We’re witnessing interesting developments in the UK at the moment, especially when it comes to the big miners and the dual-listed BHP Billiton and Rio Tinto.
To understand what is happening, we have to look back a few years to the depths of the eurozone crisis. Back then, during the jitters and volatility that swept through the eurozone, huge amounts of money from peripheral Europe ignored the fundamentals of the UK economy and made its way into sterling-denominated assets as a relative safe haven.
Fast forward a few years and people are only just beginning to wake up to the dire financial state of the British economy. With the jitters and volatility in the eurozone subsiding significantly, assets within continental Europe are beginning to look attractive again.
Hence sterling is in the process of losing its safe haven status as the money flow reverses and participants look to try and get out with their shirts still on their backs.
With the UK staring down the barrel of its third recession in five years, sterling has been the second worst performing G10 currency year-to-date, down 7.1 per cent, which is only just behind the yen’s fall of 8.8 per cent.
The only difference is that the Bank of Japan is deliberately trying to weaken its currency, a move many suggest new Bank of England Governor Mark Carney may look to follow. He’s already hinted he’s going for a very relaxed approach to hitting the government’s 2 per cent inflation target.
The chart above of sterling versus the US dollar shows that since the beginning of 2013, there has been some serious selling pressure. So much so that it has recently broken down through a major support level and, despite the recent bounce, looks set to continue its de-rating, possibly weakening to levels around the previous major lows marked in red and green.
There have been plenty of professionals suggesting short pound sterling is one of their best trade ideas for 2013. With plenty of speculators betting against ‘cable’, as it is commonly referred to by traders, memories of when George Soros famously broke the Bank of England and profited $1 billion won’t be too far from memory.
So enough with the history, what does this mean for the current market? Basically, Rio Tinto and BHP Billiton have been smashed in London, as can be seen in the charts below as money exits the sterling-denominated listings for fear of further sterling weakness and iron ore price uncertainty.
This creates a huge amount of uncertainty and really damages sentiment for the Australian listings right at a time when the market is seeing a pullback. On top of that, adjusting for the currency it presently means you can buy the London-listed BHP Billiton for $28.85 and Rio for $45.24, which are huge discounts to Australian prices.