"Mini-dollar" tag set to aid sterling in 2017

LONDON (Reuters) - While others rushed to bet on a weaker pound this summer, hedge fund Harmonic Capital Partners’ algorithms moved in the opposite direction and three months later gave the firm one of its best trading results of the year.

An English ten Pound note is seen in an illustration taken March 16, 2016. REUTERS/Phil Noble/Illustration/File Photo

Despite sterling’s post-Brexit plunge, Harmonic backed the British currency as a “mini-dollar” against the yen and the euro, and profited from the surge in the U.S. currency around Donald Trump’s presidential election victory on Nov. 8.

The strategy is drawing attention as banks and asset managers launch their end-of-year pitches to clients for 2017.

Some investors and currency strategists say the pound’s close historical links to the dollar, through trade and investment - and the tendency to move with it - favour sterling, going into a year when dollar strength is back on the cards.

They argue that, while the huge uncertainties attached to the launch of talks on leaving the European Union will continue to weigh heavily on the pound, the UK economy remains better placed to generate growth than its European or Japanese peers.

“You could say that it took a setback following the Brexit vote,” says Alastair Smith, a partner in the $1.8 billion hedge fund.

“However, by and large, the economic strength of the UK is there and well reported. On that basis, you could probably think of the pound as a sort of little brother to the dollar relative to the euro bloc and Japan.”

The dollar has surged to record highs against a raft of currencies since Donald Trump’s election brought a sea-change in market expectations of inflation.

Against the euro, the pound has gained 5 percent EURGBP=, putting it on course for its best month on a trade-weighted basis since the aftermath of the 2008 financial crisis =GBP.


There are caveats. The gains have come at a time when “short” bets on the pound weakening were at record highs, generally understood in currency markets as meaning players have little room in their books to bet further in the same direction, and making those holding such positions liable to cash out.

But a number of major bank strategists have also begun to argue that sterling's GBP= 20 percent fall since this time last year may be enough to bolster exporters and insure the economy against the worst effects of Brexit talks next year.

“The pound has been an example of resilience over the past month, largely due to the extreme levels of its positioning,” said Valentin Marinov, head of G10 currency strategy at French bank Credit Agricole in London.

“That meant that others took the heat. But the pound is also riding on the coat-tails of the dollar.”

Adam Cole, head of currency strategy at Canada’s RBC, says the pound still has further to fall, but also that the connection to the dollar may leave it less exposed than the euro to a broader dollar rally.

“In some ways the pound is a mini-dollar,” he said, presenting his ideas for 2017 this week.

“The UK historically has connections to the United States, predominantly through the structure of direct investment between the two. That does mean that just mechanically it may do better if the dollar is gaining.

Editing by Andrew Roche