Via Kevin Muir of “The Macro Tourist” fame
British Prime Minister stunned markets this morning by announcing her intention to call a snap election for June 8th. Figuring that she would have to face re-election anyway before BREXIT negotiations were complete, and given she is currently leading in the polls by over 20 points, a quick surprise election was her best bet.
I have no idea if this was the right move. It seems to make sense, but whether it will ultimately be successful is of no consequence for the trading landscape.
Right now, hedge funds and other speculators are short British Pounds. Big time.
They have been leaning heavily against Cable since BREXIT. Speculators have kept their knee on the throat of the Pound, realizing that Theresa May’s government was intent on negotiating a full and complete removal from the European Union.
Along with the long term capital flight, this has caused the Pound to weaken. All this uncertainty caused the Pound to decline to levels well below fair value.
Today, we have a situation where specs are stupid short, the pound is ridiculously cheap, and now the government has called a snap election.
Even if there is a possibility that the opposition wins, the Pound’s price needs to be adjusted higher.Suddenly BREXIT is not nearly of a ‘sure thing.’ And even if there is no going back from BREXIT, a proper mandate on negotiations will cause uncertainty to lift.
Sometimes trades are this simple. The British Pound needs to be bought. This isn’t a one hour adjustment trade. There will be a steady buyer of Pounds for weeks to come. Whether it will result in a rally that ultimately needs to be sold is another matter, but in the meantime, the possibility of a BREXIT removal needs to be priced in.
You can outright buy Pounds against the U.S. dollar, or if you want a ‘purer’ play, you can short EUR/GBP.
But most of all, be careful assuming that elections are bad news for a nation’s currency. In this case, it is the exact opposite.
