Investors have scrambled to protect against a fall in the pound following the general election as polls suggest the race is tightening.
A gauge of investor sentiment which tracks hedges against a drop in the currency has leapt to its highest level since the 2016 EU referendum, as data released overnight showed the Conservative lead tightening and suggested a hung Parliament is a possibility.
The comprehensive survey by the pollsters YouGov, which correctly predicted many of the results in 2017, showed the Tories are on course to win a majority of 28 in the House of Commons, down from 68 in a model two weeks previously.
One-week risk reversals in the pound against the dollar — a measure of the premium required to protect against a fall in the currency compared with a rise — has risen sharply over the past week even as sterling has held above $1.31 on expectations of a Conservative majority.
The gauge is now running at its most elevated level since 2016.
The price action for sterling over election night is “likely to be asymmetric” given the anticipated market-friendly outcome, said ING’s foreign exchange strategist Petr Krpata.
“This disproportionate downside compared to the upside is one of the reasons why risk-reversals are pointing to investors hedging against adverse sterling moves,” said Edward Park, deputy chief investment officer at Brooks Macdonald, an investment manager.
Expectations for sharp swings in the currency over the next week have also risen, and are running around their highest levels of the year.
Still, in the spot market, the pound has held on to its recent sharp gains, and the measures of market stress are well below the run-up to the EU referendum.
“In 2016 the outcome was a Remain or Leave victory with no room for grey in between,” said Mr Park.
The likely outcomes of this election are likely to be “far less binary in terms of the future economic implications compared to the EU referendum,” he added.
The release of the YouGov poll slightly knocked sterling but it is trading nearly 3 per cent higher than when parliament was dissolved on November 6.
A Conservative victory is widely seen as market-friendly as it would provide certainty over the immediate way forward for Brexit. Mr Johnson plans to pass his withdrawal agreement with the EU by January 31.
But his promise not to extend trade talks past the end of next year has also led many sterling watchers to caution that any gains could be fleeting as fresh Brexit uncertainty reappears later in the year.
