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Tuesday, 16 May 2017

Sterling eyes $1.30 after significant speculative shift


Sterling rose towards $1.30 again on Monday, with figures showing that speculators have cut bearish bets on the currency by the most in more than a year and the third most on record.

The overwhelmingly negative view on the pound dominating foreign exchange markets since the Brexit referendum in June last year has abated since British prime minister Theresa May called a snap general election a month ago.

Sterling was up around a quarter of a percent by mid-afternoon on Monday to trade at $1.2917, and 85.03 pence per euro .

Many sterling "bears", including big currency trading banks like Deutsche Bank and Bank of America Merrill Lynch, ditched their ultra-gloomy forecasts and the data shows many playing the Chicago futures markets have done the same.

"It may be more to do with lethargy than any optimism. The pound is not moving much, volatility has collapsed, and the election has stopped the bad Brexit headlines ... for now," said Steve Barrow, head of G10 strategy at Standard Bank.

Data late on Friday showed that International Money Market accounts on the Chicago Mercantile Exchange slashed their net short sterling position to 46,798 contracts in the week to Tuesday. That effectively means bets on sterling falling are the smallest since July last year.

The change of 34,566 contracts from the previous week was the third biggest position move in favour of the pound since IMM records began in the mid 1990s.

Net short positions have more than halved from the record 107,117 contracts at the end of March, with the bulk of that reduction coming after May's announcement on April 18 that the country will go to the polls on June 8.

"Capitulation is the driver. Bears are giving up," said Kit Juckes, head of FX strategy at Societe Generale in London.

ELECTION FACTOR

The latest poll on Monday from Survation showed that May's ruling Conservative Party is on course to win 48 percent of the vote on June 8, with Labour a distant second on 30 percent.

The IMM figures, however, don't take into account any shifts since a relatively pessimistic Bank of England inflation report last Thursday and the flow data kept by the market's biggest banking player, Citi, showed a different picture.

In its weekly report on the flows, Citi said the pound, along with the dollar against the euro, was the most sold of the G10 group of major currencies by speculative leveraged investors last week as it neared $1.30.

The bank's data also showed strong buying of the pound by "real money" - industry jargon for heavyweight longer-term investors like pension funds and insurers.

Governor Mark Carney warned of the downside risks to the UK economy, while saying he and his colleagues are still banking on a "smooth" Brexit - something few analysts in the currency market expect.

JP Morgan analysts trimmed their forecasts for further falls in a monthly note, but also still expected the pound to weaken to $1.26 and 86 pence per euro over the next few months.

"Whereas we are upgrading our ... forecasts by around 3 percent to reflect the reduced tail-risk of a disorderly Brexit in 2019 ... we nevertheless still expect sterling to weaken in absolute terms over a 1-year horizon," they said.

Reference: Jamie McGeever and Patrick Graham

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