Sterling 1-mth hedging costs at 7-year high as Brexit vote looms

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By Anirban Nag

LONDON, May 26 (Reuters) - The cost of hedging against sharp swings in sterling over the next month rose to seven-year highs on Thursday as options contracts rolled over to capture the date of the result of the British vote on the European Union.

With (Other OTC: WWTH - news) less than a month to go before the vote, expectations are growing that Britain will opt to stay in the EU. Nevertheless, hedge funds and asset managers are not taking chances by seeking to protect their exposure to UK markets through the currency options route.

Some of the latest opinion polls are suggesting a robust lead for those campaigning to stay in the EU, although traders are wary of a sharp sell-off if there are any indications that the "Leave" camp is gaining ground before the vote. As such, many remain cautious and expect more volatility in coming weeks.

Most analysts reckon a vote to leave the EU on June 23 would deal a blow to Britain's economy and would send sterling tumbling, while a vote to stay would drive sterling sharply higher.

The one-month sterling/dollar options, covering the period that includes the upcoming "Brexit" vote and the result a day later, rose to 16.60 percent, its highest level since March 2009, and up from around 11 percent a day earlier.

The one-month euro/sterling implied volatility contract also rolled over to around 14.55 percent, its highest since March 2009, according to Reuters data.

Sterling was up 0.25 percent at $1.4733, its highest in three weeks, with traders eyeing the second reading of UK gross domestic product data due at 0830 GMT. The euro was flat against the pound at 75.80 pence, having dropped to a 3-1/2 month low of 75.66 pence on Wednesday.

"When it comes to today's GDP release, one should already expect a somewhat bigger currency impact," said Manuel Oliveri, currency strategist at Credit Agricole (Swiss: ACA.SW - news) . "A rising probability of a Brexit being avoided should increase investors' focus on fundamentals as a market driver."

Worries about a Brexit drove the pound down 11 percent on a trade-weighted basis between mid-November and early April, when it hit a 2-1/2-year low. But it has recovered around half of that as investors price out chances of a rate cut that some were factoring in if Britain opted to leave. (Reporting by Anirban Nag; Editing by Raissa Kasolowsky and Susan Thomas)