Column: Funds abandon sterling at fastest pace since 2007: McGeever

ORLANDO, Fla., Nov. 22 (Reuters) – Amid all the confusion over the Bank of England’s botched forecast of when it will start raising interest rates, a clear pattern has emerged: hedge funds are abandoning the pound sterling.

Funds are the most bearish on the pound since June of last year, according to the latest positioning data from Chicago futures markets, marking a historic turnaround since the BoE’s surprise decision earlier this month to keep rates unchanged .

Data from the Commodity Futures Trading Commission shows that hedge funds and speculators increased their net short position in pounds sterling to 31,599 contracts in the week of November 16, from 12,093 the week before.

It’s basically a $ 2.65 billion bet on the pound’s fall. Just two weeks earlier, funds were net for more than 15,000 contracts, a collective bet of $ 1.3 billion on the currency’s rise.

Only twice since the launch of the pound sterling futures contract in 1988 have there been massive two-week sales, in March and December 2007.

The catalyst this time was the 7-2 vote by the Bank’s rate-setting committee on November 4 to keep interest rates at an all-time high of 0.10%, despite strong indications from Governor Andrew Bailey and chief economist Huw Pill that a hike in the fight against inflation was a real possibility.

More confusing for traders who had followed this direction and gone long on the pound sterling, Bailey and Pill were not the two dissenters calling for a rate hike. The two have since launched a mini PR offensive to clear up the mess.

Pill said on Friday the weight of evidence was shifting towards a rate hike next month, but he had not made a decision. Bailey told The Sunday Times the risks to inflation are bilateral, although he fears it may be “high for longer”. Read more

Bullish UK labor market data last week also helped push the pound up from a one-year low to $ 1.3350 above a key chart area around $ 1.34.

POLICY ERROR?

Sterling could be at a crossroads.

As the CFTC data shows, the funds are very short. But this positioning is only valid until November 16 and probably does not take into account the rebound of the pound last week. There is also a full calendar month left until the next BoE policy meeting, enough time for funds to replenish for longer.

This is more than plausible.

Annual inflation exceeds the target at 4.2% and could reach 5% next year, as signs of a strong labor market emerge. Market rate prices strongly point to only December’s second rate hike in nearly half a century.

On the other hand, 100 basis points of tightening are fully factored in over the next year. It’s pretty aggressive, and it’s about double the Fed’s expected tightening path over the same period.

Is the Bank of England really going to tighten its policy to this point? Noting fears that the Bank may make a policy error, Rabobank analysts are cautious about the extent to which rates can be raised without jeopardizing the economic recovery.

“A rate hike in December is only likely to lead to lasting gains for the pound if it is supported by further releases of strong UK data,” they wrote in a note last week.

By Jamie McGeever; Editing by Hugh Lawson

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