Pound Traders May Be Risking Brexit Tumult With Low Volatility

LONDON (Capital Markets in Africa) – Time is fast running out on Brexit and there’s still no solution in sight — yet, pound options traders are remarkably sanguine.

The cost of protecting against price swings in sterling has fallen to an almost three-month low even after U.K. lawmakers rejected Theresa May’s withdrawal plan and told her to renegotiate it with the European Union, which has warned it won’t budge. Given the risk of the whole deal collapsing, investors may reconsider positions that have driven volatility lower, according to SEB AB.

While the U.K. currency has gained 2.4 percent this year amid hope the two sides will eventually find a way forward, BlackRock Inc. has warned investors may be too complacent about the risk of an unfavorable outcome. May is expected to head back within days to Brussels to seek concessions for her Brexit deal. She’s promised to return with a reworked plan for Parliament to vote on by Feb. 13, or if not, to give members another opportunity to vote a day later. The EU has already ruled out giving up any ground.

“Falling volatility in recent weeks is related to the view that a majority of MPs never would accept a no-deal withdrawal, but with the response from EU officials in recent days people might reconsider this view again,” said Richard Falkenhall, a trading strategist at SEB AB. “The uncertainty should be reflected in implied volatility.”

Two-month sterling implied volatility, which covers the U.K.’s exit date of March 29, has dropped from a more than two-year high in December as concern about a no-deal Brexit fell. It traded at 10.8 percent on Monday, down from above 15 percent in December and near the lowest since November. The pound traded at $1.3064 as of 10:00 a.m. London time.

Speculation about the possibility of a snap election in June and news that Nissan Motor Co. ditched a commitment to build a new vehicle model in the U.K. heightened uncertainties around Brexit at the weekend. Nissan has joined a list of high-profile companies which have cited doubts over Brexit in diverting resources overseas, dealing a blow to the U.K. economy.

As well as Brexit uncertainty, pound investors will also have to contend with the Bank of England decision this week. While officials are forecast to keep interest rates unchanged on Thursday, some economists see the potential for a split to emerge on the Monetary Policy Committee as some members get increasingly concerned about accelerating wage growth. Any sign of a more hawkish tone among policy makers would support the currency.

“If anything, Brexit-related uncertainties have increased since the last MPC meeting pre-Christmas, further limiting the committee’s room for maneuver,” Adam Cole, chief currency strategist at Royal Bank of Canada, said in a note to clients Monday.

Source: Bloomberg Business News