### POV: GBP VOL SHOWS MARKET EXPECTS NO...>

STERLING: ### POV: GBP VOL SHOWS MARKET EXPECTS NO IMMINENT RECOVERY

-Brexit turmoil is reverberating throughout currency hedging markets today:

GBP/USD implied vols are rallying across the curve to levels not seen in since

the fallout of the referendum itself (See: https://tinyurl.com/GBPVols). It's

clear demand for GBP/USD downside protection is in demand, with risk reversals

correcting sharply lower and the GBP/USD SMILE curve skewing in favour of OTM

puts despite trading markedly flatter as recently as one week ago.

-These gyrations in options markets are indicative of a market that is no longer

looking beyond near-term Brexit exposure and has begun to price in the material

risk of market fallout regardless of what May and her team deliver. Despite

GBP/USD calls proving popular at the beginning of the week, this has entirely

reversed today, with GBP/USD put strikes as low as 1.2500 in strong demand.

-Expensive premiums are proving no deterrent to GBP/USD hedging, and those with

positions already in place will have been rewarded today. New trades, however,

may seek low premium or premium-free products (e.g. KO barriers and

Flexiforwards) to hedge risk without the high upfront cost going forward.