Pound’s World-Topping Rally Wobbles as Market Braces for Swings

LONDON (Capital Markets in Africa) – The pound swung between gains and losses as British voters headed to the polls to decide between Conservatives hoping to deliver Brexit in January and a Labour Party promising a second referendum.

Bets on overnight volatility in sterling surged to the highest in nearly three years and traders hedged the risk of a surprise outcome in options markets. The currency has been the world’s best performer in recent months, on speculation a majority for Prime Minister Boris Johnson would allow him to get his Brexit deal through Parliament. The rally has held even as polls conducted ahead of voting suggested the race was narrowing.

“Our base case is for the Tory Party to secure a comfortable, at least a 20-seat majority and the outcome should be sufficient to keep the pound supported over the long run,” wrote Credit Agricole SA strategists including Valentin Marinov in a research note. “If the Conservatives win fewer seats, there is a risk of a ‘sell-the-fact reaction’ that could see the pound a bit weaker in the immediate aftermath.”

The pound traded down 0.2% at $1.3172 by 1:20 p.m. in London, after climbing earlier to touch $1.3229, the highest since March 27. Sterling has gained nearly 7% against the dollar in the past three months. It slipped to 84.48 pence per euro, having reached the strongest level against the common currency since 2017 this week.

The pound has been the market barometer of political risk since the June 2016 Brexit vote. After touching an almost three-year low in early September, it has recovered on expectations that Johnson’s gamble to call an election could result in a majority that would allow him to move on to trade talks with the European Union.

Polls in the U.K. will stay open until 10 p.m., with the first indication of voting due after that in an exit poll. The first results are set to begin filtering through between 11 p.m. and midnight.

Pulling All-Nighter
Traders are preparing for a long day. Some of HSBC Holding Plc’s currency sales and trading team in London will work overnight, while Barclays Plc plans additional staffing in New York, London, and Singapore, according to spokespeople at the banks.

Investors have turned to the options market to hedge their positions. Bets that the pound will fall in the next week have surged to the highest level since the aftermath of the 2016 Brexit referendum.

“There is plenty of scope for a surprise,” said Jeremy Stretch, head of Group-of-10 currency strategy at Canadian Imperial Bank of Commerce, citing the unknowns of the turnout, tactical voting and poor weather in the U.K.’s first December election since 1923. Stretch will be heading home at lunchtime before returning to the office to work through the night.

Mark Dowding, a portfolio manager at BlueBay Asset Management in London, will be having a Christmas party with his team Thursday night. He expects them all to be huddled around a television when the exit poll is released at 10 p.m., the so-called “witching hour” for currency markets between the end of New York’s day and the start of Asian trading.

“We will be waiting until morning before deciding on any trades,” he said. “We are skeptical there will be sufficient liquidity to trade much on the overnight news.”

Source: Bloomberg Business News