Alvin T. Tan, Research Analyst at Societe Generale, suggests that the Sterling has been the G10 laggard this quarter amid mounting Brexit risks and the downward pressure is likely to intensify as we get closer to the referendum date in late June.
Key Quotes
“Sterling has been the hands-down worst performer among G10 currencies this year. The underperformance is quite stark and persistent. Sterling was the second worst performer in the period between the new year and 11 February 2016, which was when the intra-year low for the MSCI World index was reached. The Aussie dollar was the worst performer over that period, thanks to the broad global risk sell-off.
Sterling followed up by being the absolutely worst performer in the period since 11 February 2016, while AUD rose to the top of the performance rankings. There has thus been no respite for sterling across the first quarter’s rather extreme market mood swings. Moreover, unlike other G10 currencies, sterling’s implied volatility has climbed higher in recent years, becoming divorced from the global trend following the improvement in risk sentiment. The chief driver of the persistent nervousness over sterling is renewed Brexit fears.
The lowest point that cable has traded to in the past twenty years is 1.35, in the midst of the global financial crisis. If we assume that cable will trade well under 1.35 in the event of Brexit, then we could calculate the probability given by the option market of cable being under that level by the end of June (the referendum is on June 23). That probability is currently 22.8%. We continue to advocate being short sterling, in particular short GBP/USD and short GBP/NOK.”
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