it stands suggests a hard Brexit could happen.”

The latest developments have caught market participants by surprise, Foley said. She had put a close to zero chance of no-deal in Bloomberg’s survey carried out between Feb. 28 and March 4, but now sees a 40-50 percent chance. Such a scenario could lead the pound to fall as low as $1.20, according to the survey.

The pound fell 1.0 percent to $1.3071 by 3:58 p.m. in London Thursday, taking losses for the week to 1.7 percent. That comes even as the dollar has weakened, with almost every other major currency gaining against the greenback. Two-week implied volatility on sterling, a gauge of expected swings in the currency, surged to head for the highest close since July 2016.

Although market participants still have a net short position overall on the U.K. currency, asset managers and pension funds had recently been adding to long pound positions versus the euro, according to traders. Now Deutsche Bank AG has closed its short euro-sterling trade recommendation, warning “the risks of a last-minute accident have increased.”

The Bank of England said more firms are triggering their no-deal Brexit plans. Stocks exposed to the domestic economy fell, with lenders such as Royal Bank of Scotland Group Plc and home developers such as Persimmon Plc leading losses. The uncertainty pushed investors to look for safety in U.K. government bonds, which led a rally in European debt.

Both May and opposition leader Jeremy Corbyn are in Brussels to talk to EU leaders as European officials have said their priority is to avert a no-deal exit. Still, market participants aren’t taking any chances. Aberdeen Standard Investments is talking to legal experts about how Parliament could stop no deal next week.

“I have never seen so many market participants so unsure about one topic as Brexit this morning,” said Luke Hickmore, an investment director at the firm.

Source: Bloomberg Business News