By Neil Mackenzie
LONDON (Reuters) – Bets against sterling in the first half of September posted their biggest increase in two weeks since 2013, a sign that hedge funds may have consolidated their short positions as Liz Truss became Britain’s new prime minister.
According to Vanda Research (NASDAQ :), which uses data from the US Commodity Futures Trading Commission (CFTC), short contracts entered into by leveraged funds in the first two weeks of September jumped 17 percentage points.
Sterling hit a record low on Monday against the dollar, and British bond prices collapsed as concerns mount over the new government’s fiscal plan, unleashing calls for an emergency rate hike from the Bank of England to restore confidence.
On Friday, Finance Minister Truss Kwasi Quarting repealed the highest income tax rate and scrapped a planned increase in corporate tax – on top of an expensive plan to subsidize energy bills.
Speculators reduced their net short positions in the British pound to 54,843 contracts last week, worth $3.9 billion, down from a previous net short position of 68,086 contracts, according to CFTC figures. Truss took office on September 6.
With the US dollar rising in 2022 as the Federal Reserve raised interest rates faster than its peers, investors were betting on most major currencies including the British pound. CFTC data showed that speculators have maintained short positions against the pound every week since February.
The value of the latest net sterling short position of $3.9 billion may seem small to speculators in the foreign exchange market that sees trillions of dollars traded every day. But the FX market is very opaque and the CFTC data is seen as a good window into the broader market situation.
Serious money began selling the British currency in July, said Louis Gargour, chief investment officer and managing partner of $550 million hedge fund LNG Capital.
Gargour had held positions in the pound but due to UK marketing regulations it could not be confirmed if he was short-lived.
Gargour said Truss is known for his policies that may come into direct conflict with the Bank of England’s efforts to control inflation and tighten fiscal policy.
“Then came the Truss tax breaks where we’re basically saying we’re going to stimulate the economy too much, increase inflation and take on more debt, making any BoE rate hike ineffective. And she’s already said there’s more to come. Gargour said:
Viraj Patel, global macro strategist at Vanda Research, said the BoE’s intervention may not even prevent bearish market sentiment.
“Does a 100 basis point hike today really fix anything? We doubt it if the UK government continues on a fiscally irresponsible path,” Patel said.
As long as the government refuses to work in tandem with the Bank of England, LNG Capital’s Gargour said it would be a “direct hit to 95-96 cents to the dollar”.
The Bank of England said on Monday that the bank will not hesitate to raise interest rates to meet its 2% inflation target, and that it is watching financial markets closely.
Britain’s Treasury said Quarting will draw up a “medium-term fiscal plan” on November 23, along with growth forecasts and borrowing from the Office of Budget Responsibility.