The U.K. referendum over European Union membership on June 23 is mostly treated as a potential risk by investors rather than an opportunity. But after the pound’s descent this week to a nearly seven-year low, some are scouting for trades in response to the currency’s selloff as they await the vote’s outcome.
Indosuez Wealth Management
Davis Hall, global head of currencies and precious metals, says Indosuez is looking to implement a risk reversal strategy for the pound versus the dollar below 1.39, and favors long positions in the 1.35-1.39 area. This is based on the view that the pound looks excessively weak at current levels, even considering "Brexit" negative news flow. The asset manager also suggests increasing gold exposure amid risk-off market sentiment, Hall says.
An underweight position on British banks is attractive ahead of the "Brexit" vote, according to Cosimo Marasciulo, head of government bonds. Pioneer is considering short positions in the pound and U.K. bonds if the “out” campaign appears to prevail ahead of the referendum. Pioneer may also buy protection on sterling credit index in anticipation of wider U.K. spreads, and may consider going long on U.K. volatility, depending on the risk-reward characteristics, Marasciulo said.
Shorts on the sterling against the yen would be the best way to express uncertainty around U.K. assets, according to Shaun Osborne, head of currency strategy. The yen’s role as a haven asset also supports the trade, and the cross may potentially fall toward the 135/145 area as the referendum nears, Osborne says.
Head of G-10 strategy Steven Barrow is looking at bullish trades, based on the view that the U.K. will remain in the EU. The best trade would be to buy some GBP/USD calls at 1.50 with tenors from six to nine months, he said. The pound is going through its "It couldn’t really happen, could it?" anxiety over a possible U.K. exit. There’s a similar sentiment seen in the U.S., with the possibility of a Trump presidency weighing on the dollar, Barrow adds.
Bond markets are pricing around a 40 percent chance of "Brexit," and JPMorgan recommends investors remain neutral on duration, according to analysts including Francis Diamond. The bias is for a wider spread between ten-year gilts and Treasuries, on the prospect of a higher "Brexit" risk being priced in as the referendum campaigns kick off, they say.
Morgan Stanley analysts including Hans Redeker recommend shorts on the pound versus Sweden’s krona, with a target of 11.40 and a stop at 12.50. While the krona is seen as sharply undervalued given Swedish economic fundamentals, the U.K. economy is heading in the other direction. "Brexit" risks and reserve-manager liquidation should disproportionately weigh on U.K. assets, the analysts say.
Brown Brothers Harriman
Patience is the recommendation of Marc Chandler, global head of currency strategy. He suggests investors wait for technical indicators that signal the selloff has been overdone, and says he would use the options market to express the view that the U.K. is unlikely to leave the EU. However, while the market cannot sustain the pace of the recent selloff, the upside for U.K. assets is limited, Chandler adds.