Investors have started shorting sterling once again, after reversing their bets against it earlier in the month, after the British currency fell once again on the back of comments made by Prime Minister Theresa May that pointed to a potential ‘hard’ Brexit.
The latest Weekly Flows Analysis from ETF Securities to 3 October has revealed $10.1m of inflows into long euro / short sterling ETPs during the week ending 3 October.
This marks a reversal of outflows of a similar magnitude from these products during the previous week, when investors cut their GBP short ETPs at the fastest pace in a month. The pound is currently trading at €1.1150 against the euro and $1.2449 against the US dollar.
Short investors such as hedge funds increased their bets against sterling after the Brexit vote sent the currency crashing to a 31-year low of $1.27 against the US dollar. In August, The Times reported speculators had taken out £5.9bn worth of short positions against sterling, while assets in short sterling ETFs more than doubled even before the Brexit announcement, according to ETF Securities.
However, the end of September saw sentiment move in the pound’s favour, with ETF Securities reporting investors had cut their positions in short sterling ETPs by $11.1m.
Yet the latest rhetoric from the UK government has thwarted this optimism, after the Prime Minister promised to trigger official Brexit proceeding by the end of Q1 2017. Sterling fell back towards the 31-year low it had hit against the US dollar in July, and shed another 6% in Asian trade on Friday 7 October to reach $1.1841, though it later recovered losses.
Analysts believed the collapse could have been triggered by an algorithm tracking news stories, which responded to an article published by the Financial Times about French President Francois Hollande demanding “tough Brexit negotiations”.
Market commentators expect further volatility in the British currency as the country comes to grips with the Brexit vote and begins to outline a concrete plan for its exit from the euro bloc, a cause for continued uncertainty. This also means further volatility in the FX market which is likely to be reflected in ETP flows.