If Britain leaves the EU, sterling is a screaming buy

The overwhelming consensus is that sterling will crash if Britain votes to leave the EU. That can only mean one thing, says Dominic Frisby: buy sterling.

Sterling will crash if we vote to leave the European Union. Everyone's agreed. I've never seen such consensus about a market. Ever. Consensus is a dangerous thing. It usually means it's time to take the other side of the bet. When you have consensus like this among people who have never traded forex in their lives, that bet become all the more compelling. So, if Britain votes to leave the EU, should we be buying sterling? Damn right we should!

Three reasons to be bullish on the pound

Death and taxes may be certain. Nothing else is especially markets. They are full of surprises surprises which only seem obvious after the event. I don't know what is going to happen any more than you do. Those of you that have read my musings over the years will know that, when it comes to predictions, I have made some howlers, but I have also made some beauties.

You never know what's next the howler or the beauty so you have to manage your risk in the event it's the former. That's my disclaimer out of the way. Much as I may hope otherwise, I still think "Remain" is going to win the EU referendum, despite this recent surge that "Leave" is enjoying. But in the event that Leave does shade it, I think sterling could soar. Here's why.

1. The economy will be stronger

I wrote about this at length a fortnight ago, but, briefly, the irrefutable evidence of history is that the freer they are, the more people thrive and prosper. The most inventive and innovative economies have always been where people are freest, whether that is freedom from government interference (ie low levels of regulation and taxation) or freedom made possible by technological progress (which usually occurs in areas where there is minimum interference invention and freedom is a self-reinforcing cycle).

Outside the EU, the UK will be considerably freer from centralised, unaccountable, bureaucratic control and thus it will prosper. A stronger economy means a stronger currency.

2. The euro will weaken

If there is one currency that will suffer as a result of Brexit, it's not the pound it's the euro. For me, it's not a question of whether Britain can survive Brexit. It's whether the EU can. And something there is very rotten.

I don't know what is going on with Deutsche Bank at the moment, but that particular ship is sinking and it is sinking fast. The German stockmarket, the Dax, looks awful; the European banks look awful and Deutsche Bank is the most awful of the lot. It is trading below where it was in the depths of the financial crisis. It's trading at levels not seen since the 1980s. And it keeps on sinking down almost 10% just this week, as I write, and unable to find a bid. I don't know what is going on. But something isn't right.

Goodness knows what effect Brexit will have on this. But if I were on the continent, I'd be getting my money out and into the UK if I could. All this talk of capital flight? Capital is going to flee to the UK, not from it. And that, again, is bullish for sterling.

Sterling is in a long-term secular bull market against the euro, one that began in 2009 when they almost hit parity. Every low is higher than the last, every high is higher than the last. There is a clear trend and it is up. The weakness that we have seen this year is just sterling coming back to test support.

This one is going to €1.50 in my view.

3. The long-term chart of sterling vs US dollar says "buy"

As for the pound against our other trading partner, the US, this is harder to call. Here the pound is often a function of what is going on in the US, which is the larger economy. If you have inside information as to what the US dollar is going to do over the next 24 months, please write in and let me know so that I can allocate my portfolio accordingly.

But I can tell you this: sterling has only gone below $1.37 once in all recorded history. That was in 1984-85. The turmoil of the miners' strike was part of the cause, but the main reason was exceptional US dollar strength which resulted in the Plaza Accord of 1985 to weaken the currency.

Given the goings-on in the global economy and concerns about the next global financial crisis, I would not rule out a period of US dollar strength. But the evidence of the last 30 years is that every time the pound has fallen into the green zone in the chart below, it has been a "screaming buy" of the once-in-a-decade variety.

We're just above it now and, over the coming week or so, I'd argue that we are going to slip into the green zone once again. My advice when we do is to buy the heck out of the pound.And use a stop in the event that the call I'm making is a howler. Where do you put that stop? One option is just below the green zone at, say, $1.35. But be wary of this. I imagine there will be a lot of volatility, which raises the chances of being stopped out.

One distinct possibility is a false break below the green area, then a monster rally a case of: "from false moves come fast moves in the opposite direction". The trade I like most, if we vote to leave, is to buy sterling and sell the euro.

I promised I was going to write this week about the ruin the EU has brought to our fishing industry. I'll have to save that for next week now. Sterling took priority the consensus nonsense I was hearing was just too much and I had to get it off my chest.


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