GBP: Looming Brexit Risk on Exchange Rates - Commerzbank
Ulrich Leuchtmann, Research Analyst at Commerzbank, suggests that the Brexit event risk is looming and many speculative market participants might find it difficult to directly bet on or against the Brexit but many might find additional opportunities in implied exchange rate correlations.
“One thing is sure (or as sure as anything can be on financial markets): In case of a Brexit the British Pound would suffer, while the currency would recover if the British voters would decide to stay in the EU. But betting on the one or the other outcome can be tricky. Opinion polls don’t show a clear picture.
On the other hand, some considerable amount of Brexit risk premium is already priced into current GBP exchange rates. The options market, too, has priced in some considerable amount of Brexit risk: forward volatility peaks in June (when the referendum will take place). Even if one comes to the conclusion that – from a risk-neutral perspective – too much or too little Brexit risk is priced into GBP spot rates and/or GBP options, speculative GBP traders might find it difficult to bet on or against a Brexit with outright GBP spot or volatility positions for two reasons:
(a) A risk-neutral standpoint hardly seems to be justified. A Brexit might trigger risk-off price moves, as such an outcome would have consequences, which are hardly foreseeable, but which are potentially significant for many asset classes.
(b) The Brexit referendum is such a unique event that statistical arbitrage hardly makes sense. There are not dozens of EU-exit referenda to bet on. Small disagreements with market-implied risk premia are hardly worth betting on – given the considerable volatility that can be expected.”
(Market News Provided by FXstreet)