How Low Will the Pound Go? Nomura's Mr. Brexit Has Some Ideas
His family wasn’t into politics, and he never studied it. And, it’s all about Brexit now.
(Bloomberg) --
Jordan Rochester was a 22-year-old working on his Masters in economics at the University of Warwick when David Cameron pledged to hold a Brexit referendum.
Today, at 28, he’s Mr. Brexit to colleagues and clients. The currency strategist at Nomura International Plc has become the go-to guy for analyzing how every twist in the saga will hit U.K. markets, called upon to combine the notoriously thankless roles of political analyst and pound prognosticator.
“I’d say I’ve written a piece or an email on Brexit roughly every two days” for about four years, he said. More than 300 of his solo research notes are published on the bank’s website for investors. That excludes co-authored papers and countless emailed notes.
Right now, the pound is threatening to post the worst four-day losing streak since 2016 as fears for a no-deal Brexit intensify with the tough stance of new Prime Minister Boris Johnson. He has issued an ultimatum to the European Union, saying he won’t start divorce talks unless the withdrawal agreement is re-opened.
Rochester puts the chances of a no-deal exit at about 30%. If it happens, he reckons it could send sterling as low as $1.15 from the current level of around $1.22 -- already the lowest since 2017.
Wins and Losses
Of course, there’s no such thing as a sure bet. While Rochester and his Nomura colleagues have notched some big victories -- such as predicting a hung parliament in the 2017 U.K. election -- they’ve also made less auspicious calls, like for a 2018 comeback trade for the pound.
But thanks to an obsession with the minutiae of British politics and relentless output, Rochester is the one people like Andrew Swaine turn to when they’re flummoxed.
“Jordan’s insight into British politics and his ability to decipher the narratives and political actors has been extremely solid,” the London-based money manager said. “It’s not easy to trade politics. What politicians say and what they ultimately do can produce a series of entirely different market outcomes.”
And Rochester’s prolific output looks destined to continue: The arrival of Johnson as prime minister has reignited fears the country could leave the EU without an agreement at the end of October.
As the pound slides, bets for currency volatility are climbing fast. The British stock exchange is slowly shrinking. Gilts are marching higher as investors seek the safest assets.
Sterling hit Rochester’s year-end forecast of $1.25 the day after the Conservative Party chose Johnson as its new leader. From here, he sees the pound trapped in a range over the rest of 2019 until U.K. politicians negotiate an agreement with the EU or walk away without one. The median forecast of his peers in a Bloomberg survey has cable ending the year at $1.28.
All Brexit
Although his entire career has so far been defined by it, Rochester never set out to be the Brexit guy. His family wasn’t into politics, and he never studied it.
He started out on the Scottish independence referendum, part of a Nomura team that developed a model to help the bank call the result early. Similar methods worked for the U.K. election in 2015, where they made a call to go long sterling betting on a Conservative majority. They got a jump of three hours on the final Brexit result.
It’s all Brexit now. Rochester spends his days scouring every new headline to recalibrate the probabilities of the final outcome. At the same time he’s checking each development against market moves, hunting for dislocations for a tactical trade, and boning up on the intricacies of the British Parliament.
A typical missive this month ran to about 800 words and covered topics from U.K. retail sales data to rare “manuscript” amendments for bills passing through Parliament. “I don’t want to be someone who wings it,” said Rochester. “The nitty-gritty of Parliamentary procedure can seem inane, but some clients like to know.”
Right now, Rochester puts the chances of the other major outcomes of Brexit -- a deal or no Brexit at all -- at about 40% and 30%, respectively. In other words, three years since the start of the process, it’s still anybody’s guess.
Against that backdrop, traders are moving to protect themselves. Philippos Kassimatis, a co-founder at hedging advisory firm Maven Global, says demand for protection against sterling losses has picked up among private equity firms that own or are seeking to buy U.K. companies, as well as U.S. investors with exposures to pound-denominated assets.
“These investors are not worried too much if the pound devalues by 5% or 7%,” he said. “They care about protecting against a 20% move.”
‘Eureka’
Crystal-balling Brexit -- and second-guessing U.K. policy makers -- has backfired for Rochester, even when he’s been right. Nomura predicted a rate hike in the thick of the Brexit crisis in August 2017, breaking with peers who were convinced the Bank of England was preparing to cut borrowing costs. But the timing was off.
“If we had gone for November we would have been heroes,” Rochester said.
He’s also been burnt predicting sterling strength: In May 2018, the team said the “battered pound” would make a comeback and hit $1.46 by year end -- it ended at $1.2754.
The complexity of it all means many investors are on the sidelines. Gianluca Girola, a trader in Citigroup Inc. in London, said real money clients outside the U.K. are fed up with the performance of the British Parliament, and their “expensive political games.”
“They’re waiting on the sidelines for a green light in either direction,” Girola said. “When the move comes, it might be fast and furious.”
Rochester concedes most of the time clients don’t want to talk about Brexit, because of what he calls “Brexhaustion.” But their interest revives when there’s a volatility event or something to trade, and when it does he’s always there.
When Brexit is finished, he says he will continue to churn out analysis on the risks of a Jeremy Corbyn government, Scottish independence or the future of the U.K. economy. Until then, he’s got plenty to do.
“At one point we are going to have a Eureka moment when we say ‘Ah, that’s what Brexit is,’” said Rochester. “But we don’t know when that’s going to happen.”
To contact the reporters on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net;Charlotte Ryan in London at cryan147@bloomberg.net
To contact the editors responsible for this story: Samuel Potter at spotter33@bloomberg.net, ;James Hertling at jhertling@bloomberg.net, Cecile Gutscher
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