Big Short Pays Off for BlueBay in Three-Year Bet Against Pound

(Bloomberg) --

BlueBay Asset Management has ended a three-year bet against the pound as it now sees an extension to the Brexit deadline and fresh elections as the most likely outcome to the U.K’s political turmoil.

The “successful trade” for BlueBay’s Mark Dowding follows a near 20% slump in the pound since the June 2016 referendum to leave the EU. Dowding, chief investment officer at BlueBay, first spoke about a short position in February 2016, as he saw markets underpricing the risk of the U.K. leaving the bloc.

The pound has been hurt by the increased chances of a no-deal Brexit, but Dowding now forecasts only a 30% likelihood of Britain leaving the European Union by the deadline of Oct. 31. He sees a growing prospect that Prime Minister Boris Johnson’s government will face a no-confidence vote once Parliament returns from its recess on Sept. 3, after the EU rebuffed a bid to reopen talks.

“Politics will become clearer once politicians are back from their holidays, however, we have closed short positions we have held on the pound since 2016 in the past week or so,” said London-based Dowding, who was promoted in May and oversees more than $13 billion in assets for BlueBay. “If we get more clarity on a Brexit extension, we think the next trade is likely to be long the pound.”

Sterling has recovered some ground in the past week after hitting a two-year low of $1.2015 on Aug. 12, following news that lawmakers were drawing up plans to try to force a Brexit extension. Volatility in sterling remains elevated, with a gauge of three-month swings at 12%, higher than the past year’s average.

While some investors including at BlackRock Inc. think the pound will keep falling and see the risk of it hitting parity with the dollar on a no-deal Brexit, Dowding isn’t alone in his view on the potential for a rebound. UBS Global Wealth Management strategists are already betting on sterling’s appreciation against the dollar, predicting it will touch $1.29 in three months.

“Market concerns about no-deal Brexit risk by October are overdone,” said Daniel Trum, a strategist at UBS Wealth. “A reversal of this and fading dollar attractiveness should lead to a rebound of sterling-dollar,” he said. Trum foresees a deadline extension and U.K. elections as the most likely outcome and predicts sterling to reach $1.35 in 12 months.

For Dowding, there has been a marked shift in what to expect next on Brexit.

“In the past year we have been skeptical that a Theresa May deal would pass and now we are skeptical that Johnson can deliver no deal in October,” Dowding said.

To contact the reporter on this story: Anooja Debnath in London at adebnath@bloomberg.net

To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net, Neil Chatterjee, Michael Hunter

©2019 Bloomberg L.P.