- Last week the Pound traded below $1.2100 and is now in danger of taking out its post-referendum low
''What's your road, man? - holyboy road, madman road, rainbow road, guppy road, any road. It's an anywhere road for anybody anyhow. Where body how?" -
Jack Kerouac's On the Road is an iconic novel and is considered a defining work of the postwar beat and counterculture generations, with its protagonists living life against a backdrop of jazz, poetry, and drug use. When I re-read these books, I cannot help feeling that the world has lost its wide-eyedness and innocence. I am also tempted to get myself an open-topped car and just take off and find out what exactly is going on. Jim Rogers who was the co-founder of the Quantum Fund and Soros Fund Management in fact did precisely that on a motor bike and called his book ''Investment Biker''.
Of course it was George Soros and his subsequent partner Stanley Druckenmiller who forced the Pound Sterling out of the exchange rate mechanism on a black Wednesday 16 September 1992. I recall that day in slow motion and as if it were a news reel. I was then on the trading floor at Credit Suisse First Boston and the speed of thought and execution I witnessed that day, I never witnessed again ever. Permit me the indulgence of dwelling on that day for a moment. At 10:30am on September16, the British government announced a rise in the base interest rate from an already high 10 to 12 per cent to tempt speculators to buy pounds. Despite this and a promise later the same day to raise base rates again to 15 per cent, dealers kept selling pounds. On my left was the Proprietary Trading Desk and he lent billions and billions of Pounds at 15 per cent.
I asked ''what are you doing?'' because the desk was at that moment the only one in the entire City of London on that side everyone desperately was trying to hedge their books.
He responded ''Aly-Khan Its not possible for Mortgage rates to be at 15%.''
That was his insight and that day he did not make as much as Soros but must have been close. By the evening, Norman Lamont the Chancellor had capitulated the Pound was gone in a Puff of smoke and interest rates were back in single digits.
Last week the Pound traded below $1.2100 and is now in danger of taking out its post-referendum low [$1.1860 but there is considerable debate about this number because it happened in the middle of the night when Gremlins and Goblins stalk the FX markets] after which the only significant landmarks left would be the low set in 1985, a few months before finance ministers agreed in the Plaza Accord to limit the strength of the dollar and then, only a few cents lower, parity with the dollar. As I watched the Pound fall like a stone, I could not help wondering if this Sterling moment is precisely like it was in 1992, a no brainer.
'Boris isn't bluffing. Every action, every appointment, every word since he entered Number 10 signals the same thing: Britain is leaving the EU on October 31' said the Telegraph's Daniel J Hannan.
The Key question is this. Can Prime Minister Johnson self-eject Britain? Can he be stopped? This is a political calculation. Prime Minister Johnson has elected to take quite properly an ''Impossible is nothing'' and ''can-do'' political posture but the bottom line is can he swing it?
if he can swing it then he has to face down the "whispering death" [Michael Holding who was thus nicknamed because He was exactly that when he opened the bowling for the West Indies] that will be the foreign exchange markets. London’s Capital Economics conducted an exercise for the dollar-sterling exchange rate, and found that for every 10-percentage-point increase in the chance of “no deal” equates to the pound losing 3.5 cents on the dollar. So if there is really still a 65% chance of “no deal,” sterling stands to drop an additional 22 cents or so. [John Authers] Thats Parity right there. We are currently experiencing the Bow wave of what could metasize into a shock wave.
The Tariff warfare, sanction and linguistic warfare specialist slapped a 10% tariff on the remaining $300b of Chinese imports. US 10-Year Treasury Yields sank below 1.90%. The entire German yield curve went negative. The World’s pile of negative debt jumped to more than $14 trillion for the first time ever. Emerging Market currencies went into a tail-spin. The Market scooped up gold, the Swiss franc and the Yen.
The most important currency to watch right now is the USDCNH which was last at 6.9738 on the off shore markets. It could slice through 7.00 like a hot knife through butter.
"We are sitting in a vehicle whose wheels have fallen off," Derek Matyszak, a senior researcher at a South African think tank, the Institute of Security Studies, told AFP about Zimbabwe but that might well apply to the FX Markets, momentarily.
President Trump keeps talking about weakening the Dollar. I find it curious that ''such a stable genius'' has yet to calculate that a strong Dollar is infinitely better and if he is serious about his warfare strategy he needs to add currency warfare to his Tariff, sanction and linguistic warfare Arsenal. My Perspective about the Dollar is this [and note well its just a fraction under its 2019 high even after a rate cut]; There is very little President Trump can do. In fact the risk is this that when the market sees he is powerless, the Dollar might lift off like the proverbial Parabola.