The currency has risen 3.2 percent against the Group of 10 currencies from this year’s low on March 10, after falling 7.4 percent in the previous six weeks, according to Bloomberg correlation-weighted indexes. The yield on the 10-year gilt dropped yesterday to the lowest level since December.
Traders are betting that whichever party forms a government after the May 6 vote will deliver a plan to reduce the record budget deficit. The euro tumbled to a one-year low against the dollar following reductions in the credit ratings of Greece, Portugal and Spain by Standard & Poor’s last week. S&P and Moody’s Investors Service signaled they may remove Britain’s AAA grade depending on the new government’s measures.
“What’s happening in the euro zone with the rating downgrades are most likely being followed by the U.K. candidates,” said Audrey Childe-Freeman, a senior currency strategist at Brown Brothers Harriman Ltd. in London. “No leader or no coalition government would like to experience a downgrade for U.K. debt.”
A ComRes Ltd. daily poll shows 37 percent of respondents planning to vote Conservative, 29 percent backing Labour and 26 percent endorsing the Liberal Democrats. That would give the Conservatives 294 seats, 32 short of a majority, ComRes said. A YouGov Plc survey gave 35 percent support to the Conservatives and 30 percent to Labour, up 2 points. The Liberal Democrats slipped 4 points to 24 percent.
‘Defensive Trading’
Still, the pound declined 0.6 percent against the dollar this week on speculation the election will result in a coalition government.
“You’re going to see more defensive trading the closer we get to the election with a lack of a change in the prospect of a hung parliament,” Peter Frank, a strategist at Societe Generale SA in London, said yesterday. “That’s a slight negative for the pound. It’s going to be a cliff-hanger.”
Sterling snapped a three-day decline, gaining 0.1 percent to $1.5163 as of 7:34 a.m. in London, from $1.5143 in New York yesterday. The currency traded at 85.69 pence per euro from 85.76 yesterday.
The U.K. deficit, the largest in the Group of Seven nations at more than 11 percent of gross domestic product, has dominated the election campaign.
‘Ludicrous’
The Conservatives, who have pledged to make bigger cuts to the 167 billion pound ($252.7 billion) shortfall than Labour and the Liberal Democrats, raised the specter last week of an International Monetary Fund bailout if the vote produces an indecisive result. Liberal Democrat Leader Nick Clegg criticized the idea as “ludicrous” and said there will be no “Armageddon” if there is a hung parliament.
Bloomberg’s Correlation-Weighted Index that measures the pound against a basket of currencies based on variances in exchange rates closed yesterday at 63.9116 in New York. While that is up from 61.8930 on March 10, it’s below the high this year of 66.8641 on Jan. 28. The index has a start date of Jan. 2, 1975, and a base value of 100.
The yield on the benchmark 10-year gilt, a 4.75 percent note due in March 2020, fell 7 basis points, or 0.07 percentage point, to 3.84 percent. This year’s closing high was 4.28 percent on Feb. 19.
Stock traders aren’t as optimistic. The benchmark FTSE 100 Index has fallen 4.7 percent this quarter, compared with a 2.4 percent drop in Germany’s DAX Index.
Short Positions
The difference in the number of bets the pound will fall compared with wagers on a gain -- so-called net shorts -- shrank to 54,666 last week from a record 71,624 on March 23, data from the Commodity Futures Trading Commission show.
“The worst scenario is priced in,” said Neil Jones, head of European hedge-fund sales at Mizuho Corporate Bank Ltd. in London. “If we get anything but a hung parliament, which is quite possible, then, given the overwhelming short position on the pound, whoever it is, it should be good for the currency.”
Even with a U.K. parliamentary deadlock “the one area where there is a synchronization is with regard to the deficit,” Jones said. It may be possible “to push these measures through,” he said.
Greek Crisis
The Greek debt crisis may be muddying the message the market is sending on the election, according to David Bloom, global head of currency strategy at HSBC Holdings Plc in London. Concern that Greece’s debt woes will spill over to other members of the European Union drove the euro lower against all 16 of the major currencies the past month except the Swiss franc and South African rand, according to data compiled by Bloomberg.
“The whole situation with Greece and the euro has obscured the situation,” Bloom said. “A hung parliament is probably priced in by now and people are selling the euro because of Greece.”
S&P affirmed its “negative” outlook on the U.K.’s AAA rating on March 29 “in the absence of a strong fiscal consolidation plan.” Moody’s said Britain has moved “substantially” closer to losing the top rank as debt costs climb. Fitch Ratings said March 24 the pace of deficit reduction is too slow.
‘Worst’ Scenario
The Liberal Democrats, Britain’s third party, gained support following Clegg’s performance in three live televised debates with Cameron and Brown. Polls suggest Brown’s Labour Party could stay in power with Liberal Democrat backing.
Two of Brown’s Cabinet ministers suggested in newspaper interviews that Labour supporters should consider backing the Liberal Democrats in districts Labour can’t win to keep the Conservatives out.
Former Bank of England policy maker Charles Goodhart said the “worst type” of hung parliament for the pound and the U.K. economy would be a scenario where the Conservatives have a “clear lead in the popular vote, Labour having just a tiny majority in seats over the Conservatives and nobody quite knowing what the Liberals are going to do.”
“Nobody would know who the government would be, or what they would do, or what its policies would be and markets don’t like that sort of uncertainty,” Goodhart said in an interview with Bloomberg News.
To contact the reporter on this story: Paul Dobson in London at pdobson2@bloomberg.net
Last Updated: May 5, 2010 03:03 EDT
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