When will Mark Carney act to save the British pound?
The historic Brexit referendum has culminated in a shock outcome that has roiled financial markets from Tokyo to New York. That the GBP/USD currency pair would come in for some serious tap was widely known. The beleaguered UK currency has been bruised and battered as it finds itself in the midst of a Category 5 storm. Once a stalwart of G10 currencies, sterling is now the worst performing of the major currencies, and for good reason.
Economists, analysts and speculators all warned about the dire consequences awaiting the UK if the country voted for a Brexit. Investment brokerages and hedge funds have not been sitting idly by while the carnage is taking place: they have been betting against the pound and UK stocks en masse. And much like George Soros, who bet against equity markets ahead of the Brexit vote, substantial profits tend to be gained this way. Recall that global equities shed $2.08 trillion on Friday 24 June alone as chaos abounded around the world.
Bank of England Governor Mark Carney has offered assurances that the BoE is prepared to act with as much as £250 billion in emergency funds to shore up the value of the pound if need be. The BoE, no longer under the control of the Treasury Department, has a degree of independence that leads some to believe it can safely navigate amid the present uncertainty. When Carney decides to take action it will be bold and definitive, but until then the chaos will continue.
Next British PM to tackle Brexit logistics
With so much negativity swirling about the UK, it is almost ironic that the EU referendum is not legally binding on Parliament – it is merely an advisory outcome. Nonetheless, UK politicians have vowed to honour the vote and the next leader will be tasked with invoking Article 50 of the Lisbon Treaty to begin divorce proceedings from the EU. The separation process could take upwards of two years to complete and is fraught with complexity.
Hedge fund managers are now taking out huge positions against UK shares and the pound. But they are focusing their efforts exclusively on those sectors most likely to be impacted by the vote. Front and centre is the FTSE 250 index, as opposed to the FTSE 100 which is focused on the international economy. There are very few speculators and currency traders who do not share the opinion that going short on the pound makes sense at this juncture. Spread betting companies have seen huge volumes of short trades on GBP/USD, GBP/EUR, GBP/AUD and others. The Bank of Tokyo is expecting GBP/USD to plunge to the mid-to-low 1.2000 level by the end of the year.
Worst decline for the pound in decades
By Monday 27 June 2016 the GBP/USD pair was trading at 1.3118, its lowest level in over 31 years, marking the steepest two-day decline since the gold standard was abolished in 1971. Hedge funds operating on the bearish side of the spectrum believe that GBP/USD could drop as low as 1.10, although this is an extreme position to take in the short term. One of the world’s largest hedge funds, Bridgewater, forecast a 4% appreciation of GBP/USD if a Remain vote was adopted and a 9% decline of GBP/USD if a Leave vote was adopted.
Investors shorting sterling and collecting on the slide
Even though billionaire investor George Soros took out a long position on the pound ahead of the vote, he likewise forecast a much lower trading range for the currency post-Brexit. According to Soros, GBP/EUR would reach parity and GBP/USD would trade at around 1.15. Soros is of the opinion that equities are overpriced and that a large correction would invariably take place given that gold has spiked dramatically in 2016.
Whatever fears traders and analysts are feeling about the impact of a Brexit are now being directed squarely at sterling. Most agree there is nowhere for the pound to go but down, and the inexorable slide is part and parcel of the UK’s disengagement from the EU. It is interesting to note that options have been replaced by cash for placing short positions on the pound. The opportunity cost of owning options, with costs rising as payouts rise, has made cash king in the pound-shorting market.
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