Sterling Policy of Benign Neglect

<p>The falling British pound has already made the cover page of two prominent UK newspapers and discussed in business and mainstream media, causing the market […]</p>

The falling British pound has already made the cover page of two prominent UK newspapers and discussed in business and mainstream media, causing the market to wonder whether the decline is near the end.

The latest pronouncements from Bank of England governor Mervyn King and his future successor Mark Carney appear to be a contest over who could deliver the most dovish measures. King has already indicated last week the slowing economy would drag inflation back below the 2.0% target despite the recent uptick in prices. Carney is willing to go the extra mile, mulling alternatives to King’s long standing policy of “inflation targeting”.

Regardless of the upcoming measures to lift growth, fiscal tightening has been tempered (with the blessing of the IMF), monetary easing may have stopped prematurely last autumn–and in anticipation of further monetary easing, currency traders have no choice but to trade ahead of the inevitable—A UK currency policy of benign neglect.

Let’s not forget the economy is struggling with four negative quarterly contractions out of the last five quarters.

And if you think that GBP is oversold, think again. Sterling longs vs USD are a NET -16,776 contracts among speculative futures traders– meaning the number of contracts short GBP vs USD exceeds the longs by 16,776 contracts. The amount is well below the record 76,000 of net shorts reached during the British elections of May 2010 – when traders feared a Labour Party victory would embark the UK into “tax & spend” policy and detract it away from the austerity required by the credit rating agencies.

Since the shorts are a quarter of the record from three years ago, there is ample room for GBP selling to escalate. Traders are not running out of policies on which to drive the pound lower. $1.51 is increasingly turning into a medium target for this quarter.

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