Pound investors are ripping up their Brexit playbooks as the chance of a no-deal exit flare once again.
Sterling is the only major currency to fall against the dollar this week as U.K. Prime Minister Theresa May gambles on getting her plan over the line with just over a week to go before the exit. Option traders are betting on further losses and increased currency swings, while fund managers are seeking help from constitutional experts to assess the potential fallout.
The political turmoil shows no sign of easing despite the looming departure on March 29, with Brussels suggesting an extension isn’t guaranteed unless Parliament approves May’s deal at a third attempt next week. Some strategists say there is as much as a 50 percent chance of Britain crashing out of the European Union, a turnaround from a week ago when the prospect of an economically damaging no-deal had been taken off the table. The pound could slump as much as 9 percent from current levels if the U.K. exited without a deal, according to a Bloomberg survey.
“The pound is softer than it was at the start of the week and that has to reflect the market’s perception that there is now an uncomfortable risk of a hard Brexit,” said Jane Foley, head of currency strategy at Rabobank. “We’re now a week away, the law as it stands suggests a hard Brexit could happen.”
The latest developments have caught market participants by surprise, according to Foley. She had put a close to zero chance of no-deal in Bloomberg’s survey carried out between Feb. 28 and March 4, but now sees a 40-50 percent chance of an event that would be “horrific for sterling.” Such a scenario could lead the pound to fall as low as $1.20, according to the survey.
The pound fell 0.4 percent to $1.3141 March 21, taking losses for the week to 1.1 percent. That comes even as the dollar has weakened, with other major currencies all gaining against the greenback.
Two-week implied volatility on sterling, a gauge of expected swings in the currency, surged 130 basis points to 15.59 percent. That is the highest it has been since December.
Although market participants still have a net short position overall on the U.K. currency, asset managers and pension funds have been recently adding to long pound positions versus the euro, according to traders.
U.K. government bonds rallied March 21 as the Bank of England left its benchmark rate unchanged and said more firms are triggering their no-deal Brexit plans. Stocks exposed to the domestic economy fell, with shares in lenders and home developers like Bovis Homes Plc. sliding.
Both May and opposition leader Jeremy Corbyn are in Brussels to talk to EU leaders as European officials have said their priority is to avert a no-deal exit. Still, market participants aren’t taking any chances. Aberdeen Standard Investments is talking to legal experts about how Parliament could stop no deal next week.
“I have never seen so many market participants so unsure about one topic as Brexit this morning,” said Luke Hickmore, an investment director at the firm.
