Pound coins are seen in the photo illustration taken in Manchester, Britain
Hedge funds in last week's Bank of England's policy meeting 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%, which convulsed UK markets, sent shockwaves through global markets, and has quickly gained notoriety as one of the most glaring examples of policy "misguidance" in recent years.
The two dissenters were not among Bank Governor Andrew Bailey and Chief Economist Huw Pill, who both signaled in the run up to Thursday's decision that a rate increase was a real possibility. The investors positioned accordingly.
The Commodity Futures Trading Commission shows that hedge funds and speculators in the week to Nov. 2 uped their net long sterling position slightly to 15,047 contracts, worth around $1.3 billion.
The pound's slump resulted in a number of positions that have been wiped out. The sterling dollar exchange rate, known as "cable", fell by 1.4% on the day, its biggest fall since August last year, and trade-weighted sterling had its worst week in 11 months.
Apple's price fell as low as $1.3422 on Thursday, just above the year low of $1.3410 struck in late September. It appears to be 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%.
With relative interest rate support diminishing, strategists at Nordea opened a new short position in cable and make no secret of why. The Bank of England is playing without credibility, they wrote on Sunday.
Several analysts think sterling's direction from here is dependent on the direction of real yields. When UK real rates keep dropping, sterling will weaken further, according to George Saravelos at the Deutsche Bank.
Hedge funds have had a dismal year trading currencies, in large part due to foreign exchange market volatility that has been so low for so long. Even a week implied sterling volatility is 7% now, only a three-week high.
HFR said its benchmark currency index fell in October, the worst month for years and plunged the index into red for the year. It is the only one of HFR's almost 40 featured indexes over a range of asset classes and strategies to be down year-to- date.
Hedge funds are going on going against the grain, but they thrive against the grain. Some will not doubt share the view of Uni credit's FX strategy chief Roberto Mialich that current long sterling positioning is much lower than it was early this year, suggesting there is still room for investors to increase long exposure to BoE tightening. Is the Bank of England going to raise rates next month? If history is any guide, the answer is surely no: there has only been one December rate increase in the last 45 years, in 1994.