FxWirePro: Brexit fatigue still detrimental to Sterling, GBP OTC hedging functions substantiate

Where does one begin in summarizing the Brexit drama in the six weeks or? The low-vol attrition in the GBP spot rate over this period (NEER down 1.5%) might indicate that the range of developments have been detrimental to the chances of the UK securing an orderly Brexit. That is likely to be the wrong conclusion– in our view, the subjective probabilities of the various Brexit outcomes have actually tilted in a more favorable direction for GBP as a result of the ruling from the European Court of Justice that the UK has the unilateral right to revoke the Article 50 process.

Any which ways, time is running out. Unless the UK takes active measures to prevent the perspective of Brexit deadlock (where UK leaving the EU without a deal), it will leave the EU without a deal on 29th March regardless of Spelman. In the absence of any signs for a postponement of Brexit, which the GBP traders had hoped for, Sterling is trading weaker today. However, compared with previous months Sterling nonetheless remains strong, which seems to be surprising but also could be momentary as you could observe the intensified hedging activities for bearish risks foreseen.

OTC updates: 

It is noteworthy from the 1stnutshell that the fresh negative bids for GBP’s crosses have been added.

Please be noted that the positively skewed IVs of GBP pairs signify the hedgers’ interests to bid OTM put strikes up to 138 levels (refer above nutshells evidencing IV skews).

To substantiate the above driving forces of sterling, GBP is factored-in hedging setup to mitigate bearish risks. The negative risk reversals across all tenors also indicate that the downside risks remain intact in the major trend.

GBPJPY display the highest number among entire G10 FX universe (trending between 13.21% - 10.99%).

Hence, vega long put is most likely to perform decently capitalizing on the rising mode of IVs. Courtesy: Sentrix, JPM & Saxobank

Currency Strength Index: FxWirePro's hourly GBP spot index is flashing -115 (which is bearish), while hourly USD is at -38 (bearish) and JPY spot index was at 76 (bullish) while articulating (at 09:38 GMT).

For more details on the index, please refer below weblink: http://www.fxwirepro.com/currencyindex