Brexit: $55bn fund manager BlueBay betting big against pound sterling as hard departure 'looks likely'

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The pound is heading lower whatever the outcome of the UK election, according to BlueBay Asset Management.

While the currency has rallied since the election was called, BlueBay began selling sterling last week, betting that the UK is set for a damaging Brexit process after the vote.

Such a view chimes with Allianz Global Investors, which recently used the rally in the pound to short it, and the median forecast of analysts in a Bloomberg News survey, which says the pound will decline about 3 per cent by the end of 2017.

“We’ve literally gone short on the pound at the end of last week,” said Mark Dowding, a fund manager at BlueBay, which oversees $55.5bn (£42.8bn). “We think you’re going to be facing a Brexit that to us looks like it’s going to be a hard Brexit.”

The pound, which tumbled following the UK’s decision to leave the European Union last June, has pared some of those losses as investors speculate that the earlier vote will ease pressure on Prime Minister Theresa May.

The Conservatives are currently expected to comfortably win the 8 June snap elections with a large majority in Parliament.

Sterling reached a nine-month high of 1.3048 on 18 May, and was trading at around $1.30 on Wednesday. Even after rallying 5 per cent in 2017, sterling remains about 13 percent weaker since the Brexit vote last June.

“There’s been this optimism in markets that a really big majority may actually strengthen Theresa May’s hand and make life a lot easier,” said Mr Dowding, who predicts sterling could retest $1.20 toward the end of the year -- an 8 per cent decline from the current levels. “I’m not really sure it will make too much difference in practice.”

Tough comments from both sides of the negotiating table signal a choppy path ahead. Bundesbank board member Andreas Dombret said on Tuesday divorce proceedings would likely be hard or very hard.

Those comments came shortly after Brexit Secretary David Davis said the UK will walk away from talks unless the bloc drops its high financial demands.

“The most significant point that we would make on the UK is that, based on our discussions around Westminster and our discussions around Brussels, it feels that the deal that UK politicians think they can achieve seems an unrealistic pipe dream,” Mr Dowding said.

Bloomberg