In­vestors seek ways to turn 'Brexit' chal­lenge into win­ning bets

The Pak Banker - - MARKETS/SPORTS -

The UK ref­er­en­dum over Euro­pean Union mem­ber­ship on June 23 is mostly treated as a po­ten­tial risk by in­vestors rather than an op­por­tu­nity. But af­ter the pound's de­scent this week to a nearly seven-year low, some are scout­ing for trades in re­sponse to the cur­rency's sell­off as they await the vote's out­come.

Davis Hall, global head of cur­ren­cies and pre­cious me­tals, says In­do­suez is look­ing to im­ple­ment a risk re­ver­sal strat­egy for the pound ver­sus the dol­lar below 1.39, and fa­vors long po­si­tions in the 1.35-1.39 area. This is based on the view that the pound looks ex­ces­sively weak at cur­rent lev­els, even con­sid­er­ing "Brexit" neg­a­tive news flow. The as­set man­ager also sug­gests in­creas­ing gold ex­po­sure amid risk-off mar­ket sen­ti­ment, Hall says.

An un­der­weight po­si­tion on Bri­tish banks is at­trac­tive ahead of the "Brexit" vote, ac­cord­ing to Cosimo Maras­ci­ulo, head of govern­ment bonds. Pi­o­neer is con­sid­er­ing short po­si­tions in the pound and U.K. bonds if the "out" cam­paign ap­pears to pre­vail ahead of the ref­eren- dum. Pi­o­neer may also buy pro­tec­tion on ster­ling credit in­dex in an­tic­i­pa­tion of wider U.K. spreads, and may con­sider go­ing long on U.K. volatil­ity, de­pend­ing on the risk-re­ward char­ac­ter­is­tics, Maras­ci­ulo said.

Shorts on the ster­ling against the yen would be the best way to ex­press un­cer­tainty around U.K. as­sets, ac­cord­ing to Shaun Os­borne, head of cur­rency strat­egy. The yen's role as a haven as­set also sup­ports the trade, and the cross may po­ten­tially fall to­ward the 135/145 area as the ref­er­en­dum nears, Os­borne says.

Head of G-10 strat­egy Steven Bar­row is look­ing at bullish trades, based on the view that the U.K. will re­main in the EU. The best trade would be to buy some GBP/USD calls at 1.50 with tenors from six to nine months, he said. The pound is go­ing through its "It couldn't re­ally hap­pen, could it?" anx­i­ety over a pos­si­ble U.K. exit. There's a sim­i­lar sen­ti­ment seen in the U.S., with the pos­si­bil­ity of a Trump pres­i­dency weigh­ing on the dol­lar, Bar­row adds.

Bond mar­kets are pric­ing around a 40 per­cent chance of "Brexit," and JPMor­gan rec­om­mends in­vestors re­main neu­tral on du­ra­tion, ac­cord­ing to an­a­lysts in­clud­ing Fran­cis Di­a­mond. The bias is for a wider spread be­tween ten-year gilts and Trea­suries, on the prospect of a higher "Brexit" risk be­ing priced in as the ref­er­en­dum cam­paigns kick off, they say.

Mor­gan Stan­ley an­a­lysts in­clud­ing Hans Redeker rec­om­mend shorts on the pound ver­sus Swe­den's krona, with a tar­get of 11.40 and a stop at 12.50. While the krona is seen as sharply un­der­val­ued given Swedish eco­nomic fun­da­men­tals, the U.K. econ­omy is head­ing in the other di­rec­tion. "Brexit" risks and re­serve­m­an­ager liq­ui­da­tion should dis­pro­por­tion­ately weigh on UK as­sets, the an­a­lysts say. Pa­tience is the rec­om­men­da­tion of Marc Chandler, global head of cur­rency strat­egy. He sug­gests in­vestors wait for tech­ni­cal in­di­ca­tors that sig­nal the sell­off has been over­done, and says he would use the op­tions mar­ket to ex­press the view that the U.K. is un­likely to leave the EU. How­ever, while the mar­ket can­not sus­tain the pace of the re­cent sell­off, the up­side for UK as­sets is lim­ited, Chandler adds.

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