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The Mere Whisper of the Name 'Soros'

The recent rumors that George Soros was involved in a big way in the fall off the Australian dollar sent us back to the good old days of Soros’s notoriety, the 1992 deal that forced the Brits to pull out of the European Exchange Rate Mechanism, and that is always invoked to explain why they aren’t in the euro to this day.

Actually, even if we assume the rumors are accurate, the two situations are very different. But it is difficult to find any news reports that don’t draw a rather simple parallel.

Soros is “the man who broke the pound” and now he is “breaking” the Aussie too, right?  Ummmm.  No.

What Happened

On Monday, May 6, 2013, somebody [by unverified reports, Soros Fund Management] placed a sizeable short order with an FX trader in Hong Kong, with a settlement time of 36 hours: in other words, the bet was to be settled soon after the Reserve Bank of Australia made its anticipated interest rate announcement Tuesday.

Currencies of course trade in pairs, and in this case Soros – or somebody – was betting USD against AUD.

Coincident with rumors that it was Soros, the Aussie slipped in Monday’s trading, falling from US$1.030 to US$1.025

On Tuesday, the RBA did in fact cut the benchmark rate, what is known in Australia as the official cash rate, by 25 basis points, bringing the OCR to a record low of 2.75 percent. With the announcement the value of the Aussie vis-à-vis the USD fell again, to $1.0175.

That unknown Hong Kong trader did quite well.

Stanley Druckenmiller

The fluctuations in the value of the two dollars on Thursday, May 9th, were even more dramatic than had been the events and rumors of earlier in the week. The Aussie went as high as US$1.025 and as low as USD$1.005, before closing the day just a little off that low.   This time the world had a definite name and face to attach to the FX volatility. That name was Stanley Druckenmiller, CIO of Duquesne Family Office.

Hmmmm. That’s not a name that will put an end to whispers of Soros’ involvement. Druckenmiller was Soros’ right-hand man at Quantum at the time of the big pound-mark trade.

At the Sohn Investment Conference in New York, at Wednesday in the western hemisphere, Thursday in the eastern,  Druckenmiller said the Aussie dollar has ridden the commodities supercycle, and that the supercycle in coming to an end. He advised investors generally to avoid currencies of countries that are too dependent on the export of raw materials.

Now: facile parallels notwithstanding, neither the argument Druckenmiller made nor any other good reasons that may now exist for shorting the Aussie have a lot to do with the case against the pound in 1992. That tug-of-war occurred in a unique context: the transitional period in Europe marked by the existence of an ERM, a mechanism designed to keep all the European currencies within hailing distance of one another prefatory to their merger into a single euro.  “Breaking the bank” had a very clear significance for Soros, Druckenmiller, and their associates at the time. It meant selling the pound for longer than the Bank of England could keep buying it, outlasting their wiliness or ability to abide by a continent-wide diplomatic commitment.

Australia has no closely analogous commitment to “break.” Heck, the Aussie has a continent all to itself anyway.

Think Like a Manager

The Hong Kong investor wasn’t trying to win a tug-of-war motivated by anything analogous to the ERM. He was ‘only’ betting in a traditional way on the result of a predictable policy decision.

Now, it isn’t at all clear, to me at any rate, that the ongoing decline of the Aussie has any such cosmic cause as Druckenmiller’s case suggests. One doesn’t need a supercycle as an explanatory factor.

It had not been a wildly implausible prediction after all. Glenn Stevens, the RBA Governor, had made it clear he was biased toward further easing. Even that record low level of the OCR at 2.75 looks pretty high against the U.S. dollar, so it is rational in a prisoner’s-dilemma sort of way for the RBA to think that they are participating (in a measured way!) in a race-to-the-bottom that has been forced on them.

The bottom line? Soros is not Zorro. Their names simply sound confusingly similar. Maybe the press should get over its own idolization. Instead of trying to think about asset managers in personal terms, a better approach is to try to think like an asset manager.