Pound volatility a bargain for investors eyeing Brexit breakout

State Street Bank & Trust is neutral on sterling but finds betting on swings over six months attractive, as that covers the Oct. 31 deadline for the UK to leave the European Union. Longer-dated sterling volatility is “undervalued” for Adam Cole, chief currency strategist at Royal Bank of Canada, given the persistent Brexit risks and domestic political uncertainty.

The British currency has been stuck mostly in a $1.29-$1.31 range this quarter as cross-party talks, aimed at finding common ground for an exit deal with the EU, have dragged on without result. UK labour data could fuel some spot-market action in the coming week, but a sustained move is seen as unlikely with the Bank of England expected to stay on hold until Brexit is resolved.

“The Easter break gave people a chance to take a break from Brexit and I think they’re finding it hard to re-engage” in the market, said Timothy Graf, head of EMEA macro strategy for Europe at State Street Bank & Trust. “However, once you do get some meaningful news,” the pound “would have that potential to jump 1 per cent in your face and I don’t think anyone can predict which direction,” he said.

Contracts betting on implied volatility over six months have slid to 7.87 per cent, from 12.78 per cent at the end of last year, even as speculation mounts that the UK could see a second Brexit referendum or even an early election. One-year volatility also touched its lowest since January 2018 last month.

RBC’s Cole prefers the one-year gauge, as “it’s not hard to construct scenarios where cable trades back up to $1.50, or down to $1.10 and positioning for this in options is starting to look attractive.”