How to make money from Britains general election, part 3

IT'S been an exhilarating night for currency traders, some of whom will be sitting on very handsomegains. Sterling rallied well beyond expectations on the news of the Conservative victory. Before mostof us were able to process the significance of the 10pm exit poll, the pound jumped 1.3% (the exactopposite of what happened in 2010, when the market feared a Lab-Lib coalition). As results startedtrickling in, the market took a little while to figure out whether the exit poll may have been too goodto be true (the pound dipped slightly as a little good news for Labour, in the form of some safe seatsheld, came in from 10:50 on). Then from around 3am, as the SNP wipe-out in Scotland becameundeniably clear, and any remaining Labour hopes were squashed, the pound rallied further still. Allin all it strengthened roughly 2% against the euro and 1.5% against the dollar, recovering much ofits pre-election weakening.

Broadcasters' predictions typically lag traders' models because they need to be more cautious. Theclever algorithms of Nomura, a bank, apparently started showing a Conservative majority fromaround 2:20am; shorting the euro against the pound was the logical next step to cash in on this intel,tells Jordan Rochester, FX strategist.

With the distraction of the election now out of the way (given a much clearer-than-expected result)traders are returning their swivel chairs to the macro picture. Some wonder whether there might bea longer-term backlash against the pound now that an EU referendum seems certain. Oliver Harvey,from Deutsche Bank, acknowledges in a note that there is a related currency risk, but it is unlikely tobe at the front of investors' minds for now (and polls are suggesting that Britain would not exitanyway). Traders can instead turn their attention to the more mundane details of inflation andlabour-market reports, both of which will be coming out over the next week.

http://www.economist.com/blogs/freeexchange/2015/05/markets-and-britains-election-1?fsrc=rss