Traders Extremely Bearish on British Pound

Traders make bearish bets on sterling - Bets against the currency more than when Soros beat BoE

COPENHAGEN - Futures traders are more bearish than ever on sterling amid concern that the currency's worst annual start in 13 years will continue as the United Kingdom's budget deficit approaches the Greek shortfall that roiled the euro. 

Wagers on the pound weakening against the dollar outnumber futures that profit on a rise by eight times more than when George Soros made $1 billion betting against the currency in 1992, the year Prime Minister John Major's Conservative government was forced to withdraw from the European Exchange Rate Mechanism. Sterling fell 19 percent that year. 

The pound has lost 6.2 percent in 2010 on speculation a budget gap will skewer the currency: Either record borrowing will push debt costs higher and force policymakers to print more money to buy bonds, or lawmakers will cut spending too fast and trigger a new recession. Prime Minister Gordon Brown's government estimates the deficit will hit 12.6 percent of gross domestic product, almost as high as the 12.7 percent in Greece that drove European leaders to consider a bailout. 

"The risk of a UK double dip is substantial," said Hans-Guenter Redeker, London-based head of foreign-exchange strategy at BNP Paribas SA, which predicts an additional 13.6 percent drop to $1.31 by the end of 2010. "Sterling is increasingly trading like an emerging-market currency with rising bond yields no longer working in favor of the currency." 

Ten-year gilt rates have climbed more than a percentage point in the past year, the fastest increase since mid-2004.

BNP, whose Sept 8 forecast for this quarter is closest to the mark in a Bloomberg survey, is now the most pessimistic of 36 strategists. After reducing their median prediction 2 percent in January, strategists cut it 3 percent this month, the quickest drop since September. Twenty-two strategists see the pound ending the year below 2009's $1.6170 close. 

Brown said on March 10 the economic recovery is "still in its early stages and remains very fragile". His Labour Party is locked in an election battle that may lead to the first parliamentary stalemate in 36 years and reduce the chances of enacting his five-year plan to cut the shortfall to 4.4 percent of GDP, which Fitch Ratings already has called "too slow". 

Sterling was at $1.5167 on Monday, up 0.7 percent for the past week. The currency slid 0.2 percent against the euro to 90.63 pence, down 2.1 percent this year. The pound is the only one of 16 most-traded currencies tracked by Bloomberg to weaken over the past six months against the euro. 

Strategists remain bullish on the pound even after cutting their forecasts. The median prediction of 35 analysts in Bloomberg's survey calls for a 4.9 percent gain to $1.59 per pound by Dec 31, down from a consensus of $1.67 on Jan 28.

The pound's drop may already reflect the deficit. At 4.098 percent, 10-year gilt yields are up 115 basis points in the past 12 months and were 103 basis points higher than German bund rates on Feb 23, the biggest gap in more than four years. 

Greek yields have risen as much as 139 basis points this year and closed at 6.25 percent last week. Gilt rates have risen no more than 22 basis points since Jan 1, peaking at 4.23 percent on Feb 22. British government debt was 55.8 percent of the economy in 2009, less than half of Greece's 113.4 percent, according to Goldman Sachs Group Inc. 

The UK isn't facing a financial crisis in the "foreseeable future", You-Na Park, an analyst at Commerzbank AG in Frankfurt, wrote in a March 10 note to clients. 

Bloomberg News