"The General Election outcome solved one huge uncertainty just to open two new ones. EU referendum is now all but certain to be held in 2017. New Scottish independence referendum has also become a lot more likely, although our guess would be that it is probably held further away than 2017 (we would expect only the new Scottish parliament following the May 2016 elections to agree on the timing).
We believe the EU referendum is potentially a significant risk for GBP. Even though polls have been moving in favor of continued membership in the EU, the risk is too significant to discount until a material “poll-proof” shift in voters’ support occurs.
However, we are doubtful markets will be able to price this risk effectively given the timing is so far away. In our view, it is simply too early to trade this.
1. Implied volatility and risk reversal skews truly started pricing the Scottish referendum risk or the General election risk only about six months away from the events.
2. It would be hard to hedge the position against general market swings affecting global vols. Liquidity at tenors higher than 1y also tends to be generally poorer.
3. Finally, we are not even sure if the Referendum falls within the 2y or 3y bracket. There is an uncertainty as to when in 2017 the vote take place. According to an analysis by Eurasia Group, Cameron is likely to prefer a date early in the year, while EU skeptics within his party probably a date later in the year to have more time for campaigning."
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