Bank of England: Pound’s worst week of the year upends an $8.4 billion trade

Already a subscriber?A sharp slump in the pound is imperilling billions of dollars worth of bets on further strength.the Bank of England laid the groundwork for a shift to interest-rate cuts

It’s a rapid about-face for markets. With the pound outperforming more than 90 per cent of global currencies just two weeks ago, speculative investors – a category that includes hedge funds and asset managers – had boosted bets in favour of sterling to the highest since July 2007, worth some $US5.5 billion as of March 12.Traders pared a portion of those long bets in the week ahead of the BOE’s decision.

The pound’s drop also boosted demand for options that payout if the currency falls. So-called risk reversals – a barometer of market positioning that compares the demand to buy a currency versus the appetite to sell – now show the most bearish sentiment for sterling since late October. That means the UK would move in lockstep with the US Federal Reserve and the European Central Bank, which are also seen cutting for the first time on that monthEarlier this year, expectations were euro-area and US policymakers would act sooner and deliver more cuts. Now, the amount of easing priced in for the BoE – about 80 basis points – is widely in line with what’s seen coming from the Fed. Bets are slightly more aggressive for the ECB, at around 90 basis points.

Source: Loan Digest (loandigest.net)

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