Currency risk caps traders’ NBP appetite

06 April 2017 04:49 Source:ICIS
Pound Euro Image credit Image BROKER REX Features

Increased volatility in the sterling-euro exchange rate following the UK’s vote to leave the EU has hit liquidity at the British hub, traders have told ICIS.

While NBP liquidity edged higher in March, compared to one year prior, growth was outpaced by the Dutch TTF ( see ESGM 3 April 2017 ).

The TTF overtook the NBP as Europe’s largest traded gas market in 2015 and opened up a significant liquidity lead in the aftermath of the UK’s vote to leave the EU.

Participants at euro-backed firms have noted the increased emphasis on managing risk by increasing hedging in the currency market.

“A few years ago you generally did not have to worry about hedging sterling, you might lose out sometimes but you would do better [on] others. Things tended to even out eventually,” one trader at a European utility with British customers said.

“But now you are having to hedge currency each time you trade, which is cutting your margin and your appetite to take a position in the first place,” he added.

This increased risk for traders backed by other currencies will have been key in their decisions to cut their exposure on the British hub.

The increased hedging activity has been reflected in companies’ balance sheets.

In 2016, Danish incumbent DONG Energy announced that 71% of its sterling exposure had been hedged ( see ESGM 8 November 2016 ).

This was in stark contrast to before the UK referendum, when DONG’s sterling hedge ratios were around 40 percentage points lower.

DONG has significant exposure across euro- and sterling-derived markets, holding generation assets and numerous retail contracts.

While the utility deals in Danish krone, the currency is pegged to the euro by the central bank with an accuracy of +/- 2.25%

A trader at another vertically-integrated European utility said there had been a similar uptick in currency hedging at his company, saying: “Participants are definitely a lot more active on the currency side of things.” However, he added that he was “not convinced that it has had a significant impact on liquidity.”

By Thomas Rodgers