Recent comments from the Bank of England Governor, Mark Carney, have further reinforced the importance of the upcoming EU membership referendum vote in relation to the economic outlook.
There are many diverging views on this topic. “The evidence that a vote to leave the EU would make a serious dent in our economy, jobs and prosperity is overwhelming and still growing,” said Carney. On the other hand, the “leave” campaign has criticized the BoE’s analysis.
The Chancellor of Exchequer George Osborne recently said, "The Bank is saying that it would face a trade-off between stabilizing inflation on one hand and stabilizing output and employment on the other." With a wide spectrum of scenarios to consider, policy makers, investors and analysts will be looking at benchmark Sterling markets for clues.
Short Sterling ahead of “Brexit”
Short Sterling trading has already experienced bouts of volatility so far this year, most notably in January when risk sentiment was most negative. Recently volatility in Short Sterling has declined; however, this is more likely signalling a pause whilst the markets consider the potential for various scenarios ahead.
“With Short Sterling futures pricing a moderate chance of an interest rate cut, investors and hedgers that were looking at plays for higher rates are cautious at the moment. We’ve seen strong increase in the use of Sterling options, particularly upside calls as a means to hedge a “leave vote.” Investors are looking for protection, which has increased their reliance on options relative to futures particularly whilst implied volatility is low,” says Chris Rhodes, Head of Interest Rates.
The chart below depicts the ratio of calls to puts on Short Sterling options:
Call/Put Open Interest Ratio
|Y-o-Y % growth Future vs. Option Volumes|
|Volume Y-o-Y %||Open Interest Y-o-Y %|
|Sterling 1yr Mid Curve||75%||66%|
|Sterling 2yr Mid Curve||35%||31%|
|As of May 12, 2016|
Hedging Interest Rate Exposure
As macroeconomic changes spark activity in the interest rates market, lenders, asset managers, hedge funds and traders with exposure to UK interest rates are looking to hedger their exposure. To effectively manager their risk, market participants rely on the deep liquidity of ICE Short Sterling futures and options contracts.
Cash-settled future based on the LIBOR rate for three-month deposits
Option that delivers into the nearest three-month Short Sterling futures contract
Option that delivers into a three-month Short Sterling futures contract expiring in five years
With interest rate contracts ranging from three months to 30 years, the ICE interest rate franchise supports trading across the full curve. As monetary policies shift around the globe, ICE markets provide hedging solutions to help participants effectively manage price risk.