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Time to take a breather on Brexit risk 

April 6, 2016

Katie Martin, The Financial Times

Looking clever in financial markets is not only about being right about the game-changing events that seem obvious in retrospect, though it helps. Being “The One Who Spotted Subprime/Greece” counts for something.

Entry-level cleverness is about not looking silly, spotting the very obvious neon-clad banana skins that lie ahead.

Chief among those achingly well-flagged risks for this year is the UK’s EU referendum in June. If you do not know that is coming, and that it could plausibly end up with the UK opting for splendid isolation, and that such an outcome could, in turn, shake up British financial markets, then you probably should not be in a position of financial responsibility.

So it is little surprise that UK markets, particularly sterling exchange rates, have taken this on board. Hedge or be damned, particularly with the knowledge that the UK runs a large and growing current account deficit. Investors do not even need to sell sterling aggressively for the currency to fall; inflows just need to dry up, even temporarily, and gravity will drag it down.

But there is a danger that the hedging may be going too far. You have to believe that things will get outrageously ugly in June for the current pricing of sterling options to make sense. Read more

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