Trump-May Meeting Should Boost the Pound

 | Jan 26, 2017 | 12:00 PM EST
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British Prime Minister Theresa May will be meeting with President Donald Trump over the next few days on her visit here to the U.S. She has been talking it up publicly by saying that the U.S. and Britain can "lead the world." Some are speculating that the relationship has the potential to be a new Reagan-Thatcher relationship. That may or may not be true. However, the meeting does present some interesting opportunities for both countries, politically and economically. It also presents opportunities for investors.

As you know Britain voted last June to leave the European Union. That triggered massive selling in stocks and the pound. I was "pounding" (no pun intended) the table and telling you to buy stocks at the time and I also said that the pound's fall was irrational. There was no reason behind such an enormous devaluation of the currency. It was based on pure emotion and a false narrative that the U.K. economy would collapse. Turns out that the British economy put in the strongest performance of any industrialized economy in the world in 2016. The pound is on its way to recovery now, and I wouldn't be surprised if the Bank of England becomes the second major central bank to start raising interest rates sometime this year.

On the political side, Trump has said he supports Brexit and even offered that Britain would prosper by leaving Europe. I am sure he will attempt to transfer some of his optimism and confidence to May, who needs it badly because there is still a major fear campaign in her country about what dire effects leaving the EU would have, most of this largely driven by her opposition.

Trump is also against Europe, generally, and he's even spoken of his desire to reduce our role in NATO, which is a direct shot across the bow of countries like Germany. I am sure he views a strong U.S.-U.K. alliance as turning some of the other European countries toward him and his populist agenda. One country that comes to mind is France. French presidential candidate Marine Le Pen paid a visit to Trump at Trump Tower several weeks ago and now she is leading in the presidential election polls. The French presidential elections commence in May of this year.

Trump may well try to negotiate a trade deal with Theresa May while she's here. I believe this would instantly trigger buying in the pound, which has already seen some very strong gains.

I normally don't like moving into a market prior to a big event because, to me, that's like gambling. Instead, I'd rather see the outcome, then play off the (usually) wrong reaction of the crowd. (E.g. Brexit, election night, etc.) However, I think if a trade deal does get done it will be universally received as a positive and I see that resulting in some very big gains for the pound.

I trade forex, so I am buying GBP/USD. However, if you are stock trader you can "buy" the pound by using one of two British pound ETFs, either the iPath Goldman Sachs iPath GBP/USD Exchange Rate ETN (GBB) or, the Guggenheim CurrencyShares British (FXB) .

Either one of those would give you exposure to a move in the British pound. The risk/reward here is low. Either way, deal or no deal, I think the pound will rally further. It's probably undervalued by at least 10% against the dollar and in the currency markets that's a really big move.

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