Bearish Pound Positions at Record High Before BOE Rate Decisionby
Bearish wagers have reached record 80,572 contracts: CFTC
Watch out for policy disappointment: Credit Agricole’s Marinov
Speculators that are the most bearish on sterling in nearly 25 years may be vindicated by a report on Monday showing Brexit is probably hitting Britain harder than markets previously envisaged.
Sterling declined versus most of its 16 major peers as the data showed U.K. manufacturing shrank more than initially forecast in July. Hedge funds and other large speculators ran the biggest net short positions, or bets on the currency’s decline, since records began amid speculation that the Bank of England will cut interest rates for the first time in more than seven years on Aug. 4 to head off the risk of recession.
The pound has fallen 11 percent against the dollar since Britain voted on June 23 to leave the European Union and posted its third consecutive monthly drop against the greenback in July.
Short positions outnumbered bullish wagers by 80,572 contracts last week, according to U.S. Commodity Futures Trading Commission data. That’s the biggest bet that the pound will fall since Bloomberg started compiling the data in 1992.
“Brexit could still play out as the perfect storm for the pound,” said Valentin Marinov, head of Group-of-10 currency strategy at Credit Agricole SA’s corporate and investment-banking unit in London. “Some people are bearish because it could trigger a balance of payments crisis which could see the currency depreciating sharply further on the back of portfolio outflows.”
The pound fell 0.2 percent to $1.3201 as of 4:04 p.m. in London. It dropped to a 31-year low of $1.2798 on July 6. Sterling weakened 0.2 percent to 84.65 pence per euro.
All but two of 51 economists in a Bloomberg survey forecast BOE policy makers led by Governor Mark Carney will cut the key interest rate from a record-low 0.5 percent, where it’s been since March 2009. The median estimate in a separate survey was for the BOE to maintain its asset-purchase target at 375 billion pounds when it announces its latest policy decision on Aug. 4.
Britain’s vote to leave the EU, along with recent economic data that underscored the ensuing setback to consumer confidence and business activity, have boosted speculation that the BOE will ease monetary policy this month. Swaps signaled a 98 percent chance of a rate cut this week, compared with odds of around 15 percent on the day of the U.K.’s referendum.
Still, Marinov said that with such high probability priced in, the pound is vulnerable to policy disappointment, which could send it higher in the near term.
“The market is very, very short the pound, and it would take a very aggressive and pre-emptive BOE to convince investors to add to the already extended market positioning,” he said. “And the BOE is already close to the zero bound. Further quantitative easing may achieve little given the current levels of bond yields.”
After the BOE surprised markets in July by leaving policy on hold, officials signaled that loosening would probably come this month.
Monday’s manufacturing output report “is clearly a source of concern,” said Ned Rumpeltin, the London-based European head of foreign-exchange strategy at Toronto Dominion Bank. “It sets the stage for the Bank of England later this week, solidifying expectations of a rate cut. We continue to look for considerable downside risks for the pound from here.”
Toronto Dominion predicts that the central bank will cut its official rate by 25 basis points, increase its asset-purchase program by 50 billion pounds and introduce other credit measures. It sees sterling falling to $1.20 by year-end.
U.K. government bonds fell for the first time in four days, with the benchmark 10-year gilt yield rising four basis points, or 0.04 percentage point, to 0.73 percent. The yield dropped to a record-low 0.681 percent on July 29.
Gilts returned 2.5 percent in the past month, according to Bloomberg World Bond Indexes, outperforming their U.S. and euro-region peers amid speculation that the BOE will loosen monetary policy.