Boris Johnson’s government on Monday dismissed claims by Labour that the prime minister has an interest in promoting a no-deal Brexit because some of the Conservative party’s financial backers could profit from such an outcome.
Simon Clarke, a junior Treasury minister, rejected suggestions by shadow chancellor John McDonnell that the prime minister was personally exposed to a conflict of interest because hedge funds that have supported him in the past are also betting on a no-deal departure.
Using a parliamentary manoeuvre, Labour forced Mr Clarke to come to the Commons and answer questions on the matter after former chancellor Philip Hammond claimed over the weekend that the prime minister was supported by “speculators who have bet billions on a hard Brexit”.
Mr Hammond alleged in a newspaper article on Saturday that “there is only one outcome that works for them: a crash-out, no-deal Brexit that sends the currency tumbling and inflation soaring”.
The former chancellor’s allegations were subsequently backed by Nicholas Macpherson, a former Treasury permanent secretary, who tweeted: “Mr Hammond is right to question the political connections of some of the hedge funds with a financial interest in no deal. They are shorting the pound and the country, with the British people the main loser.”
In the Commons, Mr McDonnell said the prime minister and the Conservative party had received £726,000 from individuals who backed a no-deal Brexit this year alone, “many involved in hedge funds”.
Mr McDonnell asked: “Isn’t there a danger that the promotion of a no-deal scare by a prime minister, resulting in profiteering by his friends and donors, could be seen as a conflict of interest by any standard and contrary to the ministerial code?”
Mr Clarke, the exchequer secretary, replied that the government would not comment on any individual positions taken by market operators but said: “We do not accept there is any prospect of a conflict of interest.”
Instead, he accused Mr McDonnell of “making a fairly political and speculative attempt to try throw mud around the house” and said the shadow chancellor was “propagating myth” and “smear”. Mr Clarke categorised Mr Hammond’s own comments as “outlandish speculation”.
Crispin Odey, founder of hedge fund Odey Asset Management, who has donated £10,000 to Mr Johnson’s campaign and has been shorting sterling denied he was trying to influence, or had any influence over, Mr Johnson’s policies.
“It’s crap, it really is,” he said of the suggestion hedge funds were using donations as a way of influencing Mr Johnson’s policies so they could profit from a no-deal Brexit. “You’d have to understand nothing about financial markets to believe you hold a position for three years.
“They [the people making these suggestions] are doing it to try and create the illusion that Boris gets money from dubious places [and from people] who are unpatriotic and who want to see the country go down,” he told the FT.
Sterling has been out of favour ever since the large drop that followed the UK’s vote to leave the EU. Investors fear that Brexit will leave the country poorer and probably with lower interest rates, both of which are classic negatives for the currency.
The pound tends to weaken further on any signs that the UK might leave the EU without any deal to soften the impact or to help facilitate trade. It tends to rise when it appears that a compromise may be in sight.
Unlike dealing on stock markets, there is no data available to identify currency speculators. However, it is clear that more than two years after the Brexit vote, negative bets on sterling are near all-time highs.
Regular data from US regulators released last week showed that net so-called shorts on the pound were still near historic highs, despite sterling strengthening as much as 5 per cent against US dollar in the first half of September.
Jordan Rochester, a currency strategist at Nomura, said the accumulation of negative bets was due to the deterioration in global investor sentiment and the expectation that the UK will underperform the US regardless of whether Brexit goes ahead on 31 October.
“Investors are buying the dollar because of concerns about the global slowdown. Conspiracy theorists can come up with all sorts of theories but the reality is that the market is very large and can’t be driven by a handful of hedge funds,” he said.
Companies and investors with exposure to sterling also need to hedge against a no-deal Brexit hitting the pound, even though that is seen as an increasingly unlikely outcome.
Mr Rochester noted that derivatives markets no longer expect large moves in sterling on 31 October, suggesting traders believe the prospect of no-deal Brexit has receded. This view is backed up by bookmakers, where the probability of the UK leaving the EU at the end of October has fallen to 17 per cent from 40 per cent in August.
Paul Robson, a currency strategist at NatWest Markets, said investors were now more focused on the period between the EU leaders’ meeting on October 17-18 and the end of the month as most likely period of volatility, with negotiations between the UK and EU expected to go down to the wire.
“We expect sterling to be volatile as currency markets plot the way through a very uncertain general election in late autumn or early winter,” said Mr Robson.