A Tory donor and several supporters of Liz Truss are among numerous hedge fund managers said to be enjoying profits from the pound’s tumble.
Crispin Odey, who reportedly made £220 million by betting sterling would fall when the UK voted for Brexit, placed a similar bet months ago believing other traders had underestimated how long inflation would peak for.
He claims he was so confident in his predictions that he spent the day of its unveiling ‘hunting grouse’.
The 63-year-old is one of many traders said to have made a ‘smal fortune’ by ‘short-selling’ the pound on Friday, when it dropped from $1.12 to $1.08.
The strategy allows investors to profit when the price of a stock falls or a currency weakens against another.
Many aggressive investors are said to have spotted opportunities to ‘short the pound’ after the chancellor unveiled a new growth plan on Friday which went against the consensus of mainstream economists.
Kwasi Kwarteng was accused of ‘gambling’ with the UK’s finances by pledging massive tax cuts, to be funded by more than £60 billion of borrowing, which he says will pay for themselves by boosting business.
It’s feared the plan could fan the flames of inflation by encouraging spending, which would make Britain’s debt more expensive to pay back by forcing further rises in interest rates.
According to The Sunday Times, there were widespread expectations at a dinner attended by hedge fund managers last week that Mr Kwarteng’s ‘mini-budget’ would spell doom for the UK currency.
A source told the newspaper: ‘They were all supporters of Truss and every one of them was shorting the pound.’
Short-selling is a normal part of most financial markets, and experts widely agree it can help keep the economy healthy by preventing bubbles or allowing sharp-eyed investors to highlight red flags that the ‘herd’ has missed.
But there are strict rules banning its abuse by people who may gain insider information that helps them guess where a market will head.
There has been no suggestion of insider trading, and positions taken by a small group of investors cannot spark drops of the kind seen in the pound.
Mr Odey’s fund had reportedly gained 145% in a year before the mini-budget was announced.
He told The Telegraph: ‘The truth is that I didn’t do anything on Friday. I shot. I haven’t put a trade on for the last two months. I didn’t need to. This was easy to see from miles away and didn’t depend on Kwasi coming into government or anything else.
Sterling’s dollar value had already begun sliding before the mini-budget, which analysts chalk down to the US raising interest rates much more sharply than the UK.
Experts say this has cemented the American currency a ‘safe haven’ during the inflation crisis, while the UK’s policy has been lambasted as ‘utterly irresponsible’ by a former Chief Economist for the World Bank.
Dr Bruce Morley of Bath University, a leading researcher on currency markets, told Metro.co.uk: ‘Over the last few days, particularly since the budget, there’s been a fair amount of speculation, which is partly why it fell quite sharply after the budget.
‘But also it has to be said that international investors were surprised by how much borrowing there’s going to be, and currencies tend to fall in value the higher the levels of debt a country has.
‘The UK debt is probably going to reach about 100% of annual GDP in the near future, although we don’t [yet] have the forecasts’.
The weakness of the pound is mainly a ‘reflection of big fundamentals for the UK pound, particularly relative to the dollar’, he added.
International investors are increasingly flocking to the US, which is less vulnerable than Europe to the energy crisis fuelled by the Russia-Ukraine war.
Kit Juckes, chief of currency trading strategy at the Société Generale bank, told Metro.co.uk: ‘The big repricing that’s been going on all year is the repricing of the dollar, which is the other side of the same trade.
‘The dollar’s incredibly strong because they’re the world’s second-biggest energy producer now and the economy’s been much more resilient.’
Repeats of Friday’s ‘fire sale’ on a similar scale are unlikely in the coming months as the markets now know what to expect from Liz Truss’s economic plans, Mr Juckes added.
The Bank of England is now under considerable pressure to raise interest rates in response to Mr Kwarteng’s plan.
Paul Dales, chief UK economist at Capital Economics, told Metro.co.uk.’There are always traders shorting (selling) and going long (buying) the currency’,
‘These traders become more active at times of volatility as the potential gains are larger when currencies are moving around a lot.
‘That said, this behaviour is the not root cause of the weakness of the pound.
‘That’s been driven by an expectation that as a result of the Chancellor’s fiscal policies, inflation in the UK will be higher for longer which means the exchange rate needs to fall to equalise prices in the UK and overseas.’
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