Rate hike won't stop sterling’s run

File picture: Reuters

File picture: Reuters

Published Jun 25, 2014

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London - The precise timing of a Bank of England interest rate hike may be a little less clear after Governor Mark Carney's remarks on Tuesday, but there are still plenty of reasons to bet a strong pound will rise further.

In testimony before a parliamentary committee, Carney appeared to push back slightly against expectations rates would rise before the end of the year.

Inevitably, that led to talk of bets on sterling being pared.

The foreign exchange market is already heavily positioned for further sterling strength.

Speculative net long sterling positions are at their highest this year, up to 52,296 contracts in the week ending June 17 from 35,842 in the previous week, according to the latest CFTC data.

That was a remarkable turnaround from just over a year ago, when speculators held net short positions of 53,687 contract.

With sterling's trade-weighted value at a still-elevated 87.90, a level last seen in 2008, and positioning skewed, a sell-off in the pound seems a logical outcome.

But that might be too obvious.

On Tuesday, Carney did not row back on comments he made on June 12 when he signalled UK interest rates may rise sooner than the market then expected.

For all that the BOE seeks to stress any future move is data-dependent or state-contingent, the reality is that the direction of travel for UK rates is up, even if the timeline is as yet indistinct.

At the same time, Britain remains open for business.

US pharmaceutical company AbbVie's $46 billion pursuit of UK-listed Shire is ongoing.

If successful, it would likely entail the purchase of a very material amount of sterling.

Canada's SNC-Lavalin's 1.16 billion-pound acquisition of the UK's Kentz Corp may be smaller, but nevertheless will probably necessitate demand for sterling.

Chinese Premier Li Keqiang's recent visit to Britain should also generate substantive sterling-positive investments.

 

SUKUK

Britain's 200 million-pound sukuk issue might not be very large, but it is the first Islamic bond from a Western government, and it sends a positive message to potential investors.

UK Prime Minister David Cameron has been keen to position London, with its many wealthy Islamic investors, as a hub for Islamic finance.

Notably too, it was Qatar's QIPCO whose name was prominent at Royal Ascot this year after Queen Elizabeth, for the first time, gave permission for the flagship horse racing event to be partnered by a commercial entity.

That may seem to be a specious argument to make with regard to currency values. At a cultural level, though, it underscores a broader international narrative that supports sterling.

It looks obvious to many that after its recent strong run, sterling is overbought and is due a big correction. Sterling may take a breather, but the notion that the pound's strong run is over and done with seems just a bit too obvious to be true. - Reuters

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