Pound Proves Economists Wrong in World-Beating Rally: CurrenciesDavid Goodman
The rally that made the pound the best-performing major currency in the past six months is gathering momentum as the U.K. economy defies the skeptics.
Options traders are the most bullish on the pound versus the euro since November and have cut bets that Britain’s currency will weaken against the dollar to the least since May. While economists and strategists have raised their forecasts for the pound against the greenback to the highest since April, the median estimate still calls for a 4.5 percent decline by year-end, data compiled by Bloomberg show.
Sterling surged to a seven-month high after a report yesterday showed U.K. unemployment fell, adding to signs growth is gathering pace. After Bank of England Governor Mark Carney tied future interest rates to unemployment and inflation, investors are bringing forward bets on when borrowing costs will rise, enhancing the pound’s allure. Carney reiterated today that policy makers won’t raise rates until the jobless figure falls to 7 percent.
“We are still very bullish on sterling,” said James Kwok, the London-based head of currency management at Amundi, which oversees the equivalent of $970 billion. “Many economists remain persistently bearish on sterling even though recent data keeps surprising on the upside. They seem to think that the improvement we’ve seen is just temporary.”
Citigroup Inc.’s Economic Surprise Index for the U.K. has risen to 84.8 from this year’s low of minus 49.9 in March. Positive readings suggest economic releases have been generally better than analysts’ forecasts in Bloomberg News surveys. The gauge has been above the bank’s Group of 10 index since May 27.
The pound has strengthened at least 2.2 percent against all 31 of its most-traded peers in the past six months, setting a four-year high against the yen and touching records against the Turkish lira and Indian rupee.
The U.K. currency fell 0.1 percent to $1.5809 as of 1:56 p.m. in New York, after earlier reaching $1.5832, the strongest level since Feb. 8. Implied volatility from options trading shows there’s a greater chance of sterling reaching $1.60 before Dec. 31, the highest prediction among 64 year-end analyst estimates compiled by Bloomberg, than of it weakening to the median forecast of $1.51. The pound gained 0.1 percent to 84.11 pence per euro today.
As recently as April, sterling was this year’s worst performer among the 10 currencies tracked by Bloomberg Correlation-Weighted Indexes on speculation Carney would step up efforts to boost Britain’s economy.
It’s the biggest gainer on the gauges in the past six months, climbing 7.7 percent, on signs the economy may require less stimulus to reach what Carney has described as “escape velocity.”
Carney said in August that policy makers planned to hold the benchmark interest rate at a record-low 0.5 percent until unemployment fell to its pre-set threshold, which the central bank didn’t see happening until the fourth quarter of 2016. He gave evidence in parliament today for the first time since the bank’s forward-guidance policy was introduced.
“Until we see unemployment fall to 7 percent, we will not begin to consider tightening monetary policy,” Carney told parliament’s Treasury committee. “It’s not about time but about conditions.”
The jobless rate dropped to 7.7 percent in the three months through July, the Office for National Statistics in London said yesterday. Economists predicted it would stay unchanged at 7.8 percent, based on the median estimate in a Bloomberg survey.
U.K. services expanded the most since 2006 in August and manufacturing growth accelerated to a 2 1/2-year high, Purchasing Managers Indexes showed last week. A gauge of U.K. house prices is at the highest level since November 2006.
Gross domestic product expanded a revised 0.7 percent in the second quarter, a report showed on Aug. 6. The economy has “turned a corner,” Chancellor of the Exchequer George Osborne said in a speech on Sept. 9.
The premium traders pay for options to sell the pound against the dollar on a three-month basis narrowed to 1.078 percentage points today, 25-delta risk reversals show. That’s the smallest gap since May 9 and compares with 1.638 points in July.
Options to buy the pound versus the euro last week reached the most expensive relative to sell options since November. That shows bearish bets established at the beginning of the year are being unwound, according to Olivier Korber, a currency-derivatives strategist at Societe Generale SA in Paris.
“The options market is really less bearish on the pound,” Korber said yesterday. “The options markets can’t ignore growth being revised higher, stunning PMIs and good housing numbers. Hence, the risk-reversal is much softer.”
The pound reached 83.83 pence per euro yesterday, the strongest level since Jan. 23, and the most relative to the 85-pence median analyst forecast for year-end since May 2. That’s still weaker than the average exchange rate over the lifetime of the 17-nation shared currency of about 73 pence.
The run of strong economic data in the U.K. is unlikely to continue, according to Mankash Jain, the head of foreign exchange and investment management at Solo Capital Partners LLP in London. Investors should buy the euro against the pound if it weakens toward 82 pence, betting the 17-member currency will rise to 88 to 89 pence within the next three months, Jain said.
“The overall outlook for the U.K. is still very bad,” Jain said. “The BOE are going to have to take some kind of positive action to reinforce their statement that interest rates will remain low.”
Futures traders are betting that the pound will decline against the dollar, according to the latest data from the Washington-based Commodity Futures Trading Commission.
The difference in the number of wagers by hedge funds and other large speculators on a decline in the pound compared with those on a gain, or net shorts, was at 43,046 on Sept. 3 from 38,226 a week earlier. Net shorts reached 77,738 in June.
The positioning of the market means there are prospects for further sterling strength, according to Stuart Bennett, the head of Group of 10 foreign-exchange strategy at Banco Santander SA in London. Bennett’s year-end forecast of $1.60 is the most bullish in the Bloomberg survey.
“The speculative market is still significantly net short cable,” he said, referring to the pound against the dollar. “If that part of the market unwinds those positions, given the upbeat economic news, that could be the catalyst to knock sterling higher. The background for the pound is pretty positive.”