Herd of pound bulls sees currency’s potential unleashed in 2020

“We’re in the very early part of a sustained rally,” said Stephen Jen, founder and co-chief investment officer of Eurizon SLJ Capital. “The general election has a good chance of delivering a healthy majority for the Conservative party. If we have a clear outcome on the 12th we have a shot at $1.35 by year-end.”

The UK currency has already recovered a lot of ground since hitting an almost three-year low in September, gaining nearly 8 per cent since then on the prospect of an end to Brexit uncertainty. Bank of America Merrill Lynch expects the currency to hit $1.39 by the end of 2020 and Goldman Sachs sees a rally of more than 4 per cent versus the euro by the end of the first quarter.

Eurizon’s Jen, a pound bull for more than a year who said in January that fair value was at least $1.50, concedes he missed the currency’s sell-off to below $1.20 this summer, but “caught the recovery.” Now he says current market pricing is distorted and the election will have such consequences for policy that any rally is likely to be sustained.

Adrian Lee & Partners, which manages over $15 billion in assets, agrees. Its eponymous founder said the fund is turning more positive on the UK currency, especially versus the euro. He sees the promise of an end to Brexit as “an opportunity to buy the UK, not sell it.”

“The prospect of Brexit being over at some point together with fiscal stimulus will be very positive and it will make sterling and UK assets more appealing,” he said.

In the options market, demand for contracts to buy sterling has outweighed those to sell by 50 per cent since October, after remaining balanced through the first nine months of the year, data from the Depository Trust & Clearing Corporation show.

Hedge funds and other large speculators have pared their bets against the pound over recent months, although the most recent week of positioning data from the Commodity Futures Trading Commission showed a slight uptick in bearishness. Figures for the week through Nov. 19 indicate a net short of 31,903 contracts versus a more than two-year high of 102,702 in early August.

There are still three weeks to go until the December vote and pollsters have warned that people’s political allegiances have become harder to predict. Almost half of voters supported different parties in the elections between 2010 and 2017, according to research published by academics at the British Election Study.

Even though Eurizon’s Jen is bullish on the pound, he doesn’t recommend taking a huge bet before the election result.

“In a situation like this it’s not necessary for an investor to pre-position because once the outcome is clear, assets including the currency would go a long way,” he said.

Clearing Parliament

Some investors still see longer-term threats looming for the UK economy, though, with Allianz Global Investors warning against complacency and Algebris Investments expecting the pound to stay under pressure in the longer term.

Johnson will need to get his Brexit deal through Parliament, a hurdle that defeated his predecessor Theresa May three times. The Conservative leader has said his party’s election candidates have all pledged to vote for it, meaning a majority win should see the UK leave the bloc by the deadline of Jan. 31.

For BlackRock’s chief fixed-income strategist Scott Thiel, the pound will move to $1.35 or higher on a deal. Johnson’s aim to get a trade agreement with the EU by December 2020 looks like a tight deadline and is likely to be extended, he said.

“The negotiation of the agreements thereafter is also important but I don’t see that as being a deterrent for investment,” said Thiel. “Clarity around Brexit leads to a higher pound and higher gilt yields based on the improving fundamental view.”