As the battle between Brits’ fiercely historic “independence” and the establishment’s Project Fear, anxiety is building over the looming Brexit decision. Despite rallies in most markets over the past few weeks, UK-related risk premia remain extremely-elevates with British corporate bond risk notably decoupled from EU’s credity risk but it is the FX markets where the biggest dislocations are with Cable volatility at its most elevated ever relative to EUR. While equity markets remain unimpressed by the FX and credit market concerns, Fed’s Lockhart warns “BREXIT POSES RISK THAT CAN SPILL BACK TO U.S. ECONOMY.”
GBP/USD (Cable) volatility curve is completely perturbed…
and credit risk remains decoupled…
But it is Cable volatility relative to EUR that is at its most extreme…
In other words, investors are paying more in order to hedge against price swings in the pound (and credit) since Lehman as longer-term implications of Brexit take center stage.
