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How low will the pound go? Nomura's Mr Brexit has some ideas

London

JORDAN Rochester was a 22-year-old working on his Masters in economics at the University of Warwick when then-British prime minister David Cameron pledged to hold a Brexit referendum.

Today, at 28, he's Mr Brexit to colleagues and clients. The currency strategist at Nomura International Plc has become the go-to guy for analysing how every twist in the saga will hit UK markets, called upon to combine the notoriously thankless roles of political analyst and pound prognosticator.

"I'd say I've written a piece or an email on Brexit roughly every two days" for about four years, he said.

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More than 300 of his solo research notes are published on the bank's website for investors. That excludes co-authored papers and countless emailed notes.

Wins and losses

Right now, the pound is threatening to post the worst four-day losing streak since 2016 as fears for a no-deal Brexit intensify with the tough stance of new Prime Minister Boris Johnson. He has issued an ultimatum to the European Union, saying he won't start divorce talks unless the withdrawal agreement is re-opened.

Rochester puts the chances of a no-deal exit at about 30 per cent. If it happens, he reckons it could send sterling as low as US$1.15 from the current level of around US$1.22 - already the lowest since 2017.

Of course, there's no such thing as a sure bet. While Rochester and his Nomura colleagues have notched some big victories - such as predicting a hung parliament in the 2017 UK election - they've also made less auspicious calls, like for a 2018 comeback trade for the pound.

But, thanks to an obsession with the minutiae of British politics and relentless output, Rochester is the one people like Andrew Swaine turn to when they're flummoxed.

"Jordan's insight into British politics and his ability to decipher the narratives and political actors has been extremely solid," the London-based money manager said. "It's not easy to trade politics. What politicians say and what they ultimately do can produce a series of entirely different market outcomes."

Rochester's prolific output looks destined to continue: The arrival of Johnson as prime minister has reignited fears the country could leave the EU without an agreement at the end of October.

As the pound slides, bets for currency volatility are climbing fast. The British stock exchange is slowly shrinking. Gilts are marching higher as investors seek the safest assets.

Sterling hit Rochester's year-end forecast of US$1.25 the day after the Conservative Party chose Johnson as its new leader. From here, he sees the pound trapped in a range over the rest of 2019 until UK politicians negotiate an agreement with the EU or walk away without one. The median forecast of his peers in a Bloomberg survey has cable ending the year at US$1.28.

All Brexit

Although his entire career has so far been defined by it, Rochester never set out to be the Brexit guy. His family wasn't into politics, and he never studied it. He started out on the Scottish independence referendum, part of a Nomura team that developed a model to help the bank call the result early.

Similar methods worked for the UK election in 2015, where they made a call to go long sterling betting on a Conservative majority. They got a jump of three hours on the final Brexit result.

It's all Brexit now. Rochester spends his days scouring every new headline to recalibrate the probabilities of the final outcome.

At the same time he's checking each development against market moves, hunting for dislocations for a tactical trade, and boning up on the intricacies of the British Parliament.

A typical missive this month ran to about 800 words and covered topics from UK retail sales data to rare "manuscript" amendments for bills passing through Parliament. "I don't want to be someone who wings it," said Rochester. "The nitty-gritty of Parliamentary procedure can seem inane, but some clients like to know."

Right now, Rochester puts the chances of the other major outcomes of Brexit - a deal or no Brexit at all - at about 40 per cent and 30 per cent, respectively. In other words, three years since the start of the process, it's still anybody's guess.

Against that backdrop, traders are moving to protect themselves. Philippos Kassimatis, a co-founder at hedging advisory firm Maven Global, says demand for protection against sterling losses has picked up among private equity firms that own or are seeking to buy UK companies, as well as US investors with exposures to pound-denominated assets.

"These investors are not worried too much if the pound devalues by 5 per cent or 7 per cent," he said. "They care about protecting against a 20 per cent move."

Crystal-balling Brexit - and second-guessing UK policy makers - has backfired for Rochester, even when he's been right.

Nomura predicted a rate hike in the thick of the Brexit crisis in August 2017, breaking with peers who were convinced the Bank of England was preparing to cut borrowing costs. But the timing was off.

"If we had gone for November we would have been heroes," Rochester said. He's also been burnt predicting sterling strength: In May 2018, the team said the "battered pound" would make a comeback and hit US$1.46 by year end - it ended at US$1.2754.

The complexity of it all means many investors are on the sidelines. Gianluca Girola, a trader in Citigroup in London, said real money clients outside the UK are fed up with the performance of the British Parliament, and their "expensive political games".

Waiting on the sidelines

"They're waiting on the sidelines for a green light in either direction," Girola said. "When the move comes, it might be fast and furious."

Rochester concedes most of the time clients don't want to talk about Brexit, because of what he calls "Brexhaustion" .

But their interest revives when there's a volatility event or something to trade, and when it does, he's always there. When Brexit is finished, he says he will continue to churn out analysis on the risks of a Jeremy Corbyn government, Scottish independence or the future of the UK economy. Until then, he's got plenty to do.

"At one point we are going to have a Eureka moment when we say 'Ah, that's what Brexit is,' " said Rochester. "But we don't know when that's going to happen." BLOOMBERG