"It seems the trend of the pound's exchange rate still can't escape a volatile situation!"
Noticing the pound's exchange rate quickly falling, once again breaking through the 1.5300 support level, Dominic, a hedge fund manager in the Foreign Exchange Investment Trading Department at Goldman Sachs Group on Wall Street, exclaimed:
"Despite the positive impact, the market trend is falling instead of rising. This indicates a significant divergence among investors in the market regarding the expected referendum results on the 23rd, and the bull-bear struggle feels far from as simple as it appears on the surface."
"Previously, major institutions had relatively low expectations for the recovery of the UK economy, and even the European economy."
Hearing Dominic's words, Christine, Chief Analyst of the Foreign Exchange Investment Market, responded,
"This is also the fundamental reason why European currencies such as the Euro, Pound, and Swiss Franc have continued to decline over the past two years.
Now, due to the UK's referendum on Brexit. From a fundamental analysis perspective... Regardless of the outcome, this event has clearly exacerbated the internal problems of the EU economic system, highlighting its sharper internal contradictions.
In other words, no matter how this event unfolds. It will further lower expectations for economic recovery within the EU system, putting more pressure on the future exchange rates of all European currencies. It's just that the recent proactive monetary policy of the Bank of England and its open market operations have brought some positive impact to the pound's exchange rate.
Coupled with a prolonged continuous decline, the pound's exchange rate has reached a multi-year low, approaching its 2008 low. There is a technical rebound demand. This led to strong buying by bulls in the market.
In reality, I believe the long-term trend of the pound's exchange rate has not actually changed."
"Ms. Christine, I didn't expect you to turn bearish too. I remember half a month ago, you didn't think so."
Dominic said with a smile.
Christine smiled and said,
"Half a month ago, the pound's exchange rate was still below the 1.5000 mark. At that time, under the Bank of England's rather aggressive monetary policy guidance and open market operations, there was indeed a strong demand for a rebound. And the UK cabinet was able to pass the resolution on the 'Brexit Referendum'. In my opinion, that was unexpected.
Now, the pound's exchange rate has rebounded by more than 800 pips from around the 1.4500 level where the Bank of England first conducted open market operations. It can be said that the expected positive news has already been priced in, so it will naturally be difficult for it to continue rebounding, and the pressure to rebound will naturally increase."
"But other analysts in our institution don't think so. Others believe that while the recovery of the European economy is likely to fall short of expectations, for the UK, which has already gained the initiative within the EU economic system, the future is still worth looking forward to."
Dominic said.
"Hollowing out of manufacturing, severe imbalance in industrial structure, gradual political chaos, further sharpening of conflicts between England and Scotland..."
Christine listed various core social problems currently facing the UK, smilingly saying,
"I really can't see where the potential for future economic recovery lies. Sometimes one has to admit that the truth is always held by a minority. Under the current market conditions, I believe the winning probability of shorting the pound's exchange rate should be much higher than longing it."
Dominic smiled and replied,
"You can't say that either. From another perspective, although the 'Brexit Referendum' event is very likely a blow to the entire EU economic system and a solid negative factor for the future trend of the Euro exchange rate.
However, for the UK, which is currently at the center of global investor attention, and for the pound's exchange rate trend. I don't believe it's entirely a negative attribute.
You know, under the previous EU agreement, the obligations the UK bore by remaining within the EU system were far less than the benefits. If it leaves the EU, in terms of its national economic development, it should shed a large number of heavy burdens and return to a state of economic development where it can start afresh with a lighter load.
Under heavy burdens, its economic recovery cannot be significantly boosted. And when it sheds many burdens and doesn't have to bear many obligations, natural development becomes somewhat easier than before. After all, after leaving the EU, the government's burden will be much lighter, and the government's financial pressure will not be as great."
Christine responded,
"But after leaving the EU economic system, although the burdens that should have been borne are shed, many trade projects that were originally closely cooperative will also be affected when interests are no longer aligned.
The pros and cons here are actually very difficult to sort out and see clearly. But... the gradual loss of vitality and decline of the entire EU economic system is a conclusion that can be easily drawn without deep analysis.
Therefore, I still maintain that even if the UK successfully leaves the EU. It will be difficult for it to truly escape the influence of the entire EU economic system, and equally difficult to emerge from the quagmire of economic stagnation, or even recession."
"So you think... our institution, in its actual position trading strategy for foreign exchange investment, should now short the pound's exchange rate, just like institutions such as Citibank, BNY Mellon, Blackstone Group, and Aberdeen Asset Management? What do you think the outcome of the referendum on the 23rd will be?"
Dominic asked.
Christine responded:
"It's hard to predict the outcome of the referendum on the 23rd, but in reality... I believe this referendum result will not have a fundamental impact on the trend of the pound's exchange rate. In the current market... Institutions that have taken long positions have already fully priced in the expectation of a 'Remain' vote on the 23rd.
If, by then, the referendum result is as expected by these bullish institutions, given that the pound's exchange rate has rebounded from around 1.4500 to a peak near 1.5400 over the past half month or so, there is a very high probability that the 'good news' will materialize, but turn into a bearish trend, most likely prompting many long positions that have already accumulated floating profits in the market to take profits and cover.
Similarly, if the referendum result is different from the expectations of these bullish institutions in the market. Then, the occurrence of this 'black swan' event. Will deal an even heavier blow to the current pound exchange rate market, causing bullish institutions and massive long positions in the market to initiate a panic covering."
"According to your analysis, is the pound's exchange rate destined to continue its decline, with no other possibilities?"
Dominic asked.
Christine nodded and said,
"I believe there is only this one possible trend. After all, the volume of long and short positions accumulated in the market at this time is already very large. Without an extreme and sharp market fluctuation, it would be impossible to clear such a massive volume of positions.
Therefore, even if the pound's exchange rate wanted to consolidate sideways, it would be impossible. Since sideways consolidation is impossible, and an upward breakout is highly unlikely, then most likely, it can only continue its previous downward trend and break lower."
Dominic smiled and said,
"Looking at the trend of the pound's exchange rate, it seems that institutions like Blackstone Group, Citibank, and BNY Mellon probably have similar thoughts to yours. From various analytical factors, although I cannot fully agree with all your points, we are quite consistent on the expected trend of the pound's exchange rate and the current trading strategy."
"Mr. Dominic, are you also planning to turn from bullish to bearish?"
Christine asked with a smile.
Dominic replied,
"Being bearish or bullish doesn't really matter. No matter how we analyze the future direction of the market, it's essentially just a gamble. Given that... when choosing a trading strategy, we can only try to gamble in the direction with the higher probability."
"That's true."
Christine nodded slightly.
"I heard that this bull-bear battle for the pound's exchange rate was actually triggered by a small, Chinese-funded institution located far away in Hong Kong. Did you know about this?"
Dominic said.
Christine responded,
"I also heard about it. This institution seems to be called 'Huayi Capital'. If it weren't for the significant shorting influence of this institution, the number of long and short positions in the pound exchange rate market would probably not have accumulated to such a massive scale.
Moreover... I also heard that Mr. Frederick of the 'Aberdeen Asset Evolution No. 1' main hedge fund changed his trading strategy to massively short the pound's exchange rate recently, also influenced by this institution's many bearish views."
"Oh, really?"
Dominic seemed a bit surprised to hear that.
Christine smiled and continued,
"I heard that the fund manager of 'Huayi Capital' also publicly posted a bearish analysis report online, simultaneously issuing a challenge to asset management institutions worldwide that are long on the pound's exchange rate, and to numerous bullish retail investors in the market."
"That's interesting. It seems I'll have to look into the background of this institution when I have time."
Dominic said with considerable surprise.
"I've read the bearish analysis report this person posted online, and I think there's really some truth to it.
This time, the investment style of 'Chinese capital' in the pound's exchange rate market is also completely different from before. I suspect the mastermind behind this is probably the manager of this institution.
Moreover, I also suspect that this guy publicly boasted online and issued a challenge to bullish market institutions. His fundamental purpose is to manipulate sentiment and induce buying."
Christine said.
"Induce buying? That shouldn't be possible, right?"
Dominic exclaimed.
Christine shrugged and said with a smile,
"I'm just suspicious; I don't have any evidence."
"Well, let's not discuss the true trading purpose of this Chinese-funded institution anymore."
Dominic felt there was no need to delve so deeply.
He nodded slightly, then shifted his gaze back to the trend chart of the pound's exchange rate, saying,
"There's really a lot of smart money in the market that shares your view!"
Christine said,
"With the lessons learned from last year's 'Swiss Franc black swan' event, many institutions on Wall Street now know how to mitigate risks."
"No wonder the price of spot gold also fluctuates so much. But we don't need to do hedge trading."
Dominic said with a smile.
After speaking, Dominic's gaze turned again to the trading teams in the trading room.
He quickly issued instructions to everyone to cover long positions, turn from bullish to bearish, gradually establish short positions, and implement the corresponding trading strategy to target the pound's exchange rate.
When Dominic made the bearish and short-selling trading strategy.
When tens of millions, even hundreds of millions of dollars from Goldman Sachs Group's Foreign Exchange Investment Trading Department poured into the short side of the pound's exchange rate.
Soon, the pound's exchange rate once again took a dive.
And as trading time continued.
At 3 AM Beijing time, nearing the end of the US trading session.
Across the entire market, news about Goldman Sachs Group turning from bullish to bearish and aggressively shorting the pound's exchange rate began to gradually spread.
Ultimately, this led to the pound's exchange rate continuing its dive during the late US trading session.
Closing near the 1.5200 level.
Subsequently, when market trading hours once again shifted to the Asian trading session on June 21st, under the continuous influence of the news that Goldman Sachs Group had turned from bullish to bearish, the pound's exchange rate directly broke further through the 1.5200 level, burying all investors who had taken long positions above 1.5200, as well as the institutions that had increased their long positions.
"Damn it, I really didn't expect that Goldman Sachs Group, which had been enthusiastically bullish just last week, would actually betray us."
June 21st, Tuesday, 8:30 AM Beijing time.
Shortly after market trading hours had begun in the Asian session, in the main fund trading room of Tianhe Capital Company in Hong Kong, Gu Chijiang, serving as both the company's general manager and fund manager, watched as the pound's exchange rate opened low and continued to fall, already hitting the 1.5170 mark.
Seeing the fund's holdings already in an overall floating loss, his mood instantly turned irritable, and he couldn't help but curse.
"Mr. Gu, what should we do now?"
Xie Hongxing, the trading team manager, also asked with a deep frown.
After continuous additional buying at high levels.
Now, the number of long positions held by their institution is quite massive.
Actually, the pound's exchange rate trend has not fundamentally changed at the moment, nor have the expected referendum results on the 23rd.
Under these circumstances, with the overall holdings already in a loss-making state.
If they were to choose to close positions and cut losses, neither Xie Hongxing nor Gu Chijiang would be willing.
Gu Chijiang paced back and forth in the trading room, hesitated for a moment, and said,
"Let's wait and see. I refuse to believe that without substantial negative news, and with the market generally still bullish, the pound's exchange rate can fall below the 1.5000 level? As long as it hasn't left the consolidation range, we'll hold."
After speaking, Gu Chijiang immediately contacted the trading department of 'Huifeng Huanyu Hedge Fund'.
He sought the opinion of Godfrey, whose long position holdings were even larger than his.
Godfrey noticed Gu Chijiang's emotional fluctuations, smiled calmly, and reassured him:
"So what if Wall Street capital is aggressively shorting? This is just market sentiment disturbance before the referendum; there's no need to worry.
Moreover... the latest news I've received is that the Bank of England and government agencies are already planning a short-squeeze operation targeting 'Wall Street capital' that maliciously shorts the pound's exchange rate and extensively propagates bearish sentiment."
(End of Chapter)