FxWirePro: Sterling shrugs-off upbeat UK manufacturing prints, OTC signals Brexit intensity as puts on command owing to highest risk reversals

The UK has produced upbeat manufacturing production despite unfavourable hot news to their business, prints actual numbers at 2.3% versus forecasts at 0.0% and previous flashes at 0.1%.

While industrial output in the United Kingdom grew 2% in April from March of 2016, following a 0.3% gain in the previous period and beating market expectations of a flat reading. 

Whereas the British pounds against majors (Yen, euro and CAD) has completely shrugged off the above mentioned upbeat numbers.

GBPJPY fell from yesterday’s highs of 157.951 to the current 155.704, EURGBP gains from previous close at 0.7805 to the current 0.7818 levels and GBPCAD trimmed today’s early gains to 1.8464.

Elsewhere, no need to specify GBP vols have been flying with sky rocketed pace no matter what both prior and post Brexit event.

ATM IVs of GBPUSD for 1w expiries are flashing at 14.3%, and more than 22% in 1m tenors, while puts seem more expensive than calls (downside protection is relatively more expensive) as you can see the highest negative risk reversal adjustments.

These computations indicate the difference in volatilities, and therefore price, between puts and calls on the most liquid out-of-the-money (OTM) options quoted on the OTC market.

Moving on, big tail risk of this potential event is evidencing its effects on sterling.  We estimate the risk of Brexit at 45% and the accumulated negative shock to the economy at 4-8% over five years.

We remain bears of GBP/USD, as the BoE MPC is scheduled for next week which is likely to defer the decision and keep bank rates at 0.50% due to the ’Sword of Brexit’ is hanging over confidence.

Stay short in GBP/USD through diagonal put spread, hold 2m GBP/USD (1% ITM strikes & -1.5% OTM strikes with shorter expiry) debit put spread.