(Bloomberg) -- The pound's good fortune is set to continue this month, if seasonality is any guide.
Sterling appreciated versus the dollar every April during the last 13 years in what Bank of America Merrill Lynch describes as the strongest seasonal trend among Group-of-10 currencies. In a research note, the bank recommended a two-month option trade to take advantage of the periodic strengthening pattern, while Mizuho Bank Ltd. and Rabobank also have put stock in the U.K. currency's tendency to outperform in April.
The trend corresponds to a typical increase in incoming capital at this time of the year, driven by dividend payments to British shareholders from foreign companies and other investment inflows that mark the start of the U.K. financial year. The fact that sterling has strengthened in April even during past episodes of heightened financial instability and political risks helps boost conviction in the seasonality, according to Bank of America.
“Historically it's pretty reliable,” said Neil Jones, head of hedge fund sales at Mizuho Bank Ltd. “So I would go with it again this year. It's self-fulfilling.”'
The pound's 3.2 percent rally last April was the second-best monthly gain of 2017. The currency completed a fifth straight quarterly advance versus the dollar on March 30, the longest winning streak since mid-2014. It has made a positive start in April, gaining 0.5 percent so far.
‘Remarkable Outperformance'
While sterling is the third-best G-10 performer this year with a 4.2 percent gain to about $1.4080, option volatility on the currency averaged higher last quarter amid uncertainties about Brexit. Still, the seasonal appreciation pattern may withstand such concerns, according to Bank of America's head of G-10 currency strategy Kamal Sharma.
“This remarkable outperformance covers major events such as the financial crisis, general elections and the Brexit referendum, and suggests to us a consistently strong underlying flow which has trumped these idiosyncratic factors,” he wrote in a note dated March 23.
Yet, seasonality won't necessarily give sterling a large boost this year, given it already rallied by almost 2 percent in March, according to Rabobank's head of G-10 currency strategy Jane Foley. She sees the U.K. currency rising to $1.44 by the first quarter of 2019.
“The extent of any seasonal gains in the pound in April could be influenced by its performance in March,” said Foley. “A strong move in March could limit the follow through in April.”
--With assistance from Anooja Debnath
To contact the reporter on this story: Charlotte Ryan in London at cryan147@bloomberg.net.
To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net, Anil Varma, Marco Bertacche
©2018 Bloomberg L.P.
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