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The UK election and an anatomy of the coming sterling crisis!

The Macro View

Trading sterling based on the eccentricities of UK polling data has been historically a mug’s game – an existential reality magnified by the traumatic fall in cable after the June 23 2016 shocker on the Brexit referendum. So I had a 1.30 target on my bullish sterling trade idea (recommended buy price 1.20), published in this media platform on 9 September 2019.

Investors who caught this stellar 10 big point move on sterling are welcome to consider hauling me to a celebratory currency gnome’s liquid dinner at a watering hole of my choice and toast me with a chorus of “He’s a jolly good fellow – sometimes he gets the bloody thing right”!

The risk of a hung parliament and botched Brexit has been visceral, a potential sword of Damocles over us sterling bulls. However, I now believe that sterling’s breakout will be swift and spectacular to the upside after the 12 December UK general election. Why?

One, the Conservative Party’s opinion poll lead over labour is widening as the campaign reaches its endgame and I find the usual caveat about not trusting polls to be humbug.

Two, sterling is creeping up not just against the US dollar but also against other luminaries on its trade weighted index, notably the Euro.

Three, UK house price data for 2019 was better than consensus, even though consumer confidence has taken a predictable hit from the vagaries of Brexit. This exhaustion is also ballast for Boris Johnson’s bid to renew his lease on 10 Downing Street with the people’s mandate in the general election.

The British electorate is as exhausted as my tribe of Blighty/Vilayet watchers after all the twists and turns of Brexit/Westminster politics since June 2016. At least Boris Johnson has secured some sort of EU deal and priced out the no deal hard Brexit catastrophe option from cable. Surely that is sufficient for him to be summoned by Her Majesty the Queen to Buckingham Place to form the next government in her name. Imagine second Elizabethan reign that started with Winston Churchill in 1953 and may possibly end with Boris Johnson, the blond buffoon of Eton, Pop, the Bullingdon Boozers Club and Balliol/Oxford. A Sophoclean tragedy or a predictable farce for the House of Mountbatten-Windsor, I wonder.

Four, I have been watching sterling volatility, option skews and positioning data like a hawk to exploit any real time gifts Mr. Market Esq. may bestow on me. Yet the range bound sterling volatility tells me that the financial markets are not worried that Jeremy Corbyn and his Trotskyites (Trots) will seize power in London on December 12. The 12 digit opinion poll lead of the Tories now looks invincible, as all the political parties have unveiled their manifestos to the electorate. Ironically, the Tories and Labour have now squeezed out the smaller parties who made the governance of Britain a mockery in the past three years – from Neil Farage to the Lib Dems to the Scottish/Ulster nationalists to Lord Asif Sabri, Viscount Humpsted (“Humpy”) of Mill Hill.

Five, despite its rise to 1.29, sterling is the most attractively valued G-10 currency on multiple metrics. Sure, black swans, protest votes, even turnouts on December 12 are all variables but I believe the political risk to the sterling bulls is now acceptable.

Six, I have lived with the correlation between sterling and Downing Street politics my entire adult life. I was able to persuade Daddy to allow me to head for America (Arizona State initially, in the aptly named Sin City, Tempe campus) with four high school cronies from Dubai rather than fly to dreary, rainy London of the Ghostown/early Maggie era. My argument?

Sterling had surged to 2.40 against the US dollar in late 1979 or 8.9 UAE dirhams after Mrs. Thatcher won the 1979 general election against Big Jim (Brrrr), the North Sea oil bonanza made Britain a petro-power at the precise moment the fall of the Shah of Iran from his Peacock Throne caused oil prices to triple. The financial markets also lost confidence in the impotent anti-inflation strategies of the Carter White House.

On 15 September 1992, Black Wednesday, sterling’s humiliating exit from the ERM was masterminded by George Soros and Stan Druckenmiller, The Quantum Fund made a billion dollar killing against the Bank of England and inflicted more damage on the British economy in a single afternoon than Göring’s Luftwaffe managed in the Blitz.

I saw this happen before my eyes in the Chase Manhattan Bank’s glass walled trading aerie in lower Manhattan. I could see the silhouette of the faux – Renaissance fortress – palazzo of the New York Fed from the glass widows as I frantically helped the spot sterling desk deal with the tsunami of hedge fund selling in the pound and the lira against the mark. This was the moment I finally understood what was meant by “Deutschland, Deutschland uber alles”.






The Macro View, zLead Article, zNewsletter

About Matein Khalid

Matein Khalid

Matein Khalid is Chief Investment Officer of Asas Capital in the DIFC; he is responsible for global investment strategy and the development of the multi family office platform. He has worked in Wall Street money centre banks, securities firms and hedge funds in New York, London, Chicago and Geneva. In addition, he has been an advisor for royal investment offices in the Gulf for 8 years. Mr Khalid has four degrees in finance, economics, banking and international relations from the Wharton School, University of Pennsylvania. He is a director at the American College of Dubai and has taught MBA level courses in commercial/investment banking at the American University of Sharjah and British University of Dubai. He writes the Global Investing columns for Khaleej Times, Gulf Business and Oman Economic Review.

Articles by Matein Khalid

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