April 24, 2017 / 4:50 PM / 3 months ago

Jury still out on sterling U-turn, banks' flow data shows

3 Min Read

LONDON, April 24 (Reuters) - A surge in buying of Britain's pound last week put only a small dent in record net market bets against the currency and sentiment remains finely balanced, official data and capital flow reports from major banks showed on Monday.

The internal indicators run by the currency world's single biggest dealer, U.S. bank Citi, showed both big long-term fund investors and the more speculative and short-term hedge fund community bought the pound in the week to last Friday.

That was fuelled by a surge in sterling following Tuesday's surprise calling of early parliamentary elections for June 8, and matched analysis last week from another major player, Deutsche Bank, covering the bulk of the day's flows.

Sterling rose by almost 4 cents trough to peak around the announcement, racking up its second biggest daily gain against the dollar since the 2008 financial crisis.

But opinions on the day varied as to how much of the record high number of bets against the pound had been washed out in the move, which some traders said had come among fairly moderate flows of capital.

Data from the Commodity Futures Trading Commission issued late on Friday showed that investors had cut only 6,000 contracts off the net "short" on the pound -- from 106,000 contracts to 99,500 contracts -- in the week to close of business on Tuesday.

That also only came as a result of investors opening net "long" bets on the pound, with the number of shorts in the market actually rising on the week. There were also significant caveats in the Citi numbers.

"Hedge funds became a sterling buyer and their weekly buying was the strongest in six weeks," Citi's European head of FX strategy Richard Cochinos said in the weekly report sent to the bank's clients at the start of U.S. business on Monday.

"20 day positioning for leveraged investors however remains roughly flat."

The Citi numbers rated one-week flows and momentum among hedge funds as favouring the pound, but still showed it as a "sell" over the past four weeks. Real money was a buy on a four-week basis but leaned against the pound in the previous week.

Its overall indications of net flows on the pound, also taking in corporate orders, was negative for the week.

Deutsche's Corax measurement of market positioning showed 12 percent net buying by leveraged players and asset managers, one of the heaviest position changes of the past year.

A third bank to report on the subject on Monday, Credit Agricole, concurred that sterling had been bought strongly after the announcement but also stressed the risks ahead.

"With speculative short positioning less elevated, we anticipate limited upside risks from the current levels," analysts from the French bank said on Monday.

"This is especially true as overall uncertainty with respect to actual Brexit negotiations should continue." (Editing by Catherine Evans)

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