Trump Versus Brexit Means Pound No Longer Most Volatile Currency

  • Sterling had biggest swings in G-10 before and after U.K. vote
  • Currency may be a way to hedge European political risk

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The pound has become an island of relative calm -- but more by accident than design.

After posting the biggest price moves among major currencies in the run-up to, and wake of, the Brexit vote, sterling is now down in sixth place for anticipated three-month gyrations. 

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That’s less because of the muted drop in implied pound volatility than the increases shown by other currencies. The impact of the U.K.’s June 23 vote to leave the European Union is fading, with markets now swayed more by Donald Trump’s ascendancy to the White House and the rise of political populism.

This may also make the U.K. currency a good way to protect against risks posed by the several European votes in coming months, from Italy’s Dec. 4 referendum on constitutional reform to elections next year in France and Germany.

“Some people are suggesting euro-sterling could be a good way to hedge euro political risk,” said Petr Krpata, a London-based foreign-exchange strategist at ING Groep NV. “You have the Brexit outcome, you have the U.S. election outcome, so the market will now be assigning bigger risk premia to euro crosses ahead of the important political events in the euro zone.”

Pound-dollar implied three-month volatility was at 10.5 percent on Wednesday in London, down about 1.5 percentage points from a month earlier and little more than a point below its 2016 average, data compiled by Bloomberg show.

Sterling relinquished its volatility crown to the yen on Nov. 1. As of the end of October, the pound had the biggest historical price swings looking back over three, six and 12 months.

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