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Billionaire Currency Trader: The Man Who Broke the BOE

Billionaire Currency Trader: The Man Who Broke the BOE

2013-05-10 16:00:00
Research, Research Team
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Article Summary: George Soros netted a profit of over 1 Billion Euro in 1992. Find out more about his strategy and what he is trading today.

Remember Black Wednesday? On September 2nd,1992, George Soros became known to history as the “Man who broke the Bank of England.” On that day, George Soros sold short more than $10 billion in Pounds Sterling netting a profit of around 1 Billion Euro.

Let’s delve further into Soros’ strategy, philosophy, and his current moves.

Strategy

Simple economics: Soros trades within boundaries derived by rules. By doing so and by understanding the dynamics between economic giants in Europe, he puts the pieces together. Considering interest rates fluctuations and government interventions, Soros detected an emerging bubble.

He borrowed pounds, sold them for Deutschmarks; and overflowed the currency market with excess supply of pounds. This led to Pound devaluation.

1. Play by the rules

2. Detect an emerging bubble

How did Soros know?

In September 1992, United Kingdom’s government was between two crossroads on whether to raise their interest rates to the levels of the European Exchange Rate Mechanism (ERM) or to float its currency. Soros foresaw pound devaluation because: UK would have to withdraw the pound from the EERM because the Bank of England (BOE)would not be able to keep GBP exchange rate above the agreed limit. Therefore, the pound would have to be devalued.

Soros was aware that Deutsche Bundesbank, German’s Federal Bank, favored Sterling and Italian lira devaluation. Secondly, high British interest rateswould be calamitous towards UK’s asset prices. Therefore, prior to September of 1992, he began borrowing Sterling and converting them into a concoction of French Francs and Deutschmarks.

On September 16, 1992, the British Pound was forced out of the ERM.

Philosophy

George Soros takes advantage of the power of prediction from a slightly different angle. Soros is a pattern-detector: he looks for patterns of errors. He applies his knowledge regarding a social theory-- Reflexivity—towards his financial strategies. This theory is based on the principle within the Thomas Theorem: “situations that men define as true, become true for them”. In other words, essentially, our decisions are based on the predictions we make ourselves, therefore the predictions become fact.

Analogously, within the arena of economics and financial markets, individuals’ predictions about the market can possibly lead to prediction-biased decisions and actions. Here George Soros enters; detects an emerging financial bubble; predicts people’s actions; and then he goes against just that.

We all look for patterns to make our executions; however, discovering the minority financial strategy leads to the highest reward.

Soros 2013

Soros latest trade has been betting against the Japanese Yen. He has made almost $1 Billion on these trades since last year, as he is shorting the Yen. On April 4th, 2013, after Japan announced monetary easing measures to achieve a 2% inflation target, the Yen fell more than 3 percent against the dollar.

Soros says If the Yen starts to fall, which it has done, and people in Japan realize that it is liable to continue, and want to put their money abroad, then the fall may become like an avalanche,” on CNBC.

Learn Forex – USDJPY Weekly Trend

Billionaire_Currency_Trader_The_Man_Who_Broke_the_BOE_body_x0000_i1025.png, Billionaire Currency Trader: The Man Who Broke the BOE

Created using FXCM’s Marketscope 2.0 charts

Today you can take advantage of the weakening Japanese Yen just like the currency trading giant George Soros! As Japanese Yen pairs move towards higher highs, traders can utilize a breakout strategy.

Don’t have a strategy? FXCM offers a series of automated breakout strategies implementing buying, selling, and exit logic considering current market conditions. This is available to download through the FXCM App Store--Find out more about our Breakout 2 strategy here.

--Written by Sunaina Rajani, DailyFX Education

E-mails can be sent to instructor@dailyfx.com

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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