Ralph Shell @ 1:49 PM, Thursday June 03 2010
An article this morning in the Telegraph.co.uk by Edmund Conway entitled "The Gamblers betting on Britain going bust," said that hedge funds are betting billions that the UK goes bust. During the past few weeks hedge funds have placed more than $3B in credit default swaps, betting on that outcome, he claims.
It is no real surprise to us, having observed that the big specs, many of whom are hedge funds have been short for many weeks. In our last COT report we pointed out that the large spec, in the futures only report, was short a massive 56.9% of the open interest. This was larger than the spec short in the euro, at 54% of the total market.
Conway does point out that history is against the speculators move. The Brits have not defaulted on their debt since 1672 when Charles II refused to pay interest on some bank loans. Britain's debt to GDP ratio is as high as many of the weaker euro members, but this year, they will have to borrow less money than Germany. Why? The maturity length of the British debt is among the longest in the world.
It looks like international business events may be moving the pound this week. Prudential, who had apparently sold sterling to pay for the acquisition of the the Asian business of AIG had to cover their shorts when the deal fell through. Then we have President Obama taking the offensive against the hapless British Petroleum. Fines and additional taxes being inadequate, he is now going to pursue BP criminally, increasing the upside for financial recovery. Has anyone considered who really owns BP; and who these fines and penalties are coming from?
What ever the reason the pound versus the USD has tumbled about 1.50 points from today's high at 1.4740. Yesterday's equity rally has fizzled today but it is hard to determine where the pound fits into the risk off model. Though the Brits have some problems, they are not bound by the confinement of a single currency, one of the reasons the euro/pound touched .83 this week, down from .91 just last March. If the volatility of tomorrow's employment reports or the equities markets gives us further weakness, we want to buy the pound versus the USD in the 1.45/l.4525 area.
Author: Ralph Shell - ForexRazor Analyst - Graduated from a small Ohio liberal arts college. Graduate studies in economics and history at Duke University. Ten years experience trading cash commodities in domestic and export markets. Former commodity analyst with Merrill Lynch in Chicago. Member of and floor trader at the Chicago Board of Trade for 18 years.