Hedge Funds Bet Big Against Sterling Following Salzburg Debacle
LONDON (Reuters) – Hedge funds have been growing increasingly bearish on the pound since April, when it traded above $1.42, and their aggressive selling helped to drive it below $1.27 last month. The situation escalated significantly following last week’s Brexit debacle in Salzburg, which laid bare the chasm between Britain and the EU on Brexit.
Hedge Funds’ Growing Bearishness on Sterling
Funds and speculators have been increasingly bearish on sterling since April, when it traded above $1.42. Their aggressive selling has helped to drive it below $1.27 last month. In fact, funds and speculators have increased their net short position in sterling in the latest week to 79,258 contracts, according to the latest Commodity Futures Trading Commission (CFTC) figures from U.S. futures exchanges.
This massive bet against the pound, worth around $6.51 billion, is the largest since May last year. The speculative community’s turn against sterling has been sharp, with their net short position now marking a swing of $10.77 billion in just five months. In contrast, they were net long to the tune of 47,702 contracts in April, worth around $4.26 billion.
Their net short position is already among the largest since CFTC began compiling data in 1995. The only time it has ever been bigger was during the year after the Brexit referendum itself, between July 2016 and May 2017. Analysts at one large bank estimate that the CFTC positions are only around 20 to 30 percent of all short positions in the pound across the global currency market.
The Impact of Salzburg on Sterling
The European Union summit in Salzburg on Thursday, which laid bare the chasm between Britain and the EU on Brexit, was a major blow for sterling. The talks between the EU and Prime Minister Theresa May on how to manage Britain’s withdrawal from the bloc, which is only six months away, hit a brick wall. The consensus seemed to be that it was a humiliation for May.
Sterling duly tumbled, falling more than two cents against the dollar, or 1.7 percent, marking its biggest one-day fall in nearly two years. Moreover, the event raised the likelihood of a no-deal Brexit, further exacerbating concerns over sterling’s value. And as far as hedge funds were concerned, it only increased their likelihood to double down on their bet against sterling.
Analysts’ Views on Sterling
Analysts at various banks have cautioned that positioning in sterling remains short but well below extremes. For instance, Deutsche Bank’s Oliver Harvey notes that May’s speech was a "material negative" for sterling, recommending selling the pound against the euro to hedge against an increasing deterioration of Brexit negotiations.
Brexit: The Primary Driver of Sterling’s Fortunes
Sterling’s fortunes against the dollar and hedge funds’ positions have been pretty closely correlated since the Brexit referendum in June 2016. That’s likely to remain the case in the months ahead, as both will continue to be heavily influenced by Brexit and UK political developments.
Conclusion
The recent developments at the Salzburg summit and their implications for sterling were starkly highlighted by the market’s reaction. The chasm between Britain and the EU on Brexit widened significantly, resulting in a fall of 1.7 percent against the dollar – the biggest one-day drop in nearly two years.
The massive bet against sterling by hedge funds has reached alarming proportions, with their net short position now at 79,258 contracts, worth some $6.51 billion. However, it remains to be seen how far the no-deal Brexit scenario will push sterling down. Meanwhile, analysts remain cautious in these uncertain times, recognizing the ongoing risks of a negative turn in UK politics.
In summary, the current market situation surrounding sterling has been shaped by events unfolding in the context of the Brexit debate in the UK and EU. However, we cannot know for certain how much further this currency might decline or which other factors might contribute to changes beyond what we’ve seen so far. What’s clear at present is that uncertainty prevails across both currencies due primarily because uncertainty about their economic futures remains high due mainly because these markets face significant challenges ahead in these turbulent times.
