Pound volatility seen as an opportunity for Allianz
LONDON: The UK government is engulfed in a political crisis and time is running out to forge a Brexit deal – and yet volatility traders are remarkably sanguine.
While this has puzzled some fund managers, Allianz Global Investors says it’s now betting on greater swings in sterling. The cost to hedge against turbulence in the pound versus the dollar over the next year climbed the most in a month after Prime Minister Theresa May saw two of her most senior ministers resign within 24 hours, but is still below long-term averages.
“For me there is a buying opportunity in terms of the volatility side for sterling,” said Kacper Brzezniak, a portfolio manager at Allianz, which oversees 513bil (US$601bil) of assets globally. “My view is that we could get a fairly large move in either direction, you could say markets are perhaps complacent or maybe a bit fatigued with Brexit.”
Allianz’s Brzezniak said the firm went long volatility ahead of last weekend by buying options, with a bias for sterling-dollar puts.
Even though the next 12 months encompass a key European Union summit in October and the UK’s March 2019 exit, a one-year gauge of volatility is yet to show signs of panic among pound traders. It touched 8.23% on Tuesday, its highest in three weeks, but lower than the annual average of 8.44% and far from this year’s 9.32% high.
“Progress hasn’t been great in Brexit negotiations and it’s a bit surprising that one-year volatility hasn’t risen more than we have seen so far,” said Van Luu, head of currency and fixed-income strategy at Russell Investments Ltd. The October summit is by when “we should make significant progress and if there isn’t significant progress then there is certainly scope for higher volatility in the exchange rate,” he said.
It’s a view shared by strategists at UniCredit SpA who see volatility hitting particularly high levels around events such as the EU summits in October and December. They recommended a long-volatility trade this month.
“I would expect people to want to be compensated for the potential volatility that you could see over the coming months,” Mike Bell, a global market strategist at JP Morgan Asset Management, said in an interview last week. “I would expect implied vol to be somewhat higher given the extent of the choppiness we could see before we get to the eventual end state.”
With May trying to pass her vision through Parliament while keeping her party intact, and Brexit progress a factor for the Bank of England’s policy, it is getting more challenging to predict where sterling is headed. Russell’s Luu sees more upside from here on sterling and Allianz’s Brzezniak remains bearish on its prospects – but both see more swings.