Pound Strongest Since ’08 Luring Bulls Like No OtherLucy Meakin and Lukanyo Mnyanda
Britain’s pound is the most coveted currency among traders, who are betting a rally that pushed it to the strongest level since 2008 is just getting started.
Hedge funds and other large speculators are more bullish on sterling than any other major currency, according to JPMorgan Chase & Co. analysis of data from the Commodity Futures Trading Commission in Washington. The pound climbed above $1.70 last week for the first time since August 2009 as the Bank of England hinted it may raise interest rates sooner than traders expect. Strategists from Commerzbank AG to Wells Fargo & Co. boosted their forecasts in anticipation of further gains.
“In a world that’s been starved of significant moves, which has become used to low volatility in the foreign-exchange market, when something like this suddenly emerges, you could see quite a big move develop,” Simon Derrick, the chief currency strategist at Bank of New York Mellon Corp. in London, said in a June 19 phone interview. “For the last few years clearly you’ve been in a $1.50-$1.70 world, so the idea you could suddenly break through that opens up a lot of new territory.”
Bullish sterling bets measured by the CFTC are, as of last week, at the highest level since 2007. BOE Governor Mark Carney gave new impetus to the pound’s advance by telling financiers on June 12 that the U.K.’s first post-crisis rate increase “could happen sooner than markets currently expect.”
The pound surged 1.6 percent versus the dollar this month, the best performer among 16 major currencies tracked by Bloomberg after the New Zealand dollar’s 2.5 percent gain, as the prospect of higher bond yields boosted its allure. Sterling rose to $1.7063 on June 19, the strongest level since October 2008, and traded at $1.7022 at 2:08 p.m. in New York.
“The U.K. looks like it will be the first major central bank to raise,” Mark Haefele, the global chief investment officer at UBS AG, said in a Bloomberg Television interview on June 20. Britain “won the World Cup in economic policy coming out of the crisis,” he said.
Strategists surveyed by Bloomberg have been slow in keeping up with sterling’s gains. The median year-end forecast of estimates compiled by Bloomberg had risen to just $1.66 as of June 20, from $1.63 in early May.
Commerzbank raised its year-end projection to $1.72 on June 19, citing Carney’s signal on rates, from $1.66. It predicted an advance to 78 pence per euro, versus 79.92 today and compared with a median estimate in a Bloomberg survey of 79. On the same day, Wells Fargo raised its one-year forecast to $1.73, from $1.69, and targeted a rate of 74.5 pence per euro.
Higher bond yields because of rate-increase bets “should continue to impart a slightly positive bias” to sterling, Nick Bennenbroek, the New York-based head of currency strategy at Wells Fargo, said by phone on June 19.
The pound has climbed from a three-year low of $1.4814 on July 9, about a week after Carney took the helm of Britain’s central bank. It has appreciated 2.8 percent versus the dollar this year, extending a 6.5 percent gain from the start of 2012 to the end of 2013. It’s up 3.9 percent against the euro in 2014, and reached the strongest in more than 1 1/2 years of 79.59 pence on June 16.
Bets by hedge funds and other large speculators on an advance in the pound exceeded those wagering on a decline by 52,596 contracts in the week ended June 17, the most since December 2007 and up from 35,842 a week earlier, the latest CFTC data show.
When measured over time and relative to their historic averages, net-long positions in the pound are the highest of 11 currencies, according to a JPMorgan model.
“A lot of the good news is now becoming priced in,” Ken Dickson, an Edinburgh, U.K.-based director of foreign exchange at Standard Life Investments Ltd., Scotland’s second-biggest money manager, said by phone on June 17. “Some of the strength we’ve seen in sterling already reflects the view that U.K. rates will go up more quickly,” he said, adding that the pound “is roughly in line with fair value” to both the dollar and euro.
Deutsche Bank AG, Credit Suisse Group AG and Commerzbank all brought forward their forecasts for the timing of the U.K.’s first rate increase after Carney’s speech this month. Barclays Plc said in a June 20 report it may take place by year-end.
The BOE chief was able to signal the start of the normalization in the key rate, which has been at 0.5 percent since March 2009, because of the strength of the U.K. recovery. Gross domestic product growth will outpace Britain’s Group of Seven peers this year, expanding 3 percent, according to median estimates of economists surveyed by Bloomberg.
As recently as May, Carney signaled he was prepared to wait until next year before raising rates. The effect of his change of tone has been all the more pronounced because the European Central Bank added to stimulus measures this month, while the Federal Reserve isn’t due to end its bond-purchase program until later this year.
The bets on pound appreciation are a bright spot in a generally flat foreign-exchange market, where the floods of cheap central-bank cash pumped around the world since the financial crisis have flattened out many of the trends traders exploit to make money. Deutsche Bank’s Currency Volatility Index fell to a record-low closing level of 5.34 percent on June 19, down from its high for the year of 8.52 percent in January.
In a market seeking trends, “positioning is more important than normal,” Kevin Hebner, a strategist at JPMorgan in London, said in a June 18 phone interview. “The pound is the clear outlier. Perception of central-bank policy and the divergence in that policy is clearly the big driver.”