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How to hedge the risk of voting on the Brexit agreement next week? This investment bank has a coup!

January 11, 2019 01:20
source: Global Forex

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On January 15th, the pound is likely to face a new round of riots, and investors have begun to look for ways to prevent currency fluctuations. A foreign investment bank found an excellent risk hedging tool.

According to media reports, the British Parliament began a new round of five-day debate on the draft Brexit agreement this week to prepare for the draft on the 15th. The controversial amendment on the 9th was passed again, which put the British Prime Minister at greater risk.

The market is increasingly worried about the prospect of Brexit. Due to the uncertainty of Brexit, the UK economy has suffered a serious impact in the past year: overseas investors have withdrawn, domestic consumer confidence has weakened, and the financial industry has been bleak. All walks of life in the UK are preparing for possible unresolved Brexit.

The analysis pointed out that the loss of Brexit to the British economy is beyond imagination. According to a report released by Ernst & Young (EY) on Monday, banks and other financial companies have transferred at least 800 billion pounds (about 1 trillion US dollars) of assets because of Brexit.

Market concerns are undoubtedly dragging the pound. The latest survey shows that if the UK can successfully leave the European Union, the pound hopes to rise more than 5%, and if it is counterproductive, the pound may have to plummet 6%. Last month's survey showed that the probability of a disorderly Brexit in the UK was 25%.

The one-month risk reversal option for the pound against the dollar on Wednesday reached -0.75, the highest level since August 31 last year. Despite the bearish sentiment in the market, the short-term rebound in the early sterling was only due to the weak dollar, and the fact that the indicator is still negative means that the nightmare of the pound is not over yet.

As key days approach, many investors are beginning to look for ways to guard against a new wave of currency riots.

French agricultureCreditThe bank believes that the best tool for hedging the next wave of pound risk may be NordiccurrencyRelated volatility options. The bank strategist Valentin Marinov wrote in a report.

"The volatility of the British pound will undoubtedly continue to rise on the day of the British Parliament's vote on January 15. Therefore, the volatility indicators of buying the Swedish Krona and the Norwegian Krone can provide a cheaper hedge."

In the Brexit storm of 2016 and 2018, the short-term volatility of the Nordic currency is most correlated with the sterling volatility.

Marinov pointed out that from historical data, the Swedish Krona and the Norwegian Krone will be an excellent choice for the risk of Brexit in the coming weeks. Before the March 29 deadline for the Brexit, the pound may fall to a low near 1.25. At present, the one-month volatility of the pound/dollar is around 12.4%, and the one-month volatility of the euro/Swedish krona and the euro/Norwegian krona is only 6.36% and 6.97% respectively.

(Article source: Global Forex Network)

                (Editor: DF392)

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