That was quick, now that it looks like the Conservatives failed to achieve victory, and hard U.K. fiscal decisions may be lacking in the future, Morgan Stanley is unwinding their long British pound / short Aussie dollar trade opened up just a month ago.
We have decided to take off our long GBP/AUD trade in the FX portfolio at the same level we entered the trade on April 1, 2010 (1.6590). While we remain very bearish on the Australian dollar, having a short position against both USD and SGD in our portfolio, we are no longer bullish on sterling. Indeed, given the likely outcome of the election, which shows that there is likely to be a hung parliament without any of the major parties having a majority, even the Labour and Liberal Democrats together would be unable to form a government. The outcome at this point looks to be the worst conceivable and we worry that the required tightening of fiscal policy is unlikely to materialise whoever forms a government. Now that the election is out of the way, the market will perhaps start to focus on the UK’s unhealthy fiscal deficit, which was 11.5% of GDP in 2009 compared with the Greek deficit of 13.6%. Given the huge uncertainty that could well go on for a while, we fear that sterling is in for a rough ride.
They’re cutting out fast, but perhaps for a very good reason given the election result.
Still, as ugly as U.K. finances will look going forward, something tells us Australia could soon become a new focus of crisis-hunters’ attention given soaring CDS spreads and news that tons fo Australians are defaulting on utility bills. We guess the idea is that if you want to short the Aussie dollar, don’t use the British pound to do so. Maybe the U.S. dollar might be the better option, the chart below could soon be unwinding.
(Via Morgan Stanley, Stephen Hull, Global Currency Research, 7 May 2010)
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