February 17, 2013 7:45 pm

Investors turn their backs on sterling

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Uk Sterling©Charlie Bibby

Hedge funds and investment managers are dumping sterling as disappointing economic growth in the UK, the threat of a downgrade of its debt and an upcoming change of guard at the Bank of England have fuelled concerns about a drop in the country’s asset values.

More speculators are shorting the pound than buying it for the first time in five months, according to figures from the US Commodity Futures Trading Commission that are used as a proxy for activity in the global hedge fund community. Betting against the pound is second only in popularity to shorting the yen, which has plunged in value against other currencies this year as investors have positioned themselves for more expansionary monetary policy in Japan.

“The pound seems clearly at risk of following the yen and suffering the next large-scale devaluation for a major currency,” said Mansoor Mohi-Uddin, head of global currency strategy at UBS.

Many asset managers, including Franklin Templeton, one of the biggest bond investors in the world, say they have slashed their positions in the gilt market on the expectation that yields will climb and sterling will weaken. FX Concepts, the currency hedge fund, is among the investors to have profited from short sterling trades this year.

Mike Amey, head of sterling portfolios at Pimco, the fixed-income specialist, said: “The economy will flatline again this year. Real income growth is shrinking, the government is still cutting spending, investment is weak, and it doesn’t look like exports are picking up. We’ll probably have growth of zero to 1 per cent for at least a few more years.”

The pound slid to a seven-month low against the dollar last week after the BoE warned that inflation would continue to be above its target and growth would remain sluggish.

Pound sterling graphic

Investors returning to the eurozone this year have also helped haven demand for the pound to wane, sending sterling to its weakest level against the single currency since 2011. Government borrowing costs rose last week to their highest level since April, with 10-year gilt yields climbing above 2.2 per cent.

Expectations that Mark Carney, the incoming BoE governor, will be even more dovish than his predecessor have also led to caution on UK assets.

“There’s been a clear Carney effect on gilt yields,” said one government bond trader at a UK bank. “He’s been a proponent of expansionary policy and views inflation as not as relevant in the current environment.”

The BoE has signalled it would be happy to see a weaker pound boost exports in the UK’s struggling economy. Martin Weale, a member of its monetary policy committee, said in a speech on Saturday that the gains for the UK economy due to the depreciation of sterling since the financial crisis in 2008 had been “disappointing”.

Sir Mervyn King, the current BoE governor, said last week that countries should be allowed to implement policies to stimulate growth that have consequences for their exchange rates. The Bank has stressed that it does not target the UK’s exchange rate, in accordance with a statement released by the G20 released at the weekend stating that members of the world’s largest economies should refrain from competitive devaluation of their currencies.

“The reality is that everyone is engaged in the global currency war but is telling everyone else not to admit it,” wrote Stephen Jen, head of currency hedge fund SLJ Macro Partners, in a note to clients at the weekend.

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