UK: No clear catalyst for GBP weakness - MUFG

Derek Halpenny, European Head of GMR at MUFG, notes that the pound was the worst G10 FX performer in trading yesterday with little in the way of news to explain the move specifically.

Key Quotes

“Certainly, the pound has performed well since Trump’s victory in the US election – it has essentially matched the dollar’s performance and perhaps with the triggering of Article 50 at some point in Q1 2017 lying ahead, market participants have decided now is the time to unwind long pound exposure. There was also the announcement by the UK Treasury Select Committee of an enquiry being launched into the “efficacy of monetary policy or otherwise, its unintended consequences, and its prospects”, which Chairman of the Treasury Select Committee, Andrew Tyrie stated needed careful examination.”

“From an FX perspective such an enquiry could be deemed to be either positive or negative for the pound. Interference in central bank decision making could worry investors over undue political influence in independent decision making that might undermine the pound but a process that is deemed to encourage a move away from QE could also be viewed as a positive for the pound. This announcement certainly fits with the theme in the financial markets that QE is on its last legs either because of governments taking up the policy mantle through fiscal stimulus or because central banks themselves are losing faith with the effectiveness of QE now that rates are at the lower bound. Importantly, this enquiry will also study the risks of the Treasury or politicians putting undue pressure on the BoE that might undermine its independence.”

“We doubt this enquiry will have much impact on the pound with Brexit developments set to continue to dominate from early next year. It’s worth remembering though that something similar is likely to happen in the US under the Trump presidency and with anti-QE feeling amongst Republicans far more intense than in the UK, such an enquiry in the US could prove much more market moving than this parliamentary enquiry.”

“Given the Brexit vote toward the end of June, the markets will today pay a bit more attention to the Balance of Payments statistics being released by the ONS at 0930 GMT. That BoP data will reveal the cross-border financial account flows including portfolio and FDI flows and will be the first clear look at how cross-border flows responded in the immediate aftermath of the shock vote.”

“One piece of more timely flow data from the BoE suggests that the much feared capital flight in response to Brexit did not take place. Monthly data from the BoE on foreign investor purchases of Gilts shows continued demand in the wake of Brexit. While there was net selling in July (GBP 4.4bn), foreign investors renewed their purchases with GBP 15.1bn worth of buying in August and September and then a further GBP 10.5bn of buying in October. So the Q3 portfolio flows on the debt side may well show continued inflows.”

“The lack of capital flight from the UK is one reason why we have a more bullish outlook for the pound in 2017 than the market consensus. Another reason is the compelling evidence that the uncertainties related to Brexit might not have the negative impact on the economy that many assume. It that regard the Lloyds Business Barometer index data for December, released today, is encouraging. The index jumped from 32 to 39 and is at the highest level since March and up from a Brexit related low of 6 in June.”