BlueBay bets on sterling drop from hard Brexit

The UK is on course for a hard Brexit that will hit sterling, according to a large European bond fund.

BlueBay Asset Management, which manages $60bn of assets, took the view last year that the UK would “find it hard” to agree to the EU’s demands in trade negotiations and a couple of weeks ago the fund placed a negative bet on the pound.

Recent discussions with officials in London and Brussels have convinced BlueBay that either a deal on trade is out of reach, or the UK will be left with a very restricted agreement on its future relationship with the EU. A 10 per cent slide in sterling against the euro is the most likely result, said Kaspar Hense, an investment-grade bond fund manager at BlueBay.

“We will see a hard Brexit for sure,” said Mr Hense. “Market haven’t yet priced in the significant impact on the City of London and the risks to the UK economy. The only way out will be a weaker pound and the central bank, to some extent, devaluing the currency,” he said.

The UK formally left the EU in January, and has since remained part of the bloc’s customs union and single market on a temporary basis. The British government has said it would like to strike a deal over the future relationship by the end of this month, although in theory that could take longer.

This week UK and EU representatives met for talks in London, but despite positive signs in recent rounds of negotiation, Michel Barnier, the EU’s Brexit negotiator, said that there were still “significant divergences” between the two sides. The EU has also published preparations for a no-deal departure.

Concerns about the impact of Brexit on the City of London have been growing in recent weeks, but sterling has been trading relatively brightly. That suggests most market participants believe the two sides will come up with some kind of deal.

The pound has been one of the best performing currencies so far this month against the dollar, notching up nearly 2 per cent of gains to trade above $1.26. Against the euro, sterling is 1.1 per cent stronger than at the start of the month at €1.11.

Mr Hense said that markets are underestimating the risk that UK financial institutions’ access to EU markets will be curtailed, and the effects of the probable response from the Bank of England to a hard Brexit. Faced with a struggling City of London, the UK central bank would be inclined to nudge interest rates into negative territory, he said — a possibility that surfaced in May.

BlueBay, a fixed-income specialist that was bought by Royal Bank of Canada in 2010, has benefited from its Brexit calls in the past. Going into the 2016 referendum on EU membership, the fund correctly bet that sterling would weaken after the vote.

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