Bloomberg
Published Dec 08, 2020 10:41
Updated Dec 08, 2020 11:00
(Bloomberg) -- Pound traders who were jolted by the reality that the U.K. could leave the European Union without a trade deal are rethinking their positions ahead of crisis talks in Brussels.
The relative cost of hedging against a weaker pound over the next week is now the highest among the world’s major currencies. Over the next month, it’s second only to the Turkish lira. And the jump in the currency’s one-week implied volatility this quarter is almost triple its nearest contender.
Investors were largely pricing in a bare-bones trade pact before the weekend. They were taken by surprise when the rhetoric suddenly turned negative, and the prospect of a deal seemed less likely. The pound fell as much as 1.6% against the dollar on Monday, and 1.3% versus the euro, the most since September.
RBC Europe Ltd. now puts the odds of a deal at 50-50, down from a 70% chance just a week ago, and sees the pound falling as much as 6% against the dollar within days if there’s no agreement. MUFG warns of an 8% plunge within a week.
“Currency traders and anyone investing in the pound at the moment is quite punch drunk after four years of trying to second-guess it,” Freddie Lait, chief investment officer of Latitude Investment Management, said in an interview with Bloomberg TV. “Any deal at this point would be good for sterling.”
Sell the Rally
Lait sees a 5% to 6% advance in the pound on a deal, and a similar move down if the U.K. crashes out. RBC expects sterling to rise 2% to 3%, but recommends selling the pound if it rallies. It fell 0.2% to $1.3352 as of 9:59 a.m. on Tuesday, and weakened to 90.85 pence per euro.
For now, the surprise is that the spot market isn’t reacting more to the news, explains Kit Juckes, a London-based chief currency strategist at Societe Generale (OTC:SCGLY) SA.
“Such a binary outcome as we are now facing, with Boris Johnson heading to Brussels for last-ditch talks and both sides urging the other to give ground, is bound to trigger a significant move,” he wrote in a note to clients. “That the outcome is coming in mid-December as markets dry up before us, just adds to the jeopardy.”
He sees the euro-pound cross rising to 95 pence if the deal is called off, and falling to 85 if there’s a breakthrough. “The only thing I don’t know, is how to place odds on these two outcomes,” Juckes said.
Here are the possible outcomes to watch out for as events unfold.
A Trade Deal
Talks Breakdown
Mini Deal
©2020 Bloomberg L.P.
Written By: Bloomberg
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