The Big Picture
Asset managers wind down short bets against the pound
40000 60000 80000 100000 120000 140000 160000 180000
20000 0
Dealer long positions
Dealer short positions
Asset Management long positions Leveraged Money Long Positions
Asset Management short positions Leveraged Money Short Positions
Source: Link Group
With a no deal Brexit being taken off the table, we are seeing the first signs that the pound might be on its way up. Since the outcome of the Brexit referendum was announced three years ago, the pound has been falling consistently against most developed mar- ket currencies. While the cheaper currency created a headache for importers, it has provided a boost for pension schemes who have the majority of their equities invested in US dollar-denominated stocks. The cheaper pound has also been benefi- cial for mature schemes which have to convert their US dollar-denominated investments into pounds to pay pensions to retired members. But this trend might be coming to an end. With the confirmation of a General Election in Decem- ber and a no deal brexit being taken off the table, the exchange rate of the pound against the dollar started creeping up again. The signs of recovery are still early days and could rewind swiftly if the currency is dominated by high levels of volatility. But there are indicators that the pound might continue to appreciate. One sign is a gradual decline in short bets against the pound. Accord-
ing to the latest data released by the Commodi- ties Futures Trading Commission, asset manag- ers reduced their short bets against the pound to 78937, compared to 102267 in mid-October. However, other market participants continue to remain sceptical, short bets among dealers and leveraged money investors (predominantly hedge funds) remain high. But Marc-André Fongern, G10 FX analyst at MAF Global Forex, sees room for growth. “The currency still tends to break out upwards rather than downwards. Based on recent events, ster- ling’s path may become less arduous, even if election campaigns are likely to cause considera- ble volatility.”
Another sign that the pound might be on its way up is that big asset management firms, which held strong short bets against the pound for three years, have reversed their strategy. Examples include Bluebay and Goldman Sachs, which closed its short positions against the pound in August. A rising pound could be a new challenge for pen- sion schemes who hold most of their global equi- ties in US dollar-denominated funds.
12 | portfolio institutional | November 2019 | issue 88
08.01.2019 08.02.2019 08.03.2019 08.04.2019 08.05.2019 08.06.2019 08.07.2019 08.08.2019 08.09.2019 08.10.2019
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