© Reuters. FILE PHOTO: Sterling notes and change are seen inside a cash register machine at a cafe in Manchester, Britain, on September 21, 2018. REUTERS/Phil Noble/File Photo
By Neil Mackenzie
LONDON (Reuters) – Speculators have accumulated their biggest long position in sterling in dollar terms since Brexit, but runaway inflation and weak growth mean sterling will not survive, hedge funds and their investors say.
Speculative long positions netted $4.7 billion as of July 11, the highest dollar value since mid-2014, two years before the Brexit referendum, data from the Commodity Futures Trading Commission (CFTC) showed on Friday.
Just in terms of futures, it is the largest net long position since 2007.
UK inflation has defied expectations in each of the past four months, sending the pound up 8% against the dollar this year, while US inflation has fallen.
British wage growth broke above 7% in May for the first time
time since the 1990s, prompting the Bank of England to make a surprise half-point hike in June. Traders, who had bet that the BoE would be almost complete in May, are now seeking rates to rise above 6% from 5% at present.
This has kept the Rotterdam-based investment manager Transtrend at $5.8 billion for example long the pound sterling. He holds a bullish position in a regular computer trading, diversified trend program (DTP) fund.
“We have an active position in the pound within our diversified trend programme. We’ve been spending quite a bit of time in the pound against a variety of other currencies since March,” said Mark Van Loo, a member of Transtrend’s Investor Relations team.
“This situation is part of the ‘BoE Rising’ trend cluster, which also includes short positions in UK interest rate tools, as we have had a short position since April,” Van Loew added.
As traders ramp up their expectations for a Bank of England rate hike, they also increasingly seek out the chance that US interest rates may be about to peak.
A moment of love
The pound’s strength is also a story about dollar weakness, said Robert Sears, chief investment officer at Capital Generation Partners, an investor in hedge funds, family offices and endowments.
“The momentum on the dollar has turned bearish, so a lot of people are jumping in on this trade. And that’s where the herd wants to be at this moment: selling the dollar,” Sears said.
In general, hedge funds have been more cautious in adding to their bullish positions on the pound.
CFTC data shows a drop in net Participants – which broadly cover hedge funds – have cut their net long positions in sterling by nearly a third since the nine-month high in June to around $2 billion.
The deterioration in growth will be offset by steady inflation, said Michael Oliver Weinberg, an investor in the family office, which limits BoE action and means interest rate cuts are less likely.
“This puts a floor on the pound,” he said.
Hedge funds, which take a more active approach than computer-based programs chasing currency movements, say they are eyeing opportunities to sell the pound.
The UK has a current account deficit, which widened in the first quarter of 2023, as government income fell and the trade deficit widened. This leaves sterling vulnerable to a sell-off, BNP Paribas (OTC:) said in a note on Monday.
John Floyd, chief investment officer at macro hedge fund Floyd Capital, said a slowdown in the housing market and rising mortgage rates could cap sterling’s rally.
“The Bank of England’s aggressive monetary tightening expectations, the gold curve that has not inverted since 2000, and the fading of the coronation holiday hike may be further catalysts for a change in the direction of the pound,” Floyd said.
The other factor Floyd said he was watching is China, where weaker growth will lower inflation and economic activity across Europe.
