(Bloomberg) --
Currency traders doubt that Prime Minister Boris Johnson will deliver on his promise to tear Britain out of the European Union with or without a deal later this month.
Investors are less concerned about pound swings over the Oct. 31 deadline than they were in November and March when fears of a chaotic divorce also intensified, options markets show. Hedges against a sharp fall in sterling, through so-called risk reversals, also indicate diminishing fears of an immediate no-deal scenario.
Fears are contained even as Johnson threatens to abandon talks if the EU rejects his proposals to prevent a hard border forming with Ireland. The market is betting he may instead reach a deal, seek a delay or even be forced out of office and replaced with a less euro-skeptic government before the end of the month. If Britain does crash out, some banks estimate the pound could fall around 19% and reach parity with the dollar.
“Our base case is that there will be an extension of Brexit and new elections, possibly at the beginning of next year,” said Thu Lan Nguyen, a currency strategist at Commerzbank AG. “The extension may result in a relief rally at first. However, with political uncertainty remaining high and a high likelihood of a hung parliament, we forecast again a weaker pound at the beginning of the year.”
While investors still favor selling the pound in both shorter and longer term, it is only after the two-month horizon, well beyond the Brexit deadline, that they are looking to hedge a steep decline in sterling. Asset managers have cut their bets that the pound will drop to the lowest since July, according to the Commodity Futures Trading Commission.
Johnson will test his new Brexit proposal in the U.K. Parliament on Thursday. The EU received the U.K.'s new blueprint on Wednesday, with European Commission President Jean-Claude Juncker saying there are “problematic points” that need more work.
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According to a Times report, the EU is ready to grant another extension even if Johnson doesn't sign the letter making the request.
One-month implied volatility in pound-dollar traded Thursday at 11.69%, higher than its year-to-date average but largely trailing the March highs of above 14% and the November peak at 15.26%. The U.K. currency has steadied lately at around $1.23, down 3.5% since the start of the year.
--With assistance from Charlotte Ryan.
To contact the reporter on this story: Vassilis Karamanis in Athens at vkaramanis1@bloomberg.net
To contact the editors responsible for this story: Paul Dobson at pdobson2@bloomberg.net, William Shaw, Neil Chatterjee
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