Pimco Sees Pound Bottom as BOE Cuts Rate to Lowest Since 1951

By Lukanyo Mnyanda and Ye Xie

Dec. 5 (Bloomberg) -- The Bank of England’s third interest- rate cut since the start of October is raising speculation that the pound’s 26 percent slide may be coming to an end.

Pacific Investment Management Co., which said as recently as September the pound was “overvalued,” and Millennium Asset Management have exited or cut bets the currency will weaken. The pound traded in a range of about $1.47 and $1.55 the past month, after dropping from $2 in July.

“If you were shorting the pound, now is the time to reduce those positions,” said Myles Bradshaw, a money manager in London at Pimco, manager of the world’s largest bond fund. “The arguments to be underweight are not as strong anymore.”

Bank of England Governor Mervyn King cut the nation’s key rate to 2 percent yesterday, the lowest level since Winston Churchill was prime minister in 1951, to help bolster an economy on the brink of a recession. The rate is down from 5 percent as recently as Oct. 7.

After the decision, the currency rebounded to as high as $1.4815 per dollar from $1.4471. It was at 87.07 pence per euro in London, after dropping to a record low of 86.96 pence. The pound may gain 2 percent by April, according to the median forecast of 45 analysts and strategists surveyed by Bloomberg.

Even with yesterday’s gains the pound is poised for its worst year since 1972, as a collapse in bank lending worldwide dried up credit to companies and consumers. It’s down 15 percent versus the euro.

Shrinking Economy

Gross domestic product shrank by 0.5 percent in the third quarter, the first drop in 16 years. The economy may contract 1.1 percent next year, the most since 1991, the Organization for Economic Cooperation and Development said Nov. 25. U.K. home values declined 2.6 percent in November, the biggest drop since 1992, and 16.1 percent from a year earlier, HBOS Plc, Britain’s biggest mortgage lender, said this week.

Pound bulls have history on their side. Since reaching a 26-year high of $2.1161 in November 2007, the currency has dropped 30 percent. In the past two decades, the five major declines in the pound averaged about 22 percent from peak to trough against the dollar, according to data compiled by Bloomberg.

“We are not selling the pound because the risk-reward is not good,” said Richard Benson, who oversees $14 billion of currency funds at Millennium in London. Benson was betting against the pound for a period of six months ending in September.

‘More to Go’

A rebound in the pound may not be imminent as investors bet the central bank will cut rates further to revive the economy, Europe’s second-largest. Policy makers will reduce the benchmark rate to 1.5 percent by the end of 2009, according to the median forecast of 33 economists surveyed by Bloomberg.

“There’s still a lot more to go,” said Ian Stannard, a foreign-exchange strategist in London at BNP Paribas SA, the most accurate forecaster in a 2007 Bloomberg survey “There’ll be more weakness.” The pound will drop 16 percent to $1.24 by the end of March, according to Stannard.

Traders have amassed a net 40,244 futures contracts betting on a pound decline, data from the Commodity Futures Trading Commission in Washington showed on Nov. 25. That’s about the most since the last week of September, when they had 47,771 wagers. The currency declined 18 percent since then.

“They are more exposed to the problems in the housing market and banking sector,” said George Buckley, an economist in London at Deutsche Bank AG, the world’s biggest foreign- exchange trader, according to a Euromoney Institutional Investor Plc survey. “They should have cut the rates more quickly.” The pound will tumble to $1.30 by year-end, according to Buckley.

Less Bearish

Investors are turning less bearish on the pound, according to a Merrill Lynch & Co. survey of investors published Nov. 20.

An index tracking short positions against the pound among global debt and currency managers was at 45 in November, compared with 43 in October and 35 in September. A reading below 50 indicates investors are betting the currency will drop.

“The U.K. is addressing its problems forcefully and I tend to be leaning toward the pound’s recovery a bit more,” said Eric Busay, a money manager in Sacramento at the California Public Employees’ Retirement System, the largest U.S. public pension, with $213.5 billion in assets under management. “Deepening recession on the global basis will affect everyone.”

Bank of America Corp., based in Charlotte, North Carolina, said in a report to clients this week that the pound will rise to $1.67 by the end of March and to 86 pence per euro, saying the “bad news has been priced in” for the U.K. currency.

To contact the reporters on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net; Ye Xie in New York at yxie6@bloomberg.net.