When economies are teetering on potential disaster, there are opportunities for investors betting that these economies will tank as well as their currencies. Several high-profile investors have made their fortune in this way – could recent economic volatility make this the right time for you?
On September 16th, 1992 which was also known in England as Black Wednesday, George Soros did the improbable and broke the British pound. The British government lifted the pound from the European Exchange Rate Mechanism (ERM). In the process, George Soros on Black Wednesday made over a billion dollars by constructing a bet against the British pound.
After the Second World War, European countries wanted to integrate their economies to prevent war and create a market place that could compete with the United States. The European nations began operating under the ‘European Exchange Rate mechanism’ (ERM), created in 1979. Many of the European countries were not ready to extinguish their nation’s currencies; however, they did agree to fix their exchange rates by letting markets set the rates.
In 1990 England joined the ERM which was driven by the prodding of John Major, despite Margaret Thatcher’s opposition. Between 1990 and 1992, England repaed the benefits; inflation decreased considerably, interest rates eased and unemployment dropped below historical standards. However, in 1992 England was dragged into a massive global recession – and, in reaction, the British government wanted to cut interest rates. But by doing so the British government would have to push the pound below the agreed upon amount with the ERM, so they were trapped – and had no choice but to watch the recession continue until during the spring of 1992, only a year and one half prior to joining the ERM, England’s Treasury department realised that the pound was mispriced relative to the Deutschemark, posing a serious problem to England – and leading to the British pound tanking.
George Soros led the Quantum Fund in 1992 which at the time was primarily involved in betting on macroeconomic trends. He realised that the markets no longer believed that England would be able to maintain at the time its exchange rate and during the summer of 1992, began building a $1.5 billion position to wager that the price of the pound would fall. Soros believed that the fall of the pound was inevitable and instead of taking a gradual approach of shorting the pound, thought that the Quantum Fund should go all in at once.
When the Pound did inevitably fall, going all in netted Soros and the Quantum Fund over one billion dollars – and crashed the Bank of England.
For experts in the markets, there are events taking place allowing the opportunity to take advantage of forex trading opportunities. More recently, Switzerland’s central bank incurred massive losses after the bank decided to get rid of the cap on the strength of the Swiss Franc. These actions caused the currency to appreciate dramatically which destroyed the value of the banks euro reserves. Investor Jim Rogers saw this opportunity before it happened – and in a similar way to George Soros, won a goldmine on the Bank’s decision. Clearly, there economic events that transpire from time to time that, if investors are able to see the ramifications before they take place, could reap substantial profits. In the current economic climate, this could be the right time.
24/02/2016
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