October 18, 2017 / 7:34 AM / 8 months ago

Central bank watching and currency bets

LONDON (Reuters) - Investor positioning in some of the world’s biggest currencies has gone through major shifts in recent weeks as some of the world’s top central banks prepare to unwind years of record stimulus policies.

U.S. Dollar and Japan Yen notes are seen in this picture illustration June 2, 2017. REUTERS/Thomas White/Illustration

In the space of a week starting on Oct. 26, the European Central Bank, the U.S. Federal Reserve and the Bank of England are expected to signal higher interest rates or reveal plans to withdraw the vast sums of liquidity injected into their financial markets.

While in some cases such as the ECB, expectations of a withdrawal in stimulus are more muted, market participants are wary that a hawkish tilt by these central banks may create a ripe environment for a selloff in risky assets such as equities and those bonds that have posted double-digit returns this year.

Some of the shifts have already begun in currency markets with sterling posting some of the most violent changes in recent weeks with net positions flipping to a net long from a substantial short bet in less than a month.

“The dramatic swing in market positioning in sterling is all the more striking given the weakness in the economy and its earlier dovish stance from policymakers,” said Paul Meggyesi, a managing director at JP Morgan in London.

While Bank of England policymakers struck a dovish stance at a public meeting on Tuesday, market expectations of higher interest rates remained firmly entrenched.

If anything, expectations of interest rate hikes priced into bond markets have gathered momentum in recent weeks.

Markets now expect the most number of rate increases from Canada over the next 12 months at 62 basis points followed by the U.K and the U.S. Federal Reserve.

Reporting by Saikat Chatterjee and Ritvik Carvalho Editing by Jeremy Gaunt

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