Financial Times (10th of October 2016; online)

Pound remains under pressure as negative

sentiment persists

• ‘Hard Brexit’ talk rattles currency markets with sterling

seen as staying vulnerable
by: Roger Blitz

The pound remained under pressure on Monday as negative sentiment towards the UK
persisted, prompting analysts to expect further falls despite the market already being
heavily positioned to sell sterling.

Sterling was more than half a per cent lower, dropping to $1.2357 against the dollar,
while the euro was at one stage a third of a per cent stronger against the pound, being
worth around 0.9037p.
A bounceback following last week’s 4.3 per cent decline against the dollar, which
included Friday’s flash crash, is a trade investors would normally consider, given the
scale of the pound’s precipitous decline and the large number of investors banking on
further falls.

Positioning data from the Commodity Futures Trading Commission showed net short
sterling positions at record levels even before the pound’s 6 per cent plummet in two
minutes of early Asian trading on Friday.
The number of net short positions in sterling futures on October 4 reached 97,600
contracts, up from 87,700 the previous week, the data showed.
A foreign exchange market that is structurally short normally has difficulty weakening
much further.More tips

Kit Juckes, macro strategist at Société Générale, said the market’s short positioning on
sterling meant that “at the very minimum we should enter a period of less hectic and less
one-way trading”.
But Richard Bibbey, head of FX cash trading at HSBC, said before the Friday flash crash
that sterling was experiencing a move lower “in spite of significant short positioning”.
Kathleen Brooks at Gain Capital said there were two ways to view the market: either the
pound was overvalued and too many people were short, meaning sterling was tipped for
a comeback, or last week’s Hard Brexit talk had spooked the market and made the pound
a toxic currency.
“We think that the latter is more realistic, and we may not see a bounce in the pound for
some time,” she said.
Rabobank FX strategist Jane Foley agreed, saying sterling remained “very vulnerable
and could fall further”.
She said: “For positioning to change, we would need something significant to change in
the political outlook. It is very difficult right now to see how it could come about. Given
the outlook and the size of the UK current account deficit, I think the market is looking
to short sterling more.”
Sterling  …  may be very sensitive to rumours, reports and political hearsay

Jane Foley, Rabobank FX strategist

However, a sterling bounceback is not out of the question. Since the Brexit vote,
significant short sterling positions have been pared back, and in a market that has
become less liquid because of the reluctance of banks to take on risk, a sudden
unwinding of short positions could create more sterling volatility.
“People are worried about the bounce effect,” said Andrew Soper, head of G10 options at
Nomura. “You might get short, sharp spikes.”
But a volatile market could also drive the price downwards, according to Ms Foley. She
said: “There is the risk that if you don’t have a balance between buyers and sellers then
the price will adjust lower. Sterling looks vulnerable to that, and may be very sensitive to
rumours, reports and political hearsay.”
Morgan Stanley said it did not see sterling weakness ending in the short term, expecting
the euro to be up to 92p relatively soon “with risks to our views to the downside”, while
JPMorgan downgraded its end-of-year sterling-dollar forecast from $1.32 to $1.21.