Last month, The campaign for Britain to leave the EU enjoys an eight-point lead when people’s likelihood to vote is taken into account, according to a poll for The Independent.
Britain departing from the European Union—seem more likely. In current scenario, largely because of Europe’s migration crisis and the interminable euro mess, the polls have narrowed. Some recent surveys even find a majority of Britons wanting to leave.
Today immigration leads voters’ list of concerns, ahead of the economy and the NHS, with 45 per cent naming it among the “important issues facing Britain”.
The relative health of the UK economy comparatively to the EU, Europe slander in stagnant repose, UK growth crawling in snail's pace along at an annual rate of 2.8 per cent. The risk of “going it alone”, if you believe it exists, is not the looming shadow it was back in 1975.
UK current account deficit is larger than it has been any time since 1985, a record low of -28833 GBP Million in the fourth quarter of 2014.
So, we ponder the tail risk of Brexit caused spike in demand for GPB downside (puts) over USD.
Risk reversals: The demand for GBP puts against USD and EUR calls have spiked on fears of UK exit from the EU, you would understand this when observe risk reversal numbers for 3m – 1y tenors (see for GBP/USD & EUR/GBP).
David Cameron announced UK referendum is scheduled on 23rd June which is approximately 2 and half months from now.
You observe the these negative risk reversal numbers over the period between next 3M – 1Y tenors which is the highest among G10 currency space, you could understand as to why these hedging arrangements for bearish risks in GBPUSD. Whereas IVs are also the highest during these times, we see 3m ATM IVs are at 15.15% which is the highest among G10 currencies again.
These bearish pressures on sterling mounting especially for next 3m tenor.
The likelihood of the significant 'brexit' will likely keep adding pressure on the UK currency through the foreseeable future, while key events in the week ahead could force significant short-term volatility.
For now, we would still recommend a GBP/USD 3M risk reversal i/o 1Y as a generic hedge for Brexit risk.
As the risk reversals for 1W-1M expiries also indicate that the puts have been relatively expensive and as stated above traders are willing to pay higher implied volatility prices as the strike price grows aggressively out of the money.
The current spot FX is trading at 1.4286, we anticipate more dips up to retest of 1.39 levels going forward, or even below in next 3 months or so.
And it is understood that bearish momentum is bolstering as we saw that from delta risk reversal table, bears have been willing to pay higher premiums. Hence, aggressive bears can initiate strategy using ATM puts.
The material has been provided by InstaForex Company – www.instaforex.com