The short sterling idea remains a winner!

A sterling crash on this scale means inflation will rise far above the three per cent level implied in the gilt market breakevens

Hard Brexit has proved fabulously profitable for my tribe of sterling bears since the Tory conference in Birmingham. Sterling is 1.2160 as I write and sterling volatility in the foreign exchange options market has risen to 12.50, more than the Turkish lira. Sterling has now lost 18 per cent of its value against the dollar in 2016 alone, saddling GCC investors with untold billions in losses on their holdings of London/UK property. A sterling crash on this scale means inflation will rise far above the three per cent level implied in the gilt market breakevens. This means the Bank of England will be forced to do a policy U-turn or intervene in the currency markets in an attempt to smooth the sterling's free fall.
While extreme short positioning makes me nervous and I would book profits on the 1.33 sterling short recommended in this column after the June 24 referendum, the trend for sterling remains lower, significantly lower. Sterling rallies will be short lived and opportunities will emerge to short the currency of a nation with a seven per cent current account deficit, higher oil imports and untenable easy money central bank policies. As I wrote here in July, my strategic target is 1.05 against the US dollar.
The Mexican peso has fallen nine per cent against the US dollar in 2016, a victim of Donald Trump's threats to deport millions of Mexican immigrants from the US, build a wall across the Rio Grande, revoke NAFTA and halt the "offshoring" of US factories across the border. The Mexican peso is the most liquid currency in emerging markets and is often a cheap hedge for macro funds at a time of risk aversion. This was the reason the Mexican peso tanked four per cent in the week after Brexit this summer. There is a pipeline of future shocks even if Trump loses the election - China, Article 50, the Italian referendum, the US Senate and House elections. Despite the Banco de Mexico's rate rise, the peso could well test 20.
China's shocking fall in exports despite a lower yuan suggests that Beijing's tsunami of money creation has only lead to history's greatest credit bubble, as the People's Republic has accumulated a 245 debt/GDP ratio. There is no way President Xi and his Politburo can deliver the 6.5 per cent GDP growth target, cool the property market and provide an easy money lifeline to its state owned corporate colossi without a further, significant depreciation of the Chinese yuan. This is the lowest political cost option for the Red Emperors in Beijing at a time when half the Politburo Standing Committee is scheduled to retire. I believe the Chinese yuan can well fall to 7.4 per cent in the next six to eight months. The yuan depreciation unnerve global markets, as it did in August 2015.
The euro has fallen victim to political angst about Brexit, the Italian referendum and banking woes, Deutsche Bank's multiple disasters, the challenge to Chancellor Merkel from right wing populists in the AFD and the increasing impotence of the ECB/Bundesbank to revive growth by money printing alone. The Euro's bearish momentum will accelerate and I expect it to fall to 1.0920.
King Dollar has taken the Japanese yen down to 104, not a Bank of Japan that has run out of monetary ammunition. Yet a risk aversion spasm in global risk asset will trigger a Pavlovian scramble to buy the safe haven yen. It would not surprise me to continue to see the Japanese yen appreciate, possibly to as high as 96 against the US dollar by next June. The failure of Abenomics to structurally reform Japan Inc. leaves no other credible scenario for the Empire of the Rising Sun!
Gold has plummeted to $1,250 due to King Dollar, hawkish Fed comments and the rise in US Treasury bond yields. However, as long as the June 7 low at $1,235 is not violated, I would accumulate gold as a hedge against rising systemic risk in global banking, the rise of inflation as Western governments use fiscal stimulus to reflate moribund economies and a new Cold War between the US and Russia. I expect gold to test and break through the $1,277 October 5 high on its path to $1,300 an ounce.
Despite $52 Brent, the Canadian dollar is weak at 1.32. Yet US jobless claims are at 43 year lows while Canada has lost 73,000 jobs in the past three months. The Fed will raise rates while Ottawa could well cut rates to avoid recession. O Canada, loonie tanks to 1.40 even if Trump loses?