How You Can Make Money Shorting the British PoundCurrencies / British Pound Feb 21, 2013 - 03:43 PM GMT
Ben Gersten writes: Shorting the yen has earned George Soros more than $1 billion in profits since November.
Now Soros has set his sights on the second-most-shorted currency in the world - the British pound.
And he may have company, as the Financial Times reports: Along with Soros Fund Management, Tudor Investment Corp., Caxton Associates and Moore Capital - some of the best global macro traders - "see similarities in UK's predicament to that of Japan" and are interested in shorting the pound.
This adds to worries about the pound, which has already fallen 5% this year. And with exports falling, productivity low, and gross domestic product shrinking last quarter, Britain's economic outlook is foggy at best.
"There could be a dramatic weakening of the pound this year," one of the world's top macro hedge fund managers, who declined to be named because he does not want his firm's positions becoming public, told the FT.
For Britain's sake, let's hope that weakening doesn't lead to another "Black Wednesday," Sept. 16, 1992 - the day George Soros "broke" the Bank of England.
How Soros Broke the Bank of England
Sept. 16 is the day Soros profited more than $1 billion by shorting the pound.
Technically, the Bank of England didn't break, but by short-selling $10 billion worth of pounds, Soros forced the British government to withdraw the pound from the European Exchange Rate Mechanism (ERM) - a monetary system introduced in 1979 in preparation for the current European Union and use of the euro.
Soros saw the inflationary actions of the British government and the structure of the ERM had caused the pound to be overvalued.
Now there are once again concerns over the pound's valuation, stemming from the appointment of Mark Carney, the current Bank of Canada governor, as the next governor of the Bank of England.
Why It's Time to Short the British Pound
Investors expect Britain to have annual inflation higher than 3.2 % over the next decade - the highest among major economies.
And Carney, who will replace Sir Mervyn King as governor of the BOE in July, said he will allow higher inflation than his predecessor.
The BOE's Monetary Policy Committee also supported higher inflation targets in its February inflation report.
"Attempting to bring inflation back to the target sooner by removing the current policy stimulus more quickly than currently anticipated by financial markets would risk derailing the recovery and undershooting the inflation target in the medium term," the MPC said in the report.
Yet, traders fear Carney will pump too much stimulus into the economy, raising inflation and devaluing the pound even more.
"[Hedge funds] are now looking very closely at what they can do with sterling," Rob Kaplan, chief investment officer of Permal, one of the world's largest investors in hedge funds, told the Financial Times. "With Carney coming in, there are interesting opportunities [either] shorting sterling or going long volatility on sterling."
The best way to short the pound is through options, which can be done in the FOREX market, a global market that deals only with currencies and currency contracts.
There's also the CurrencyShares British Pound ETF (NYSE: FXB), which tracks the pound.
And besides shorting the pound, or sterling, another way to play its negativity is with inflation-linked bonds.
"I'd lean towards further weakness in sterling and appetite for inflation-linked bonds," a senior government bond trader at a U.S. bank told the Financial Times. "The clearest trade for me is for a steepening of yields."
While the British pound could be one of the worst performing currencies of the year, what are the best? Check out our report: The Best Currencies to Invest in for 2013
©2013 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: email@example.com
Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.
Money Morning Archive
© 2005-2016 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.