George Soros had this to say about the factors surrounding his famous short of the British pound:
The U.K. had a large current-account deficit…, modest FX reserves and no capital controls to rebuff the speculators,” he said.“In short, it was a sitting duck.
I'm thinking maybe the opposite would be true. The fact the UK had a current account deficit would seem to imply a depreciating currency, with cheaper exports and more expensive imports. At this juncture, I would think more investors would buy in to the currency, enticed by the prospect of asset appreciation. So wouldn't it make more sense to view current account deficits as having appreciating pressures (rather than depreciating)?
I doubt my econ is better than a billionaire, so I'm hoping (and anticipating) someone can explain the flaw in my logic.
Why does having a current account deficit contribute to making a country vulnerable to hedge funds shorting the currency?
Note: I did not stipulate assumptions about the currency regime in question. Base case can be for a peg (the system used by the GBP at the time), but if other regimes (floating, currency board) merit a look, I'll leave them as optional.