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A stand-out piece of research from one of London's most enigmatic hedge funds predicts the British Pound will surge in value against the Euro and Dollar over coming months and years as twin events collide to deliver a "transformational" global event with notable implications for foreign exchange markets.
"It is no exaggeration to claim that we are on the cusp of seeing two very dramatic instances of Special F-X. Whilst we are fast closing in on these twin events purely by timing coincidence, their combination will have a global impact far greater than even their considerable sum of parts. To say their joint consequences will be transformational for us all would be an understatement," says Dr Savvas Savouri, Chief Economist at Toscafund Asset Management in a note out this week.
Toscafund Asset Management is a multi-asset fund management firm based in London with approximately $4BN of assets under management.
It was founded by Martin Hughes while its Chief Economist Savouri was described in a Daily Mail interview piece in 2019 as a "hedge fund maverick" whose "views on the global economy are sought after across the City and Westminster".
One of the two "dramatic instances" cited by Savouri regards Brexit and the Pound: "We are no less swiftly coming to a point of reckoning when Brexit becomes a DONE DEAL and the Pound can rise to its proper level of c1.3 against the euro and buys c1.7 dollars."
A Pound-to-Euro exchange rate at 1.30 is easily the most bullish forecast for the pair that we at Pound Sterling Live have come across, while a Pound-to-Dollar exchange rate of 1.70 is equally outstanding.
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The call for substantial Sterling appreciation comes as the EU and UK appear to be on the cusp of striking a post-Brexit trade deal, which most analysts agree would deliver upside in the Pound from current levels.
However, the vast majority in the analyst community are notably cautious in predicting the extent of the gains; indeed most see the GBP/EUR rally extending as far as 1.15 in the wake of a deal while a GBP/USD rally would find itself limited in the 1.35 region. (For consensus estimates, please see the download packs available at our partners Global Reach).
A hedge fund such as Toscafund is considered a 'buy side' institution, whereas banks - who account for the majority of the analyst community we follow - are 'sell side'. A 'buy side' institution might have more freedom to express out of consensus views, as they do have to have some proverbial skin in the game in the form of client money. "In contrast to the sell-side analyst position, the job of a buy-side analyst is much more about being right; benefiting the fund with high-alpha ideas is crucial, as is avoiding major mistakes," according to Stephen Simpson at Investopedia.
The Toscafund views are therefore a notable outlier to consensus, and the reasoning behind the view is also unique. In fact, the arguments made by Savouri are simply not considered elsewhere.
The other "dramatic instance" referred to by Savouri regards the dollar and yuan - which in turn have implications for the Pound.
"We are FAST approaching the moment the trade weighted levels for the dollar and the yuan CROSS (the X-in the below chart), doing as Beijing opts to finally focus on the purchasing powers of its own population rather than those of the export markets it hitherto relied upon," says Savouri.
So what is the reasoning behind an expected surge in Sterling, and what does it have to do with China?
Savouri says the world economy is set for something of a great reset - to borrow a much-used phrase - in the wake of the covid crisis.
"On the ‘Other-Side’ we will see the Chinese economy bestride the world like never before, and bestride the world in a way which materially benefits Britain, in its own ‘Other-Side’," says Savouri. "Despite the considerable distance and time-zones that separate them, the UK & China have recorded an economic engagement which has not merely increased year by year, but one which was accelerated by the fall in sterling which followed the referendum of June 2016."
"The reality was that, far from putting China off, its improved purchasing power into the UK post-referendum spurred on the arrival of its tourists, students and investors. And if, as I am convinced China will come out the ‘Other-Side’ of this Covid-Crisis 'World Wealthier' the result will be to increase its bilateral engagement with Britain," says the economist.
China-UK relations have had a rocky 2020 between China's role in the origins of the coronacrisis, disagreements over Hong Kong and the ejection from Huawei from future participation in the country's 5G network.
But these issues are unlikely to bother China.
"From Beijing’s perspective the UK is a perfect Western-Hub from which to operate when the sun sets on its own working day, and rises here. The UK’s public schools & universities will also find themselves ever more preferred places of study for those within China coming of age," says Savouri.
He adds that Australia and Canada have been two stand-out destinations for Chinese capital since 2005, and when the world emerges from the covid-19 crisis the trend will not only continue, but come back stronger.
"These Commonwealth Nations, in addition to experiencing considerable Chinese investment inflows have received sizeable tourist arrivals and student freshmen from there. So whilst all Chinese inflows of human and financial capital to the likes of the UK, Australia and Canada have been stalled by coronavirus, be in no doubt they will return not merely to renewed growth but far stronger than witnessed before the Crisis," says Savouri.
On the matter of whether the UK and EU will reach a Brexit deal, Savouri is on record as having said that while a 'No Deal' departure would be bad for the UK, it would be worse for countries such as Ireland, Cyprus, Lithuania and Spain.
Therefore, the EU will eventually agree to an 'amicable' deal to avoid "mutually assured destruction".
GBP/EUR Forecasts 2021
Period: Q2 2021 Onwards
GBP/USD Forecasts 2021
Period: Q2 2021 Onwards