LONDON (BLOOMBERG/REUTERS) - Traders are bracing themselves for further turbulence in the pound as the risk of a chaotic exit from the European Union increases.
A measure of expected swings over the next three months, covering the Oct 31 Brexit deadline, has surged to near the highest this year after Queen Elizabeth II approved Prime Minister Boris Johnson's request to suspend Parliament for almost five weeks. That sets up a battle with lawmakers trying to block no-deal and the currency is likely to react to every political headline.
"The next two weeks in Parliament are likely to be even more brutal," said Jeremy Stretch, head of Group-of-10 currency strategy at Canadian Imperial Bank of Commerce in London. A no-deal Brexit is "firmly back onto the radar, impacting volatility".
Three-month pound-dollar volatility has climbed above 13.5 per cent, the highest since Jan 3, when no-deal risk was also rising ahead of a parliamentary vote on the Brexit deal. That level is the most among Group-of-10 peers and puts it in the same camp as emerging-market currencies such as the Mexican peso.
Traders and companies that have not hedged their sterling exposure for the October deadline now face having to pay up in the options market. The relative cost of hedging sterling over three months is at its most expensive in more than three years.
Volatility and hedging costs had collapsed after the last Brexit deadline was extended in April, but this time Johnson is vowing to leave the EU "do or die". This week's trading has seen the sterling keep reversing direction.
The pound climbed above US$1.23 on Tuesday (Aug 27) on optimism after the positive tone struck by European leaders at a Group of Seven meeting, before sliding on Wednesday and breaking below US$1.22 on Thursday. The currency could tumble to US$1.10 if Britain leaves the EU without a deal, according to a Bloomberg survey of analysts.
Meanwhile, Britain's mid-cap index slid for the second straight session on Thursday after Johnson's plan to suspend Parliament was announced.
The resulting weakness in sterling helped the exporter-heavy FTSE 100 eke out gains.
The main index added 0.2 per cent, with gains led by more internationally exposed firms such as BAT and AstraZeneca. The more domestically-focused FTSE 250 slipped 0.3 per cent by 0709 GMT (3.09pm Singapore time).
The mid-cap index was also pulled lower by a more than 17 per cent slump in Amigo Holdings after the consumer credit provider posted lower adjusted pre-tax profit for the first quarter and cut its annual forecast.