Pound options show traders positioning for delay to Brexit date
Pound options traders seem to be positioning for the possibility that the U.K. will delay its exit from the European Union.
Investors are now more negative on the currency in nine months time rather than on three-month contracts that capture the March 29 exit date, risk reversals show. That comes as the market has priced in the likelihood that Parliament will reject Prime Minister Theresa May’s Brexit deal next week, increasing the chances the government will be pushed to extend Article 50.
The spread between three- and nine-month tenors on risk-reversal options, a gauge of positioning and sentiment, is now at the widest level since September, showing investors are acknowledging the risks of a weaker pound in the second half of the year. The nine-month contract is over 200 basis points in favor of options to sell the pound, versus about 160 for three months.
The change comes as May is openly contemplating a Brexit “Plan B”, after the prime minister lost control of the timetable for setting out the next steps if Parliament votes down her deal on Jan. 15. Labour party leader Jeremy Corbyn said on Thursday the opposition party would not rule out extending the Brexit negotiating period, after its Brexit spokesman Keir Starmer said he thought delaying beyond March 29 is now likely.
The market positioning can also be seen in options betting on swings in the pound. A gauge of volatility over three months has not gained ground this week against nine-month contracts. The difference between the two was much wider a month ago, when fears increased of the U.K. crashing out of the bloc without a deal in March.