Global Investing: Why sterling can plunge to 1.05 this winter

Dubai - Britain can no longer con global investors to invest surplus 'safe-haven funds'

My june 23 call on sterling, published in this column, was a rise to 1.51-1.52 on Bremain but a fall to 1.30 on Brexit. Sterling's epic fall since June 23 vindicated the extreme skew in my trading range call. While Theresa May's swift succession in Downing Street removes short-term political risk from sterling and justifies cable's bounce to 1.33, I believe macro/positioning and flows all suggest that sterling's next move will be significantly lower, possibly as low as 1.05 in the next six months. Why?
One, fund managers are actually initiating new short positions in sterling. Note that the net short position in sterling on Chicago IMM futures has risen to 82,000 contracts. If sterling was a gladiator in ancient Rome, the smart money Caesar just gave the quid the thumbs down. Two, after both the sterling crises in 1992 (ERM exit Black Wednesday when George Soros "broke" the Bank of England) and 2008 (when Gordon Brown bailed out RBS and Lloyds HBOS), sterling lost almost one-third of its value on Planet Forex before the currency gnomes found a stable bottom. This means the next sterling bottom is at 1.05-1.10.
Three, some of the most prominent macro hedge funds in the world have gone short sterling in July. Positioning is often correlated with the volatility of sterling, which is exactly what I see happening in the foreign exchange option market. The dumb money thinks UK assets are "cheap". The cognoscenti know better even as Private Bankerji dials for NRI dollars to peddle sterling "bargains".
Four, EU politics underpin Monsieur Junker's punitive stance on Article 50 and the need for a deterrent on the eve of a referendum in Italy and elections in France, Austria and Holland. Von Clausewitz said war was politics by other means. Sadly, the EU is Germany by other means. The Tory backbenchers who deposed Mrs Thatcher in 1990 because she agreed to ERM (the ultimate paradox in British political history) and forced David Cameron to call for the doomed referendum know this in their DNA. The EU knows that access to the common market is a prize Westminster will not easily win. This will accelerate selling pressure on sterling this autumn. Note Boris heads the Foreign Office (FO); the message to the EU is in the abbreviation!
Five, the carnage in the UK commercial property market has now begun with the funds gates/freezes/discounts on NAV. HM Treasury, now run by Mrs May's consigliere Philip Hammond (Boy George is out. Karma Chameleon!) is livid that JPMorgan plans thousands of job cuts in the City of London. It is an open secret that unleased office towers in London will trigger a crash in property prices comparable in scale to the early-1990s, just after the first Gulf War. Banking plans at least 100,000 lower UK payrolls.
Britain can no longer con global investors to invest surplus "safe-haven funds" (Fat chance after Brexit!) in UK property. Financial flows can no longer finance the UK's current account deficit, a shocking seven per cent of GDP. Ergo, back to the pre-North Sea, pre-Big Bang, pre-Thatcher years of my boyhood in the late-1970s, when sterling crises were as common as rain on midsummer nights walk around Hyde Park! Mark Twain was so right. History does not repeat, it rhymes! In 1976, Britain went cap in hand to the IMF. It could do so again.
Six, sterling has punched above its weight for centuries, thanks to the British Empire, North Sea oil, the Thatcher privatisations, the City of London's role as the world's preeminent global finance hub. No more. If banks cannot "passport" euro securities and funds in London, the City's role in global finance diminishes. The Empire? As dead and gone as Nineveh and Babylon, save to the sheep of the Falklands and the offshore tax dodgers in Gibralter. The sun has not only set on Brittania's empire but sadly gone into permanent eclipse.
Seven, June US payrolls makes a Fed rate hike inevitable this winter. Theresa May's Cabinet guarantees political conflict. The Bank of England has no choice but to initiate the mother of all gilt purchase programme, a £200 billion "shock and awe" QE.
Eight, sterling fell 30 per cent after Ramsey Macdonald led Britain out of the gold standard in 1931 and after Harold Wilson's "pound in your pocket" devaluation in 1968. The Brexit hit to sterling will be no different. It's 1.05 cable!
Matein Khalid is a global equities strategist and fund manager.

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