Goldman Says Bet on Higher Pound Despite Trade Being Crowded

(Bloomberg) -- The pound rally has further to go as Brexit hedges are unwound, even as bets on the currency’s appreciation have become an increasingly crowded trade, according to Goldman Sachs Group Inc.

As the prospect grew of a longer delay to the U.K.’s exit date from the European Union, the pound jumped to the highest since July. Its rally stalled Thursday with the currency trading little changed after Prime Minister Theresa May once again staved off the threat of rebellion. Still, an increasing number of foreign investors who bought hedges since the June 2016 Brexit vote need to reduce those positions and that will mean continued support for sterling, Goldman’s market strategy chiefs told clients at a conference in Sydney on Wednesday.

A 2 percent appreciation in the pound over the past four days has sent the U.K. currency on a world-beating rally as the risk of a no-deal outcome fades. The pound was trading at $1.3296 as of 1:23 p.m. London time. Long positions in sterling are now looking the most crowded trade, especially in the options markets, said Brian Friedman, Goldman’s global head of market strategies.

That isn’t damping the firm’s appetite to wager the rally has legs. That’s in part due to the relative scarcity of sterling due to overseas merger activity since 2016 that sucked up pounds, said Bernhard Rzymelka, head of Europe rates market strategies for the firm. As companies wind back hedges placed during the past two years of Brexit uncertainty, that leaves room for the currency to rise, he said.

Hedges Come Off

“When the hedges have to come off, the pounds are not there anymore because they’ve gone for good into corporate coffers, and so there is a good risk of an overshoot in the pound,’’ Rzymelka told the Goldman Sachs macro conference.

In bonds, investors are pricing a premium for interest-rate increases by the Bank of England and longer duration U.K. gilts have underperformed their European counterparts “quite significantly” in the latest rally, Rzymelka said. That leaves him favoring a pair trade: being long duration British debt and against that, be long the pound.

“If Brexit is really bad, then clearly growth in the U.K. is going to look worse than in Europe, and on the other hand every foreign central bank is now being priced to cut rates,” he said. “It doesn’t make any sense for the U.K. to price hikes.”

Friedman and Rzymelka are part of Goldman’s trading team, a separate division to its research department.

--With assistance from Charlotte Ryan.

To contact the reporter on this story: Andreea Papuc in Sydney at apapuc1@bloomberg.net

To contact the editors responsible for this story: Christopher Anstey at canstey@bloomberg.net, Adam Haigh, Liau Y-Sing

©2019 Bloomberg L.P.