Complex Made Simple

Matein Khalid: Prime Minister Bo Jo and the sterling bulls

Even if likely future British PM Boris Johnson can't prevent a no deal Brexit, Sterling is a buy option- Here's why

Boris Johnson has the intellectual flexibility to forge a deal acceptable to both the Tory elite in Westminster and the EU’s nomenklatura in Brussels It is time to buy sterling at 1.26 for a 1.32 target, albeit with a tight stop. June in England? Trump will impose 25% auto tariffs on German exports but exempt the UK, a game changer scenario for post Brexit sterling

By Matein Khalid: Chief Investment Officer and Partner at Asas Capital

The old Westminster axiom that “all political careers end in failure” certainly holds true for Theresa May, whose last official act was to host (what cannot be cured must be endured!) President Trump on his state visit to Her Majesty’s sceptered isle by the silver sea. London bookies give 2 – 1 odds for Boris Johnson (Bo Jo) to win the crowded Tory leadership contest and thus become the First Lord of the Treasury/the next UK Prime Minister. This prospect does not surprise me. After all, Johnson is the darling of the Conservative Party membership in the shires and most MP’s believe, despite his political opportunism in the Leave campaign and monumental gaffes as Foreign Secretary (the wankera from Ankara – wicked LOL!) the former mayor of London is the only Tory leader who can beat Jeremy Corbyn in a general election.

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His legacy as an empathic One Nation Tory who helped London host the 2012 Olympics, reinvented public transport and sought amnesty for illegal immigrants is nothing to be ashamed about. Johnson studied classics at Oxford and can electrify the House of Commons with his wit and intelligence in the Charles Fox/Winston Spencer Churchill parliamentary tradition. He is the perfect antidote to the grey, boring grandees of the Tory party, geriatric male versions of Theresa May. Unlike his fellow Old Etonian David Cameron, Johnson can even mesmerize the hoi polloi with his ideas, sloppy goofiness and sunny message.

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It is no coincidence that sterling plummeted from 1.3170 to 1.2550 after the City of London cottoned on to the new political reality in Westminster – that Mrs. May’s tenure in office was over and Boris Johnson, with his nonchalance over no deal Brexit, would be the next occupant of 10 Downing Street. Yet the financial markets, as usual, have miscalculated the paradoxical idiosyncrasies of British politics. Bo Jo is the ultimate pragmatist, a master of political reinvention and parliamentary piffle paffle. He knows that the UK cannot afford the trauma of a no deal Brexit. So his first act will be to announce that he will fly to Brussels to negotiate a trade deal before the October 31st deadline to leave the EU. Unlike Mrs. May, Boris Johnson has the intellectual flexibility to forge a deal acceptable to both the Tory elite in Westminster and the EU’s nomenklatura in Brussels.

Nigel Farage’s rampage in the European parliamentary elections only reinforces the urgency of the Conservative Party to rally around an inspirational, charismatic leader – and Jeremy Hunt, Saqib Javid and Michael Gove simply cannot hold a candle to Bo Jo. If Johnson fails to negotiate Brexit, Jeremy Corbyn’s doctrinaire socialists could well govern Britain, a catastrophic scenario for global investors. If the political arithmetic in Westminster or the tough love obduracy of the EU necessitates, Boris Johnson will not hesitate to call for a general election and a new referendum.

The US Dollar Index’s failure to scale its triple top highs at 98.30 have given a bid to the British pound. While sterling has risen from four month lows against the US Dollar, it is also a victim of Wall Street’s risk aversion spasm, the escalation of the US-China trade war and rising geopolitical risks in the Middle East.

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A no deal Brexit scenario means sterling can well fall to 1.18, the Singapore flash crash lows in October 2016. However, if Johnson makes a bold declaration of intent to negotiate a trade deal with the EU, we could see the mother of all sterling short covering rallies. I expect the US Dollar Index to test its 200 day moving average at 96.40 in any case as US Treasury-JGB yields and thus dollar-yen collapses on Fed rate cut expectations. This means it is time to buy sterling at 1.26 for a 1.32 target, albeit (comme toujours!) with a tight stop. June in England? The Tories are in power, the Queen’s at Ascot, all’s well with the world.

US-British geopolitics also make me an embryonic sterling bull. Trump promised the UK a “big trade deal” once it leaves the EU but bitterly criticized free riders in NATO who take advantage of the Pentagon/Uncle Sam security umbrella. The biggest free rider in Europe is, of course, Deutschland AG, which spends a mere 1.25% of its GDP on defence and uses its weak Euro to become the world’s second largest exporter after China. This means Trump will impose 25% auto tariffs on German exports but exempt the UK, a game changer scenario for post Brexit sterling. If Bo Jo is anointed First Lord/PM, as Trump wants, expect Washington to support “the greatest alliance the world has ever known”.  

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Sterling punched above its weight in international finance due to legacy of the British Empire, the North Sea oil bonanza and the City of London’s role as a magnet for global capital since the Thatcher era privatizations of British state assets. It could regain its lost allure in a Trump-Bo Jo bromance!