February 27, 2019 / 8:54 AM / 22 days ago

Pound scales seven-month highs as no-deal Brexit fears fall

LONDON (Reuters) - Sterling rallied to its highest levels in seven months on Wednesday as investors ramped up bets that a no-deal Brexit was less likely and that Britain’s departure from the European Union would be delayed.

FILE PHOTO: British Pound Sterling banknotes are seen at the Money Service Austria company's headquarters in Vienna, Austria, November 16, 2017. REUTERS/Leonhard Foeger

On a day when most high-yielding currencies including the Australian dollar came under pressure and safe-haven bets like the Swiss franc gained thanks to geopolitical concerns, the pound was the standout performer versus the dollar.

British Prime Minister Theresa May on Tuesday offered lawmakers the chance to vote in two weeks for a no-deal Brexit or to delay Britain’s exit from the European Union if her attempt to ratify an agreement fails.

With a majority of lawmakers believed to oppose a no-deal Brexit, May’s move opens up the possibility of a delay, removing the immediate threat of a disorderly exit on March 29.

“We think the risk of a no-deal Brexit has substantially fallen for now,” said Kaspar Hense, a portfolio manager at BlueBay Asset Management, which runs $60 billion (£45 billion) in funds.

Against the dollar, the pound rallied 0.6 percent to its highest since July 2018 at $1.3335. For the month, it is the best performing currency against the dollar among major currencies, clocking a gain of 1.6 percent so far.

It also rallied by a similar magnitude against the euro to 85.40 pence.

The pound was also supported by rising bond yields.

Ten-year yields on British government debt rose to the highest level since Feb. 5 and up five basis points on the day.

Still, uncertainty remains around when Britain will leave the EU and on what terms, making investors nervous.

“Given the developments of the last few days, an extension is becoming more likely,” asset manager Amundi said in an email, cautioning that it was preparing for a “several months extension with prolonged uncertainty, not the technical extension that would very probably come with a deal scenario”.

Sterling, gilt yields rise on reduced no-deal risks: tmsnrt.rs/2UblSJy

VOLATILITY DROPS

With the risk of no deal dwindling, the relief was visibly felt in currency derivatives markets with implied volatility, a measure of expected swings in the pound, falling across the board.

Implied volatility usually rises when market participants hedge their positions before an event which may have a negative impact on a currency.

In the pound’s case, the countdown to Brexit day on March 29 has prompted companies and hedge funds to buy implied volatility, bracing for a sharp rise in price moves.

Two-month sterling/dollar implied volatility - a measure of expected price swings - is approaching three-month lows. Similar moves were seen in the far end of the curve, especially one-year segments.

2-month vol falls, 2-week vol up: tmsnrt.rs/2VpNon2

May has said if Brexit is delayed, it must be a short delay because the EU has said Britain needs to hold European elections if it is still a member beyond July 2.

Marshall Gittler, currencies strategist at ACLS Global, said May would use that deadline to give members of parliament an ultimatum.

“Her strategy is to take Britain to that cliff edge and say `now it’s either my deal or no deal,’ and hope that MPs vote for the deal,” he said. “I think that might work, which would be positive for GBP. But it’s a hell of a way to run a country.”

Additional reporting by Richard Pace; Writing by Saikat Chatterjee; Editing by Andrew Cawthorne

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