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Long sterling trade idea was a huge winner, and here's proof
Sterling has been the top-performing currency in the G10
- PUBLISHED: Sun 29 Apr 2018, 7:32 PM UPDATED: Sun 29 Apr 2018, 9:35 PM
- By:
- Matein Khaid
The British pound has been the ultimate politics-driven currency in the past 2 years. Sterling plummeted from 1.50 to below 1.20 in the immediate aftermath of the June 2016 Brexit vote, as investors were alarmed by the intransigence of the EU over a divorce bill (hard Brexit), the impact of higher inflation on the High Street, political divisions in Westminster and Theresa May's failure to increase her majority in the 2017 general elections.
However, I began to see signs of a sterling trend reversal last autumn when sterling was 1.28. The Conservative Party rallied behind Mrs May. The EU compromised on a Brexit divorce bill. There was no recession in the EU. The Bank of England begun to hint at two rate hikes in 2018. The US dollar sagged on Trump, trade tensions and the surge in the US budget deficit. Britain negotiated a transition deal with Brussels.
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My long sterling idea at 1.28 and again at 1.32 (remember the Lloyds Bank ADR trade idea?) began to make money. Last week, sterling hit 1.43 for the first time since the referendum. Sterling has been the top-performing currency in the G10, up 6 per cent against the US dollar in 2018. The financial markets have now in a soft Brexit, a successful outcome to the Northern Irish border talks and a viable trade deal. Of course, any disappointment on this front will lead to swift spasms of sterling selling.
The London money markets now price 93 per cent odds of a Bank of England base rate hike in May. However, economic growth and High Street consumer sentiment in the sceptered isle has peaked, so it will be rational for Governor Carney to signal a 'dovish hike'. Any such dovish hike from Threadneedle Street will unquestionably gore the sterling bulls.
I am also worried about the alarming deterioration in the London office and prime markets, where sanctions on Russia, the Chinese corruption crackdown (the seizure of Anbang), the liquidity crunch in the GCC banking system attest for lower foreign flows into the City of London. Sterling has always punched above its weight in Planet Forex due to London's role as the capital of the British Empire (the sun once never set on Britannia, but now has gone into an eclipse!), the epicentre of the eurocurrency markets and, in the early dawn of the Thatcher spring, the North Sea oil bonanza. Sadly, the Brexit referendum will greatly devalue both London's stature in international finance and offshore demand for sterling.
I expect sterling to maintain its seasonal strength in April, primarily due to the end of the UK tax year and dividend payments by mega UK corporates. US dollar strength, the rise in the 10-year US Treasury note yield to 2.96 and Governor Carney's public comment on soft UK data slammed cable to 1.40. Yummy. Forex folklore contends "the trend is your friend until the trend comes to an end". This trend has not come to an end.
Trade tensions with China, geopolitical risk, expectations of a Bank of Japan policy normalisation, safe-haven bids linked to the rise in volatility and the March sell-off in global equities and repatriated fund flows from the end of Japan's fiscal year led to an alarming 7.5 per cent rise in the yen from 113 to a high of 104.7 in the first three months of 2018. Deutsche Bank even predicted that ¥100 was imminent.
Yet the best laid plans of mice, men and currency gnomes aft go astray. The yen has tanked to 107 as I write. On revelations that CIA director Mike Pompeo, America's next diplomatic maestro, had traveled to Pyongyang to meet Comrade Kim McDuck slashed the geopolitical risk of North Korean missiles whizzing over the Sea of Japan. Wall Street's stock market rally resumed with a vengeance and led to a fall in yen safe-haven bids.
The Trump White House and President Xi Jinping both played down the risk of a US-Chinese trade war. The Bank of Japan showed no sign of monetary tightening. Shinzo Abe was mired in the school scandal, allegations of a government cover up and even risks of a LDP engineered political hara-kiri endgame to Abenomics.
The yen can well depreciate to 110 by August. Why? One, Ministry of Finance data suggests Japanese life insurers are major buyer of foreign bonds, mainly Uncle Sam debt. Two, Abe-san's approval ratings are 28 per cent, below even Trump. A golf game at Mar-a-lago cannot save the Japanese PM if the LDP turns against him. Three, Japanese reflation is still on a roll. Net net, another yen shokku!
The writer is a global equities strategist and fund manager. He can be contacted at: mateinkhalid09@gmail.com.