British pound ‘untradeable’ amid drama over Brexit
LONDON/NEW YORK The Bank of England and other regulators discussed the pound’s plunge and other market turmoil triggered by resignations from U.K. Prime Minister Theresa May’s government with about 10 City of London institutions on Thursday, according to a person briefed on the talks.
Executives from the big four U.K. banks — Barclays Plc, HSBC Holdings Plc, Lloyds Banking Group Plc, and Royal Bank of Scotland Group Plc — were involved in the calls, said the person, who asked not to be identified talking about a private meeting. So, too, were representatives from London Stock Exchange Group Plc and major investment-management firms.
The Financial Conduct Authority and BoE’s Prudential Regulation Authority, which are charged with ensuring the stability of the British financial system, wanted to connect on a day when May’s draft deal for Brexit caused a political crisis in Westminster that could unseat her.
Shares in British banks fell sharply Thursday, with RBS’s stock closing down 9.6 per cent, its steepest dive since the Brexit referendum itself in June 2016. Lloyds shares dropped five per cent and Barclays stock slipped four per cent.
Meanwhile, Wall Street is finding it harder to trade sterling as the drama surrounding Brexit roils the British currency.
The pound’s short-lived rally on Wednesday after May secured cabinet backing for her draft deal turned to aggressive selling on Thursday as several ministers resigned and questions of a leadership challenge arose. Cable’s onemonth implied volatility spiked to the highest level since 2016 as the pound posted its biggest drop in more than a year against the U.S. dollar. While passive algorithmic strategies can handle the extreme, headline-driven swings, it makes for a tough liquidity environment, according to Jefferies LLC.
“The news flow is far from over, the market is still short and any good news sees violent pops, which is met by selling from a very skeptical investor base,” Jefferies foreign-exchange head Brad Bechtel wrote in a note Thursday. The British currency “remains relatively untradeable at the moment, but I think the preference in the market is to hammer rallies still.”
The pound plunged as much as 1.9 per cent to US$1.2744 Thursday, from as high as US$1.3072 the day before.
Jefferies isn’t alone in its caution. UBS Securities LLC also recommended steering clear of the currency until the Brexit dust settles.