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An autumn of destiny for the British pound and the Japanese yen

By Matein Khalid

So Boris Johnson was elected the leader of the Conservative Party by 66% of the Tory membership and thus he, not Jeremy Hunt, will go to Buck House to present his credentials to Her Majesty the Queen. This increases the risk of both no deal Brexit and a potential Tory vote of no confidence in parliament, led by Mrs. May’s Chancellor of the Exchequer Philip Hammond, who will resign before he is sacked by the new first Lord of the Treasury/PM.


Sterling has thus begun its fateful rendezvous with the Halloween trade (October 31) and trades at 1.2430 on cable as I write. What next? Expect Boris’s Bromance Bro, Tweeter in Chief Donald Trump, to announce a trade pact with the US in the next two weeks. This will cause a sharp sterling rally so please do not even think of shorting the quid next week. There are rumours that the EU and British could agree to a compromise in the Eire – Six Counties of Ulster border. In any case, Johnson will now soften his rhetoric on no deal Brexit with Brussels even as he purges all the Tory Remain ministers in his Cabinet. As a classics scholar at Eton (head boy but not Pop?) and Balliol (Oxford Union President like Benazir but not Bullingdon), Johnson is a wit and bon vivant in the Charles James Fox parliamentary tradition but I doubt this alone will be enough to charm the Globish speaking ex German Defense Minister Frau and the top Eurocrats in Brussels.

I expect sterling volatility will spike in the next three months. Yet no deal Brexit means another fall in sterling below 1.20, increase in petrol/food prices and thus fall in real wages, a property bear market beyond South Ken/Chelsea/Belgravia/West End and EU tariffs on UK services/exports. This means the sceptered isle goes into recession and the Bank of England will be forced into emergency rate cuts/monetary stimulus even as the Fed is forced by strong US data (224,000 June payrolls, blow out retail sales, Philly Fed, white hot labour markets and strong housing etc.) into “neutral” after the July FOMC, a preemptive “insurance cut”, Powell’s gift bone to Trump and Wall Street. This scenario is well known to Downing Street and Whitehall policymakers. No deal Brexit will vaporize global investor confidence in Britain and sterling, making Brexit history’s biggest economic own goal since Lenin’s seizure of power in Russia’s Bolshevik Revolution. In retrospect, David Cameron ruined the British economy and sterling, which traded at 1.50 on June 23, 2016.

Sir Richard Branson expects no deal Brexit will cause the pound to fall to parity or 1.00 against the US dollar. It will be insane if Johnson suspends parliament to enable no deal Brexit to happen on October 31st. This will mean financial Armageddon in the City, a UK constitutional crisis, global financial chaos and the end of the Crown’s Union with Scotland. Yet I doubt if this will happen as Hammond and the Tory insurgents will force a vote of no confidence and a general election that would mean a new-Marxist Labour Prime Minister in Downing Street. All my life, British homes, British banks, British assets have been a safe haven for Gulf Arabs and my compatriots from Pakistan. No more. The next haven? Trump’s America!

Boris Johnson has only one potential strategic option to save Britain (and his political career) from total disaster this autumn. He should abandon his idiotic “do or die” pledge on an October 31 Brexit. He should then announce a highly simulative budget that cuts taxes and slashes inheritance/capital gains/mansion taxes to attract foreign buyers of UK property. This will enable him to negotiate a less humiliating Brexit deal, peace in our time (though hopefully not signed and sealed in Munich!) and win a few critical months for a new general election he could even win in 2020 if allied with the Brexit Party. (abominable cretins whose MEP’s turned their backs while the EU national anthem was played).

It saddens me to see a nation I have loved and admired all my life to be governed by such political opportunists and moral pygmies. Is Boris a credible successor to Benjamin Disraeli and Winston Churchill? Europe destroyed the political career of four successive Tory Prime Ministers – Mrs. Thatcher, Sir John Major, David Cameron and Theresa May. Will Boris Johnson be Number Five?

Prime Minister Shinzo Abe’s LDP/Komito coalition won the Japanese election but did not achieve the two third supermajority needed to change the pacifist, post Hiroshima/Nagasaki Article 6 of the Constitution which forbids the acquisition of nuclear weapons. This is yen positive, as is Abe-san’s comment that the Bank of Japan has not yet achieved its 2% inflation target despite seven years of aggressive monetary easing but has met the government’s employment targets. There is thus no immediate catalyst for more quantitative easing or for Governor Kuroda to scale up the Bank of Japan’s asset purchase program to drive yields into even further negative territory and depreciate the yen. The Bank of Japan balance sheet is now 100% of the Japanese GDP and it owns 50% of the shares listed on the Tokyo Stock Exchange, a mockery of capitalism 30 years after the epic stock/property asset bubble burst in 1989.

The second arrow of Abenomics (monetary easing) will not be unsheathed – and a fiscal stimulus in Tokyo will be tepid. Add a vicious rift in relations with South Korea (Imperial Japan’s wartime colony) and the fallout from US-China trade relations and the risk/reward calculus favors a yen rally.

Goldman Sachs recommends the Japanese yen as a cheaper safe haven asset to protect against the inevitable post FOMC fireworks in the global capital markets than gold. I agree. Yen volatility is far cheaper than gold vols, making it imprudent to hedge against market risk with “crowded trade” COMEX gold options. This means long Nippon yen calls as a tactical hedge is the trade de jour. Dollar/yen is now 108.20 as I write. When Mr. Market goes ballistic, I expect the Japanese yen to rise to 104 – 105, especially if Trump’s Treasury Secretary green lights intervention to weaken the US dollar. Remember the Plaza Accords? The yen will soar (as will gold) if the New York Fed begins to sell the greenback in Asia.


Also published on Medium.