Some Pound Backers See Opportunity Despite U.K. Crisis
Some Pound Backers See Opportunity Despite U.K. Crisis
(Bloomberg) --
As multiple woes pile up against the pound, sending it close to a 13-month low, some investors see a buying opportunity emerging.
Canadian Imperial Bank of Commerce and MUFG are looking for chances to buy sterling if it dips toward $1.30, while BlueBay Asset Management LLP and Jupiter Investment Management Ltd. are considering scrapping bearish bets. The pound rose as much as 0.3% to 1.3256 on Tuesday.
Sure, plenty of traders are shunning the currency as the omicron variant runs rife, Boris Johnson’s booster jab rollout struggles and the prospect of harsher restrictions lingers. Yet positive economic data -- coupled with optimism that the outbreak will ease and enable the Bank of England to start hiking rates in February -- are fueling some cautious optimism.
“Our models on Omicron suggest the wave will be short and sharp,” said Mark Dowding, who oversees $70 billion at BlueBay. As cases drop, allowing the BOE to take a more hawkish stance, the asset manager may take profits on bets against sterling, he said.
While expectations of BOE tightening at Thursday’s meeting have all but vanished, money markets traders are betting on a first 15-basis-point rate hike by February, with further increases taking the Bank Rate to 1% by November.
At Jupiter, money manager Mark Nash is also considering closing sterling short positions, citing high inflation, strong payroll data and a shortage of workers.
“The market has priced out the BOE doing anything before Christmas. There’s so little priced in and the fundamentals are so good that there’s not much potential for sterling to fall,” he said.
U.K. companies added to payrolls in November at a record pace and unemployment fell. These figures are almost certain to fuel concerns at the Bank of England that unsustainable inflation pressures are building in the labor market.
By year-end, the pound has about a 53% chance of falling to $1.31, according to Bloomberg’s options model. That in itself could see sterling bounce back.
At CIBC, head of G-10 foreign-exchange strategy Jeremy Stretch says it could bottom out at $1.3125 short term and sees potential opportunities to buy after this week’s central bank decisions.
To be sure, investors and analysts at the likes of Allianz Global Investors, Aberdeen Asset Management and Bank of America are unconvinced, especially as the number of omicron infections hits 200,000 a day. Risk reversals -- a gauge of market positioning -- indicate that sentiment on the pound over the next two weeks is still bearish, but has pulled back from the gloom of mid-November.
“A more hawkish BOE this week would likely bring in buyers and create a short squeeze,” said Jane Foley, head of foreign-exchange strategy at Rabobank, who sees the currency inching up to $1.33 if the central bank has a hawkish tone on Thursday. “I am not convinced that any rally would have legs though.”
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