Brexit fears hike costs of hedge against pound’s fall as sterling trades below $1.30

THE cost of insuring against a fall in the pound is now at its highest level since the referendum as the UK struggles to avoid a no-deal Brexit.

Currency-watchers and the Bank of England are keeping a close eye on developments in currency markets as Prime Minister Theresa May fights for political survival at home.

But experts warned the rising uncertainty is distorting markets and skewing the cost of common currency hedging strategies using put and call options on the currency that give them the right to sell and buy at a certain price.

In the current climate more people want to “put” — sell at a guaranteed price over the next six months — than call, pushing the cost of a put option 260 basis points higher than a call. That’s the biggest premium since mid-2016.

Simon Derrick, currency analyst at BNY Mellon, said: “The cost will almost certainly continue to rise as long as Brexit uncertainty persists.”

Speculative traders also have a £3 billion bet against the pound according to weekly data from the Commodity Futures Trading Commission, with some 50,400 contracts shorting the currency as of the end of last week. This peaked at 79,300 in the immediate aftermath of the fractious Salzburg summit in September, which was a diplomatic disaster for May.

Sterling traded below $1.30 today despite May’s claims this week that a Brexit deal is “95% agreed” and the PM also faces a crucial meeting of the Tory party’s 1922 Committee tomorrow.

ING Bank’s Viraj Patel said: “While a Brexit withdrawal deal may be inching closer to completion, whispers of a growing number of Conservative MP rebels losing their patience with Theresa May — with rumours of ‘centrist’ Tory MPs also having submitted their vote of no confidence in the PM to the 1922 Committee – have put the risks of a lengthy UK political impasse and a Brexit policy mistake back on the table.”

Nomura’s Jordan Rochester said the risks of a no-deal where “very slim”, adding: “It’s only in the scenario that an election is triggered or a Conservative leadership challenge is mounted that we could expect a substantial drop in the pound over the long run.”