Sterling faces weight of bearish bets on May
Investors are the most bearish on sterling since the UK voted to leave the EU almost two-and-a-half-years ago, as markets wait for the possibility of a no-confidence vote on prime minister Theresa May.
That is the message from markets where the premium to buy put options on sterling relative to calls is the steepest since June 2016 even as the numbers within the Tory Party to trigger a no-confidence vote have yet to materialise. May told Sky News that as far as she knew the threshold for a vote of confidence in her leadership by Conservative politicians had not been met.
Sterling fell 1.8% against the euro, to 88.96p last week. Against the dollar, it shed 1% of its value as the political chaos in Westminster and the resignation of a number of May’s ministers swirled around her leadership and threatened her Brexit transition deal with the EU.
The turmoil has opened up a multitude of risks for sterling, including the prospect of a UK general election or even a second referendum. RBC Capital markets said last week the best and worst-case scenarios could lead to a 10% swing for sterling.
The risk of a no-deal Brexit is greater than the wider market appears to be pricing in
- said John Goldie, a London-based broker at Argentex. The currency could still drop to parity with the euro by March, he said.
The cost of one-month put options on the pound relative to call options reached 236 basis points, up from 68 basis points a week earlier.
Sterling has now slumped 17% from around 76p since the UK voted for Brexit in June 2016. That has posed huge problems for many Irish exporters, and for SMEs, in particular, because it makes the goods and services they sell across the Irish Sea more expensive and potentially lossmaking.
The shares of many Irish stockmarket companies will also be again vulnerable if sterling falls further against the euro.
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