What will be the effect of the Scottish referendum on the pound?
SocGen and ING are out with notes on how to trade the referendum on September 18.
Earlier this week, a YouGov poll for the Scottish referendum put the No vote at 53% and Yes (for independence) at 47% with the gap narrowing to 6 points from 14 points a month ago. The bookies quickly took note and Paddy Power is now offering 5/2 for independence compared 7/2 before the poll and 9/2 two weeks ago.
If you want to make some FX options trades, SocGen is out with some strategy, via eFX.
“The realisation of a “Yes” tail risk would hurt cable the most and lift cable vols proportionately more than EUR/GBP vols. The (more likely) “No” win, however, would trigger the most pronounced sell-off in EUR/GBP vols, currently discounting a larger referendum premium,” SocGen clarifies.
“We recommend Buying a cross GBP 1M risk reversal, namely Buying an OTM put in GBP/USD with a distant strike and Selling an OTM call in EUR/GBP with a close strike. The two asymmetric strikes reflect the respective probabilities of the outcomes, offering investors a zero cost hedge,” SocGen advises.
In line with this view, SocGen recommends buying GBP/USD 1M put strike 1.60 and selling EUR/GBP 1M call strike 0.8050 (spot ref: 1.64 for GBP/USD, 0.7910 for EUR/GBP).
If you believe that the best trade is the simple trade that ING has a clearer strategy. They see a rebound in cable if the referendum is rejected but don’t see cable rising back to 1.70. But if Scotland votes for independence they “foresee one-off GBP/USD depreciation to the mid-1.50 area , reflecting the immediate negative surprise effect and the uncertainty associated with the details of the upcoming break-up”
Probably a Scotland separatism supporter
