Deal or no deal, play it safe on buying sterling
IT’S TOO early to express optimism on the outcome of Brexit by buying sterling, according to the world’s biggest wealth manager.
The pound is 2019’s best-performing major currency, but UBS Global Wealth Management advises investors “not to chase the rally”.
Options gauges of swings in the pound have flipped to signal traders to expect more turmoil, with the risk of a no-deal Brexit not completely ruled out.
“The road ahead remains foggy and bumpy,” strategists, including Daniel Trum, at UBS’s wealth arm said in a note. “The downside risks, like no-deal or general elections, remain on the table.”
The pound has gained more than 3 percent this year to about $1.32 (R19.13) as traders cut the risk of Britain crashing out of the EU without a deal. Although UBS’s base case is that a deal will eventually be reached after an extension to the March 29 deadline, it sees the currency slipping in the next three months to $1.28 and 90 pence per euro,” said Maximilian Kunkel, a strategist at the UBS wealth arm, which has $2.26 trillion of assets under management.
Price swings in the currency surged this week, with one-month implied volatility about 200 basis points higher than the one-year measure. That compares to the longer-term gauge being about 100 basis points higher only a few weeks ago.
“This tells us that the market is anticipating a great deal of noise and realised volatility in the immediate weeks ahead, but expects a calmer environment to prevail in the longerterm,” said currency strategists, including Shahab Jalinoos, at Credit Suisse.
BNP Paribas still sees a 25 percent chance of a no-deal Brexit and said its positioning analysis signals the market has shifted to price out any probability of a no-deal outcome.
“That suggests complacency,” said currency strategists headed by Sam Lynton-Brown.
“The sterling view over the medium term is a positive one, $1.45 over a one-year horizon, but the risks around that central case are very much skewed to the downside. On a one-week view, we are not bullish.” | Bloomberg