Pound Trader Keeps His Head When All About Him Are Losing Theirs

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  • Currency manager Adrian Lee is staying calm amid Brexit risks
  • Yet sterling’s drop this week shows currency’s vulnerability

Adrian Lee is a man in demand. His phone is abuzz with questions on Britain’s European Union vote. Can he brief the board on the referendum, asks a U.S. client. How about later today?

The founder of Adrian Lee & Partners, which oversees $9 billion of foreign-exchange investments for money managers, is quick to oblige. And after hearing him out, the company takes his advice -- and decides it doesn’t need any more protection on its sterling positions.

Adrian Lee

Source: Adrian Lee & Partners

Lee concedes this is a risk -- witness the pound’s slide the past two days after a jump in support for Brexit. Yet with just three weeks to go before Britons choose whether to quit the world’s largest trading bloc, he remains sanguine about the result.

After wild swings earlier in the year, Lee is finding some support in foreign-exchange markets. While the pound is down about 2 percent versus the dollar this year, it has pared a drop of as much as 6.1 percent after a series of opinion polls backed the status quo. Long-term options also point to a calmer outlook, with a six-month gauge of risks now back at levels seen in February, when the date of the vote was set.

“We don’t feel any sense of panic or urgency among our clients in seeking currency hedges,” said Lee, whose company has offices in London and Dublin. “Clients find our central-case view” that a Brexit won’t happen “reassuring, and none has decided to take extra currency protection. We’re slightly short-sterling in any case, but that’s driven by the U.K.’s fundamentals rather than political concerns,” he said. A short bet benefits when an asset declines in value.

For a quick guide to why the U.K. is holding a referendum, click here.

The pound fell 1.5 percent on Tuesday and Wednesday after two ICM Research Ltd. opinion polls showed leads for those wanting to leave the EU. But the bulk of the news was good for the pro-Europeans in May -- a Brexit “barometer” from broker and spread-betting company IG Markets Ltd. this week calculated a 77 percent chance of staying in.

“Economic and common sense will prevail and the odds suggest Britons will most likely vote to stay in the European Union,” said Lee.

No Panic

For James Wood-Collins, chief executive at Record Currency Management, sterling volatility, rather than weakness, is the main enemy.

“We’re certainly not seeing any sense of panic,” said Wood-Collins, whose company oversees $54 billion of currency exposures for pension funds and other investors, from Windsor, near London. “A large majority of our clients are maintaining their programs as usual, with a focus on managing exposure where possible to volatile trading conditions. Very few of our clients -- nor Record -- are going to take a directional view over and above what the market has priced in.”

It’s been a year of ups and downs for the pound, which has been buffeted not only by a stream of surveys on the EU vote, but also by interjections from business leaders and politicians on the prospects for -- and risks of -- a Brexit. 

Sterling was at $1.4422 at 12:39 p.m. in New York on Thursday, having climbed from this year’s low of $1.3836 in February. While it was the second-best performing Group-of-10 currency in May, year-to-date it’s still the worst. And though the price of protection against weakness and volatility remains elevated for the time of the referendum, the cost of hedging six-month declines has fallen.

“The pound remains vulnerable despite the recent rebound as the vote remains highly uncertain,” said Lisa Scott-Smith, a money manager at Global Millennium Investments in London, which oversees $16 billion. “As witnessed this week, the market was very sensitive to negative news having so quickly priced out Brexit risk premium.”

20% Slide

The danger is that a vote to leave the EU would push the pound into a drop against which investors aren’t sufficiently hedged. Lee predicts sterling would fall 20 percent on a vote to leave the EU over the course of two to three days, with much of it on day one.

It’s questionable whether such losses would endure.

The extra cost of one-month options protecting against a sterling decline versus the dollar, compared with those betting on an advance, has surged to 6.7 percentage points, the most in data compiled by Bloomberg going back to 2003. Anticipated volatility in a month’s time reached the highest since 2009 this week.

Yet risk reversals also suggest waning concern in the longer term, with the six-month rate narrowing this week to 3.3 percentage points, the least since Feb. 22, the day after the date of the vote was set.

Hedge funds and other large speculators have cut bets on a sterling decline versus the dollar, known as net shorts, by 40 percent from a three-year high in April, data from the Commodity Futures Trading Commission in Washington show.

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“The general view is that, most likely, the U.K. will choose to remain in the EU,” said Stephen Jen, a former International Monetary Fund economist and the London-based co-founder of hedge fund SLJ Macro Partners LLP, who predicted the sterling decline that started in mid-2014. “That creates asymmetrical risk for the pound because history suggests polls can be wrong.”

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