The cost of hedging against sharp swings in the British pound rose on Monday as, exactly a month before an unprecedented independence vote, speculators sought to insure against the risk of Scotland leaving the United Kingdom. Polls suggest Scots will choose to remain part of the 307-year-old union with England on September 18, but the gap between the "Yes" and the "No" camp is narrowing.
A YouGov survey for the Times on Monday found 38 percent supporting independence, 51 percent saying No, and 11 per cent undecided. Excluding undecided and non-voters, 43 percent would vote for independence, the highest since YouGov started polling on the issue. Most of the demand to hedge was seen in the euro/sterling options market, traders said.
The euro/sterling one-month implied volatility, a gauge of how sharp swings are likely to be between now and the referendum, rose to its highest in six weeks, to around 5.50 percent, from 4.5 percent on Friday, Reuters data showed. "Given that the polls are getting tighter we are seeing some demand for downside (option) strikes in sterling from hedge funds," said a chief options trader at an European bank. "It's not huge, but suffice to say there is decent demand to hedge against sharp swings in case there is a "Yes" vote." The one-month sterling/dollar implied volatility rose to 4.8 percent, from around 4.45 percent on Friday. One-month risk reversals, a gauge of demand for options on a currency rising or falling, showed a greater bias for sterling weakness than a month ago.
Part of the reason for bearish bets could - notwithstanding mixed signals on the impact of wage inflation on UK monetary policy - be due to a slight unwinding of interest rate hike expectations since last week's Bank of England inflation report. "People are turning their attention to September 18 and the Scottish referendum. Sterling puts beyond that date carry a bit of extra premium just in case we get a sharp move lower," said an options trader at a North American bank.