Note: this was an article I emailed only to subscribers back on March 29 2019. For those familiar with it – there’s an update at the bottom. . .

Because of the problems with Brexit and a slowing British economy – I’ve been interested in placing a bet against the British currency – the pound sterling (especially since events have triggered my Macro-Fragility Index to go off).

And recently – I saw that there’s an opportunity betting against the British Pound via the Invesco CurrencyShares British Pound Sterling Trust (NYSE: $FXB).

Now – just like other currency trusts – the FXB simply holds British pounds in bank account at JPMorgan Chase Bank.

But this is an interesting play because – as Jim Rickards’ pointed out – as long as interest rates are near zero in Britain, bank deposits won’t collect any yield.

And since the FXB is just British pounds in a bank deposit account – this is causing the trust to bleed out. . .

For instance – the interest collected in the FXB’s deposit account is meant for covering management fees and expenses (the FXB has an annual “total expense ratio” of 0.40%).

See the problem?

In a ‘normal rate’ environment (let’s say a 2% bank rate) – the yield collected on the pounds sitting in deposit account would pay for the expenses and have some left over (2% minus 0.40% equals 1.60%).

But – since yields in Britain are (and have been for a long while) near zero – they’re forced to pay these fees by other means.

And that’s by selling pounds from the trust – thus slowly depleting the assets in the account. . .

For instance – the Invesco CurrencyShares website states that there are 4,842,446 British pounds per ‘basket’ of FXB shares.

Then – there are 50,000 shares in each ‘basket’ as stated In the latest prospectus.

And when you divide 4,842,446 pounds by 50,000 shares – you get 96.8 British pounds.

So there are 96.8 pounds backing per share of FXB. . .

Rickards notes that the number of British pounds (96.8) is down from 100 pounds when the FXB was created over ten years ago.

And further – it will continue to shrink as long as the Bank of England (BoE) keeps interest rates near zero. 

Why?

Because without the FXB deposit account collecting interest, management must continually withdraw cash to pay the difference (the 0.40% total expense fees).

So the longer the BoE keeps rates at near zero – the more the FXB will bleed out. 

Here’s what the fine print says for the FXB in the latest ‘10K’. . .

“If interest earned by the Trust does not exceed the Trust’s expenses, the Trustee will withdraw British Pounds Sterling from the Trust to pay these excess expenses, which will reduce the amount of British Pounds Sterling represented by each Share on an ongoing basis and may result in adverse tax consequences for Shareholder… The Trust’s net comprehensive loss for the year ended October 31, 2018 was $466,573 due to the Sponsor’s fee of $722,792 exceeding interest income of $256,219.”

Of course this is a slow bleeding – but it will most likely worsen.

I believe the BoE will cut rates – even below zero – sooner than later. This will hurt the British pound’s forex value. And further cause the FXB bleeding to intensify.

All this and more – such as Brexit and slowing British growth – is why I believe betting against the British pound via the FXB looks attractive.

I haven’t initiated anything just yet, but if I do – as usual – it will be with long dated, out of the money, put options via the $FXB.

I’ll keep you up-to-date on this potential play. . .

UPDATE: Since writing this – the $FXB has dropped over -7%.

AS A DISCLOSURE: Because of the positive asymmetry the $FXB puts offered, I opened a position for my own portfolio in the Sep20’19 $120 Puts @ an average cost of $0.95 in early-April. But I have since closed the position recently at an average price of $2.15.