Short shrift for speculators in a sterling performance

A crop of positive British economic data has sent the pound surging, threatening to up-end one of the most popular trades.

A crop of positive British economic data has sent the pound surging, threatening to up-end one of the most popular trades since the Brexit vote — shorting sterling.

The pound has jumped by 2.24 per cent against the US dollar since last Thursday when better than expected manufacturing survey data started the currency on a roll that was extended on Monday with positive numbers from the service sector.

That sent analysts scrambling to adjust their most bearish predictions for British gross domestic product.

Investors in the US have built up a near-record short position in the pound, which fell by as much as 14 per cent after Britain voted to leave the European Union in June.

There were 94,486 more short sterling contracts than long sterling contracts among currency speculators in the week to August 30, according to the US Commodity Futures Trading Commission. That was down just slightly from 94,978 net short contracts in the previous week, the highest level on record. “The recent string of positive UK data surprises, particularly from PMI survey data, has collided with a market that was and remains highly bearish (on) sterling,” said analysts at Societe Generale.

The recent manufacturing and services purchasing managers’ indexes both rose by their most on record. PMIs in July had suggested recessions in both sectors.

JPMorgan strategist Paul Meggyesi said in a research note that two sterling short positions suggested by his bank, against the euro and Swiss franc, have been closed after getting “caught in the rip-tide” of positive data. Stronger growth would make the Bank of England less likely to engage in the sort of economic stimulus that would weaken the pound.

In the last three days, JPMorgan, Credit Suisse and Morgan Stanley have all raised their gross domestic product forecasts for Britain. Credit Suisse’s forecast was lifted from 1 per cent to 1.9 per cent.

Expectations of stronger growth may now push forecasters to upgrade their expectations for sterling.

Deutsche Bank and Goldman Sachs, for example, had predicted a fall to $US1.15 by the end of the year, and $US1.20 by early November, respectively. Yesterday the pound was up by 0.8 per cent against the dollar at $US1.341, leaving it a long way from most forecasts.

Still, many analysts say that it’s too early to be sounding the all-clear on Britain’s economy. The country has not yet begun negotiations with the EU, its biggest trading partner. Most companies, meanwhile, say that they haven’t made decisions on their future investments in Britain.