In our famous traders, series we’ve covered some of the biggest names in Forex trading from Stanley Druckenmiller through to Andy Krieger, looking at the backgrounds of these trading legends as well as the highlights of their career. To finish the series let’s take a look at some of the most famous currency trades ever made which obviously feature some of the names we’ve talked about.
Andy Krieger Squashes the New Zealand Dollar
In 1987, rising trading superstar Andy Krieger exploded into the Forex history books when he single-handedly weighed the New Zealand Dollar down by 5%. Krieger was carefully monitoring the currencies rallying against the US Dollar following Black Monday crash and judged that as some currencies recovered quicker than others there would undoubtedly be some currencies which would become overvalued on a fundamental basis, creating room for arbitrage.
Krieger employed the use of options, which were relatively new at the time, to build a short position in the Kiwi worth hundreds of millions of dollars. In fact, Krieger’s position was so big that it actually exceeded the money supply of New Zealand and led to the Kiwi dropping between 3% – 5%, netting Krieger huge profits for his employers, Bankers Trust.
The trade became such a critical issue for the New Zealand economy that a government official from the country reportedly called up Krieger’s boss threatening them to try and force Krieger to exit the position.
Druckenmiller Hits The Mark… Twice!
After the fall of the Berlin Wall, the Deutschmark fell sharply as investors viewed reunification between the East and West as likely to be extremely difficult. However, Druckenmiller believed that the German currency had become too depressed and initiated a multi-million dollar position in support of a rally. George Soros, who was Druckenmiller’s boss at the time, then instructed Druckenmiller to raise the position to 2billion Deutschmarks. The rally played out as expected and Druckenmiller’s long position exploded in value, netting the fund over 60% returns.
A few years after his first famous trade on the German currency, Druckenmiller was back trading the Deutschmark long once again. This time, Druckenmiller was buying the currency as he anticipated a rally in the currency against the British pound which was under attack from George Soros (we’ll come to that in a minute). Druckenmiller quickly bought up German bonds expecting that investors would quickly move into bonds in the country as German equities didn’t have as high a growth rate as British equities. Druckenmiller was right once again, and as the pound collapsed due to the weight of Soros’s famous trade, the Deutschmark and German bonds once again enjoyed a sharp rally.
Soros Breaks the Bank of England
Arguably the most famous trade of all-time is George Soros’ trade in the British pound which earned him the nickname “The man who broke the bank of England”. Heading into the 90’s, the British pound tended to mirror the Deutschmark even though the two were significantly different economically. Despite the difficulties linked to reunification between the East and West, Germany was the stronger economy, however, Britain wanted to maintain the value of GBP above 2.7 marks. The BOE’s efforts to maintain this peg left the economy with elevated inflation and high-interest rates, however, Britain demanded a fixed rate of 2.7 marks as a condition for joining the European Exchange Rate Mechanism (ERM).
Soros assessed Britain’s economic situation and judged that the fixed exchange rate would not be able to compete with market forces and so began building a short position in GBP. Soros took on large debt in order to fund and develop his position. In a bid to fight off the attack and attract inflows, Britain raised its interest rates into double digits. However, as Britain began paying out more in interest costs, it became clear that trying to keep GBP artificially supported was going to cost billions.
Consequently, the British government decided to withdraw the UK from the ERM and GBP cratered lower as the fixed exchange rate was removed. In just one single trade Soros made over $1billion. Despite what many deemed a savage and predatory attack, Soros’ trade actually benefited the UK economy as forced out the excess inflation and elevated interest rates which were plaguing the country.