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Fears that Brexit upheaval has currency market on a cliff-edge

Investors are racing to insure themselves against a plunge in sterling as fractious Brexit trade talks with the European Union threaten to collapse.

The pound has endured its worst week since the onset of the coronavirus crisis in March, falling 3.5 per cent amid fears of a cliff-edge end to the transition period, which expires on December 31. Currency experts said the biggest moves had been seen in sterling options expiring at the end of the year after a potential failure to agree a deal before October’s summit or any last-ditch effort in November.

The pound has been falling as investors fear a 'hard Brexit'.

The pound has been falling as investors fear a ‘hard Brexit’.Credit:Matt Cardy

Jordan Rochester, a currency analyst at Nomura, said the price of hedging against the pound moving in either direction, known as implied volatility, “has risen to levels only seen during periods of Brexit stress or COVID-19 market madness”. He added the market focus had “shifted very much to hedging in the event of further falls in the pound”, with the price of options to sell at a guaranteed price now at levels seen in previous periods of Brexit turmoil in late 2018 and October 2019.

Erik Norland, the chief economist at derivatives exchange CME, said data from the group’s $US82 billion ($113 billion) a day currency options market signalled traders hunting “downside protection” in November and December.

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