|
The legend of George Soros
Written by Brian Tran
Last updated: Wednesday, 03 January 2008
Anyone who trades forex would have heard of George Soros, the man who traded against the Bank of England and won. This story has been retold many times and is now stuff of legend. But now that GBPUSD is near to that 2.000 level from September 1992, when the day the Bank of England withdrew and stopped pumping money to keep the sterling pound strong.
It's easier to understand the even if it's read in the chart. Events leading up to Wednesday 19, 1992, Black Wednesday as it was called. BoE joined the European ERM (Exchange Rate Mechanism), the predecessor to the EURO). This is when all the currencies locked at a fixed price range with 6% leeway. If the price goes below or above this range, the Bank of England must intervene and make sure the prices stay in this range.
When it joined, the economies of UK vs. the rest of countries in the MRE were not in synch. The UK's Domestic Interest Rate was too low compared to the rest of the stronger nations like Germany and France, which was much higher. Their economies were in a worst shape than GB due to the high Interest Rates. With high interest high to counter inflation at 15%, while Germany had low inflation and low interest rate, this disparity was causing the fixed price range to unbuckle. With Germany enjoying a fairly healthy economic and UK entering it's economic recession, speculators saw this fixed price range in disequilibrium, seeing the pound so high compared to the Deutsche Mark while it's inflation and interest rising, they shorted in droves.
BoE refused to lower interest rate due to inflationary fears and cannot allow the GBP to be devalued according to the ERM policy. The event leadig to the yellow shaded area showed that BoE buying the Sterling Pounds to keep it high.
But the final blow-off came as it gets closer to the resistance area, George Soros and other speculators shorted even heavier, around $10 billion. Finally on that day at resistance, BoE announced they will no longer be part of the ERM and will not intervene with the currency and will let it float freely. On that news, the hard drop in the Pound can be seen on the chart above.
The following months, he and his investors made one of the biggest and rarest winnings in Wall Street history. After this event, he was the man who "broke the Bank of England." By judging the facts, Soros was lucky that BoE caved in before his $10 billion and other speculators run out as BoE has a much deeper pocket than anyone individual. This has to be remembered. Had BoE decided to continue intervening past the resistance, who knows what may have happened but certainly speculators who continue to short would have been with extremely heavy losses.
Using fundamentals (macro economic views) can be advantageous in recognizing the imbalances in the currency pairs but it must a long term trade and with a very big account to withstand the corrections and even the wrong timing of the entries.
Any opinions, news, research, analyses, prices, or other information contained on these articles are provided as general market information and does not constitute investment advice. Forexplane.com will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information. |
|