On November 8 in Hedge funds went into the Bank of England's policy meeting, which was the most positive since July, but many will have been burned by the Bank's surprise decision not to raise interest rates.
The Bank's 7 -- 2 vote to keep its key lending rate on hold at 0.10%, convulsed UK markets, sent shockwaves through global markets, and quickly gained notoriety as one of the most glaring examples of policy "misguidance" in recent years.
They were not among the two dissenters, Bank Governor Andrew Bailey and Chief Economist Huw Pill, who had both signaled in the run-up to Thursday's decision that a rate increase was a real possibility. According to investors, they positioned accordingly.
The Commission shows that hedge funds and speculators in the week to Nov. 2 have uped their net long sterling position slightly to 15,047 contracts, worth around $1.3 billion.
After the decision, many of those positions will have been wiped out by the pound's slump. The sterling dollar exchange rate, known as «cable», fell 1.4% on the day, its biggest fall since August last year, and trade-weighted sterling had its worst week in 11 months.
Cable fell at a low of $1.3422 on Thursday, just above the year low of $1.3410 struck in late September. It looks like a key chart support now.
The move in UK yields as investors revised their BoE outlook was also dramatic: the five-year gilt yield fell 20 basis points on Thursday, the biggest fall since the day after the Brexit referendum in June 2016; the 10 - year inflation-linked bond yield fell to - 3.16% on Friday, the lowest in almost a year; and the five-year linker yield slumped to a historic low of - 3.73%.
strategists at Nordea opened a new short position in cable with relative interest rate support getting diminishing, and make no secret of why. The Bank of England is playing without credibility, they wrote on Sunday.
Several analysts think that sterling's direction from here is dependent on the direction of real yields. While UK real rates will weaken, sterling weaken further, according to George Saravelos at the Deutsche Bank.
Hedge funds have had a dismal year trading currencies, largely due to foreign exchange market volatility that has been so low for so long. Even a year implied sterling volatility is still 7% now, but it is only a three-week high.
HFR said that its benchmark currency index was fell 4.37% in October, the worst month for years and plunged the index into red for the year. It is the only one of HFR's 40 featured indexes across a wide range of asset classes and strategies to be down year-to- date.
Hedge funds are going against the grain, but they thrive on going against the grain. The view of Uni credit'sFX strategy chief Roberto Mialich shows that current long sterling positioning is much lower than it was in the early this year, suggesting there is still room for investors to increase long exposure to BoE tightening. Would the Bank of England raise rates next month? If history is any guide, the answer is no: there has only been one December rate increase in the last 45 years, in 1994.