Allianz, Aberdeen on collision course over pound after BOE

Bloomberg

Some of Europe’s biggest fund managers are set for a face-off on how best to trade the UK’s first potential interest-rate increase in a decade. Allianz Global Investors GmBH is looking to sell the pound into a rally, betting the Bank of England won’t signal further policy tightening given lingering economic and political risks. Fidelity International has a similar view, while Aberdeen Standard Investments sees scope for more than one increase and prefers to maintain a long position in sterling against the euro.
The UK central bank will raise its key rate by 25 basis points from a record low to 0.50 percent on Thursday in the first increase since 2007, according to 52 of 60 analysts in a Bloomberg survey, while the remaining eight see no change. The BOE will release its latest outlook for the nation’s growth and the quarterly inflation report on the same day.
“Ultimately, the central bank is going to be constrained by what is still a weak economy, weak wage growth and in my eyes a worsening political situation,” said Kacper Brzezniak, a portfolio manager in London at Allianz, which manages 498 billion euros ($580 billion) of assets. “If, from the BOE, you got a large sterling rally or a big sell-off in gilts we would look to fade both of them” should the market reaction be “unwarranted,” he said.
Brzezniak said his decision on how to trade the pound and gilts will depend on the monetary policy committee’s vote split, the central bank’s statement, the inflation report, Governor Mark Carney’s press conference and whether there is a mismatch between the BOE’s message and the market’s reaction.
Yields on UK 10-year government bonds were at 1.34 percent as of 11:39 a.m. in London on Wednesday. They climbed to 1.44 percent on Oct. 25, the highest in almost nine months, after the UK economy grew more than forecast in the third quarter and cemented
rate-hike expectations. Sterling strengthened against the euro for a second month in October and was at 87.47 pence. Fidelity is currently “somewhat cautious on gilts” and “not too far” from levels where the fund would consider going neutral, according to Andrea Iannelli, fixed-income investment director. Current market circumstances don’t justify an increase in the 10-year yield beyond 1.5 percent, he said.
James Athey, a senior investment manager in London at Aberdeen Standard, expects the BOE to raise borrowing costs again as an increase on Thursday would merely reverse last year’s emergency cut, which he terms a “catastrophic mistake,” following the Brexit referendum.
The monetary authority “could get another couple of hikes in without doing any real damage to the economy,” said Athey, who currently doesn’t have an active position
in gilts after being short recently. “Getting rates to 1 percent would help to re-balance.”