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The Greatest Currency Trades Ever Made
The Greatest Currency Trades Ever Made
The foreign exchange (forex) market is the largest market in the world because currency is
changing hands whenever goods and services are traded between nations. The sheer size of
the transactions going on between nations provides arbitrage opportunities for speculators,
because the currency values fluctuate by the minute. Usually these speculators make many
trades for small profits, but sometimes a big position is taken up for a huge profit or, when
things go wrong, a huge loss. In this article, we'll look at the greatest currency trades ever
made.
Once you're decided on which bet you want to place, there are many ways to take up the
position. For example, if you wanted to short the Canadian dollar (CAD), the simplest way
would be to take out a loan in Canadian dollars that you will be able to pay back at a discount
as the currency devalues (assuming you're correct).
This is much too small and slow for true forex traders, so they use puts, calls, other options
and forwards to build up and leverage their positions. It's the leveraging in particular that
makes some trades worth millions, and even billions, of dollars. (For more on the mechanics
of the forex market, see our Forex Tutorial and Getting Started In Forex.)
One part of the legend recounts a worried New Zealand government official calling up
Krieger's bosses and threatening Bankers Trust to try to get Krieger out of the kiwi. Krieger
later left Bankers Trust to go work for George Soros. (For more on how this works, see
Trading The Odds With Arbitrage.)
Druckenmiller's first bet came when the Berlin Wall fell. The perceived difficulties of
reunification between East and West Germany had depressed the German mark to a level that
Druckenmiller thought extreme. He initially put a multimillion-dollar bet on a future rally
until Soros told him to increase his purchase to 2 billion German marks. Things played out
according to plan and the long position came to be worth millions of dollars, helping push the
returns of the Quantum Fund over 60%.
Possibly due to the success of his first bet, Druckenmiller also made the German mark an
integral part of the greatest currency trade in history. A few years later, while Soros was busy
breaking the Bank of England, Druckenmiller was going long in the mark on the assumption
that the fallout from his boss's bet would drop the British pound against the mark.
Druckenmiller was confident that he and Soros were right and showed this by buying British
stocks. He believed that Britain would have to slash lending rates, thus stimulating business,
and that the cheaper pound would actually mean more exports compared to European rivals.
Following this same thinking, Druckenmiller bought German bonds on the expectation that
investors would move to bonds as German stocks showed less growth than the British. It was
a very complete trade that added considerably to the profits of Soros' main bet against the
pound. (Read more about currency devaluation in What Causes A Currency Crisis?)
Many speculators, George Soros chief among them, wondered how long fixed exchange rates
could fight market forces, and they began to take up short positions against the pound. Soros
borrowed heavily to bet more on a drop in the pound. Britain raised its interest rates to double
digits to try to attract investors. The government was hoping to alleviate the selling pressure
by creating more buying pressure.
Paying out interest costs money, however, and the British government realized that it would
lose billions trying to artificially prop up the pound. It withdrew from the ERM and the value
of the pound plummeted against the mark. Soros made at least $1 billion off this one trade.
For the British government's part, the devaluation of the pound actually helped, as it forced
the excess interest and inflation out of the economy, making it an ideal environment for
businesses.
A Thankless Job
Any discussion around the top currency trades always revolves around George Soros,
because many of these traders have a connection to him and his Quantum Fund. After retiring
from active management of his funds to focus on philanthropy, Soros made comments about
currency trading that were seen as expressing regret that he made his fortune attacking
currencies. It was an odd change for Soros who, like many traders, made money by removing
pricing inefficiencies from the market. Britain did lose money because of Soros and he did
force the country to swallow the bitter pill of withdrawing from the ERM, but many people
also see these drawbacks to the trade as necessary steps that helped Britain emerge stronger.
If there hadn't been a drop in the pound, Britain's economic problems may have dragged on as
politicians kept trying to tweak the ERM. (For related reading, see Working Through The
Efficient Market Hypothesis.)
Conclusion
A country can benefit from a weak currency as much as from a strong one. With a weak
currency, the domestic products and assets become cheaper to international buyers and
exports increase. In the same way, domestic sales increase as foreign products go up in price
due to the higher cost of importing. There were very likely many people in Britain and New
Zealand who were pleased when speculators brought down the overvalued currencies. Of
course, there were also importers and others who were understandably upset. A currency
speculator makes money by forcing a country to face realities it would rather not face.
Although it's a dirty job, someone has to do it.
You can learn more about the basics of this market at Common Questions About Currency
Trading and Top 8 Most Tradeable Currencies.