It is now far too dangerous to short the British pound, another fabulously profitable short since its fateful 1.50 high against the US dollar the night of the June 2016 referendum.
The UK Foreign Secretary shocked me when he publicly warned that voting down Mrs. May’s deal to exit the EU would scrap Brexit. Sterling rose to 1.2850 on reports that the Tory Cabinet in Downing Street plans to delay the March 29 Brexit deadline. True, the proof of the Prime Minister’s pudding will be voted in the Palace of Westminster and Theresa May could well become the fourth British Prime Minister to be destroyed by Europhobic Tory political demons – after Mrs. Thatcher, Sir John Major and David Cameron. While sterling could plunge to 1.10 on a no deal Brexit, I believe the political elite of Westminster is primarily Remain, as it was in 2016. It is suicidal to bet on binary political outcomes yet I cannot envisage a no deal Brexit, chaos, a general election and a neo-Marxist Jeremy Corbyn in 10 Downing Street. My instinct is to buy, not sell sterling, albeit with a tight stop. Could sterling be on the verge of the mother of all rallies to 1.45? I say yes, yes, yes! Jolly boating weather…
It is not just the political drumbeat of a delayed Brexit that has taken sterling to seven week highs in the foreign exchange market. The Federal Reserve’s Jay Powell has ruled out a recession in 2019 (as if 312,000 new US jobs in December and 0.4% wage growth was not enough!), vowed that he will be “patient” and “flexible” in scaling back the Fed’s post-Lehman, post QE balance sheet. This message was reinforced by the presidents of the New York, St. Louis, Atlanta and Chicago Fed regional banks. This led to frenzied selling in the US dollar. As volatility tanked, international bank shares surged and sterling is correlated to the fate of global banking given the City of London’s seminal role in the British economy.
Sterling has always punched above its weight as a global currency – due to the British Empire, old colonial trade linkages, London’s role as the world’s financier since Victorian times, North Sea oil bonanza and the birth of the Eurobond/Eurocurrency/syndicated loan markets in London.
Global events have cast a shadow on sterling my entire adult life. I will remember Black Wednesday, 15 September 1992, the day George Soros humiliated the Old Lady of Threadneedle Street, forced sterling out of the ERM and made a billion dollar killing on Planet Forex, for the rest of my life.
Yet sterling’s devaluation since November 2007, when cable traded at 2.10, has been the most traumatic in British history – worse than Black Wednesday, Harold Wilson’s “pound in your pocket” debacle, worse than even 1931, when Ramsay MacDonald took the British Empire out off the gold standard.
What will happen on Tuesday January 15, the date MP’s vote on Theresa May’s Brexit deal? The vote will fail. Mrs. May will then announce a delay in the March 29 Brexit deadline, possibly even a second referendum – and sterling will fly! So fear not, duckies! The Queen’s at Ascot, the Tories are in power (barely), all’s well with the sceptered isle, Britannia’s kingdom by the silver sea!
The Chinese yuan is on a roll against the US dollar in 2019, rising at its fastest pace since the People’s Republic abandoned its currency peg in 2005. There is no doubt that Beijing wants to appease trade hardliners in the Trump White House, led by the President.
There is ample precedent for G-10 governments getting together to manipulate global exchange rates. The Plaza and Louvre Accords in 1985 – 87 were engineered by Washington to dramatically reduce the value of the overvalued Reagan dollar against the Deutschemark. The 2016 Shanghai Accord in early 2016 was a G-10 pact to allow China to inject epic monetary stimulus into its economy as contagion from the Middle Kingdom gutted global capital markets.
The Shanghai Accord set the stage for the Chinese yuan’s weakness in 2017-18. Are we now living in a tacit Shanghai 2.0 world? Yes. China wants to appease Washington in the crucial trade talks (led by a Vice-Premier close to President XI), attract foreign capital and stimulate demand abroad. Did the Politburo do a quid pro quo with the US Treasury and Federal Reserve? The evidence screams “yes”. This means it is now safe to buy the Chinese yuan at 6.80 for a 6.30 target.
Also published on Medium.