Pound’s Low Volatility Shows Traders Sharing Carney’s Serenity

  • Gauge of expected swings a year from now lowest since December
  • Gilts drop with European peers after ECB maintains policy

Carney: 'Absolutely Serene' on BOE Brexit Grilling

Mark Carney’s serenity about post-Brexit Britain is shared by currency traders.

Measures of the pound’s volatility have dropped to levels not seen since before the announcement of the date for the U.K.’s referendum on its European Union membership.

Facing lawmakers Wednesday who questioned whether the Bank of England had been too pessimistic before the vote, Governor Carney said he was “serene” and credited officials’ interest-rate cut and asset purchases with lowering chances of a recession. He also said the pound’s weakness should reduce Britain’s current-account deficit.

The sense of calm shared by currency markets has been accompanied by a rebound in the pound from a three-decade low versus the dollar as manufacturing, services, consumer spending and housing all held up in the wake of the June 23 vote to leave the EU. The pound dropped the most on record as the referendum result was confirmed, and it’s still the worst-performing major currency since then.

“There is a sense that the immediate fallout for the economy has been rather limited, so we are seeing the market adjust to that,” said John Hardy, head of foreign-exchange strategy at Saxo Bank A/S in Hellerup, Denmark. “It’s fair for volatility to drop some, but I don’t think it’s fair to say that we’ve seen a bottom in sterling. I see downside risks, against the dollar in particular.”

Sterling slipped on Thursday, adding to the previous day’s drop that was the biggest in a month, even as a Royal Institution of Chartered Surveyors gauge showing the housing market gained momentum in August became the latest source of good news.

Lowest Since January

One-month pound-dollar implied volatility dropped 0.29 percentage point to 8.47 percent as of 4:17 p.m. London time, set for the lowest closing level since January, according to data compiled by Bloomberg. The one-year measure was at 9.42 percent, headed for the lowest close since December, about two months before then Prime Minister David Cameron disclosed the referendum date.

The pound slipped 0.2 percent to $1.3311, after sliding 0.7 percent on Wednesday. It has recovered about 4 percent since slumping on July 6 to its lowest level since 1985. Sterling weakened 0.5 percent to 84.68 pence per euro, extending its depreciation after the European Central Bank on Thursday left the levels unchanged for its interest rates and asset-purchase program.

Gilts, Bunds

U.K. government bonds extended their losses along with German bunds after ECB President Mario Draghi said in a press conference in Frankfurt on Thursday that policy makers didn’t discuss an extension to the ECB’s bond-buying plan, cooling speculation that it would be expanded.

Ten-year gilt yields rose seven basis points, or 0.07 percentage point, to 0.75 percent and earlier reached 0.76 percent, the highest level in more than one month.

With the terms of the U.K.’s exit still to be negotiated, the median of analysts’ predictions compiled by Bloomberg is for the currency to drop to $1.28 by year-end and $1.27 in March.

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