Daily Management Review

$15.5 Billion Against GBP


03/24/2016


For the current year, Forex Market Players bet the pound to $ 15.5 billion. The sum is very large: in size, it corresponds to the GDP of Iceland.



public-domain-image.com
public-domain-image.com
Expectations for the pound is very high. Or rather, low: it should fall to the 80s’ lows. Based on purchased options, currency traders expect to 4% drop on the results of the referendum on 23 June. More than half of the amount (total of $ 15.5 billion) have already been put after 20 February, when the UK government decided on the referendum’s date.

The notorious "Brexit" keep investors on alert: the EU accounts for half of Britain's exports and imports, and breaking such close links will have very serious consequences. Nervousness is growing: in the latest ICM’s poll, Brexit’s supporters for the first time got ahead of fellow citizens who want to stay in the EU (43% vs. 41%). Needless to remind that one of the main arguments of the skeptics again were breaches in the EU safety system, which are clearly visible in the example of Brussels.

Paul Meggyesi, Forex strategist at JP Morgan, says that the pound have already fallen, yet customers still are not willing to buy it. The risks are too high, and the bottom is hardly achieved. The consensus forecast indicates 55% chance of falling to the level of 1.35 pounds to the dollar on the day of referendum (23 June). This will be a minimum of 1985. At the moment, the pair GBP/USD is trading at about 1.41.

However, this is only the average forecast: there are also pessimists with their very reasonable arguments. Nick Kunis, senior analyst at ABN Amro, said that Britain and the EU could choose to "divorce with a scandal." In this case, a few dozen large free trade agreements will be stopped, the UK will sink into recession and the pound will crash against the dollar to a mark of 1.15. In December, Bloomberg acknowledged ABN Amro (the largest commercial bank in the Netherlands) as the most accurate predictor of the British currency.

The implied volatility of the pound for the period prior to July rose to 15%, which was the maximum for the last 6 years. This means that investors are really concerned about the Brexit issue. The British currency’s volatility had reached such heights neither last year, when the election might end with paralyzed parliament, nor in 2014, when the Scots vote for independence. Premiums on options to sell the pound rose more than twice in relation to the premiums for the purchase. The spread hit a new high.

Mizuho Bank is not far away from ABN Amro’s colleagues in terms of optimism. The Japanese bank predicts decline of the pound against the dollar to 1.20 if Brexit still happens. Meanwhile, the exit from the EU proceeds attracting new influential supporters. For example, Boris Johnson, Mayor of London, said on Wednesday that Britain will "vigorously flourish" after leaving the EU. Johnson stressed that the capital's business support for the idea remains almost at zero.

source: bloomberg.com






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