The cost of hedging against a swing in the value of the pound just hit a seven-year high
The price of hedging against volatility on the currency markets spiked today, as traders become increasing nervous with just four weeks to go until the EU referendum.
The cost of insuring against swings on the value of the pound, as measured by one-month options for swapping sterling into US dollars hit a seven-year high today.
The price attached to such contracts, which now run up to a few days after the vote, shot up to 16.2 per cent today, from just 11 per cent for contracts ending in the few days before the vote. That was the highest since the height of the recession in March 2009. Higher hedging costs imply higher volatility since it means people are willing to pay more to protect themselves against fluctuations.
Panmure Gordon's chief economist, Simon French, said that "spikes" in the forward rate "tend to proceed a stronger sterling", and suggested that higher volatility doesn't necessarily mean a shaky currency. "Interpreting spikes in forward volatility as signs of weakness is lazy analysis and is not backed up by the empirical facts," he added.
The pound has been bouncing around since the end of 2015. It fell by around ten per cent against the dollar between November and February, just after the date of the vote was announced, but has since recovered by nearly six per cent.
The Bank of England estimates that referendum uncertainty was responsible for nearly half the fall in the value of sterling during this time.
Sterling climbed again this morning in an impressive week for the currency. It was up 0.2 per cent to $1.4727 and steady at €1.3172. In the past seven weeks the pound has added nearly eight cents against the euro and six against the dollar.
A string of good opinion polls for the Remain side in the EU referendum debate have been pointed to as the cause of sterling's recent ascent.
Analysts had expected the pound to remain wedged between $1.40-$1.45 right up until the vote, but double-digit leads for Remain along with heavy-hitters such as Mark Carney, Christine Lagarde and the World Trade Organisation swinging behind their cause has reassured markets that the prospect of a vote to leave the European Union could be fading.