Bets trimmed as pound rebounds

LONDON: Currency speculators cut back their bets against sterling as a growing list of economic reports showed the British economy had weathered the aftermath of June’s vote to leave the European Union without a major shock.

Sterling has started to climb back from its initial Brexit-led plunge of more than 10% as data from business surveys, retail sales, exports, construction, house prices and vehicle demand all showed remarkable stability through July and August.

Its recovery to a near twomonth high against the dollar was cemented by figures yesterday that showed Britain’s all-important services sector in August staged its biggest recovery in the survey’s 20-year record, expanding far faster than economists expected.

As the economy’s resilience to Brexit confounds economists – and undermines the Bank of England’s worst fears – it has also unnerved currency speculators, who had built up their biggest bets ever on the pound falling further.

Last week saw the first reduction for nine weeks in these net short positions on the Chicago Mercantile Exchange, according to Commodity Futures Trading Commission data. It was a relatively small shift, to a net short position of 92 486 contracts worth just under $8 billion from a record 94 978 contracts the week before.

But previous episodes of extreme bets against sterling over the past 20 years suggest the currency’s recovery has further to run, and that these short positions are vulnerable to a potentially substantial unwinding.

“Expectations of a UK recession are receding and there are question marks over whether the Bank of England was too aggressive in easing,” said Manuel Oliveri, an FX strategist at Credit Agricole.

“What we are telling clients is there is still a risk of position squaring and sterling can run up to $1.35-$1.36,” he said.

The pound rose to $1.3375 yesterday, its highest since July 15. That was up more than 4% from the 31-year low just under $1.28 it struck in the days just after Britain voted to leave the EU.

Britain’s services sector, which accounts for more than 70% of UK economic output, expanded last month at such a pace as to cast serious doubt on the view the country would slip into recession this year.

JP Morgan’s UK economists said the risk of imminent recession had receded. They maintained their call for further policy easing from the BoE this year, but raised their 2016 growth forecast to 1.9% from 1.7%. – Reuters