Swiss franc, yen may gain most vs pound on Brexit, options indicate

LONDON: The Swiss franc and Japanese yen may be the biggest gainers from falls in sterling in the run-up to Britain's referendum on whether to leave the European Union, options prices suggest.

With polls indicating a close vote on June 23, the costs of hedging via options against volatility in the pound have soared to six-year highs. Options give holders the right to buy a currency at a pre-set level and can be used either to defend against a big move or to speculate on one.

Indeed, options prices show investors expect bigger sterling falls against the traditional "safe-haven" Swiss franc and Japanese yen than against the euro or the dollar.

"Brexit would be a colossal event," said David Bloom, head of currency strategy at HSBC. "We believe it would drive sterling weaker by 15-20 percent, and would likely drag the euro lower. If money is flowing out of sterling ... the Swiss franc would likely be an obvious destination for much of this flow."

In the options market, three- and six-month risk reversals

-- a gauge of demand for options on a currency rising or falling -- show the highest bias for sterling weakness against the Swiss franc since January 2015.

Reuters data shows the three-month risk reversal is bid at 6 vols in favour of sterling puts, or options betting the pound will fall against the franc.

By comparison, the three-month sterling/dollar risk reversal is bid at 4.7 vols, in favour of pound weakness, while a similar dated euro/sterling option is being dealt at 3.4 vols in favour of euro strength.

Graphic on sterling three-month risk reversals and Brexit risk: http://tmsnrt.rs/1oyehEe

STERLING'S SKID

Sterling has taken significant losses in the first quarter of this year and the broad-based trade-weighted sterling index has fallen to its lowest since late December 2013.

Global investors worry that leaving the EU would threaten the foreign investment flows Britain needs to fund its current account deficit, one of the biggest in the developed world at around 5 percent of gross domestic product.

Traders said that is also reflected in robust demand for options betting on sharp weakness in the pound against the yen.

Sterling has already lost 12 percent against the yen so far in the year, compared with just 3.6 percent against the dollar and 7.8 percent against the euro.

"We are seeing investors going long in the yen against the pound," said Petr Krpata, currency strategist at ING.

"With the Swiss franc you always have the threat of intervention by the Swiss National Bank. With the yen, you know the currency will jump quite a bit if Brexit happens."

Three-month sterling/yen risk reversals show the bias for sterling weakness at its most extreme since late 2011, trading at 6.6 vols in favour of sterling puts.

Even the six-month risk reversals are trading at 6.7 vols , highlighting investors' concern that the uncertainty could continue well beyond the referendum.