Wednesday next week marks exactly three months until Britain’s referendum on its EU membership. That gives another opportunity for an insight into how concerned pound currency traders are about the outcome.
The benchmark three-month gauge of volatility in pound versus the US dollar would cover the June 23 vote for the first time next week, giving traders another instrument to protect themselves against price swings. With surveys still pointing to the “remain” and “leave” camps running neck and neck, a six-month measure is about 1 percentage point from a five-year high reached last month.
If the “leave” camp gains further ground and “it seriously looks like a ‘Brexit’ I would suggest volatility moves above 20 percent,” a level last seen in 2009, said Neil Jones, the London-based head of hedge-fund sales at Mizuho Bank Ltd.
“If we sense a shift in the opposite direction towards the ‘in’ camp, then three-month sterling [pound] volatility would be hit hard as the urge to hedge uncertainty would be reduced substantially,” Jones said.
While the pound has recovered from the seven-year low against the US dollar reached last month, it is still the worst performer since the start of this year among G10 peers.
The pound has borne the brunt of not just traders doubting the Bank of England’s (BOE) ability to tighten policy, but also the uncertainty surrounding the Britain’s EU membership. The BOE warned this week that an exit might hurt spending and hold back Britain’s economic growth.
The pound climbed for a third week versus the US dollar, rising 0.7 percent to US$1.4488 as of 5:05pm in London on Friday. It dropped to US$1.3836 on Feb. 29. The pound weakened 0.3 percent in the week to ￡0.77 per euro, and slid 1.3 percent against the yen.
Three-month implied volatility, a measure of price swings based on options, climbed 78 basis points, or 0.78 percentage point, this week to 10.70 percent. The measure reached 11.89 percent on Feb. 24, the highest on a closing-price basis since April 2, with six-month volatility touching 13.64 percent the same day.
“Presumably the three-month will be pushing up” to 11 percent or more next week, said Chris Turner, London-based head of currency strategy at ING Groep NV. Turner remains bearish on the pound and forecasts “euro-sterling to be trading close to ￡0.80 ahead of the referendum in June.”
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