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The British pound is behaving like an emerging market currency due to Brexit and liquidity conditions, analysts at Bank of America say.
In a note this week, Kamal Sharma and Myria Kyriacou, analysts at the bank, warned that the UK’s exit from the European Union would permanently change sentiment around the British pound.
“Using only the BIS Triennial Survey turnover statistics, it would be concluded that the depth of the GBP market should have provided some coverage against volatile market movements,” they said. “This has not been the case and, in our view, Brexit is likely to permanently alter the way investors view the pound.”
The BIS triennial survey, conducted every three years by the Bank for International Settlements, an organization owned by 62 central banks, analyzes the size and structure of global currency markets.
Sterling was trading 0.2% higher on Thursday at around $ 1.2444. Its value has undergone volatile changes since the UK voted to leave the European Union in June 2016, peaking at $ 1.4335 in April 2018.
The authors of the BofA note attributed the change in the currency’s position to a collapse in liquidity conditions since the Brexit referendum. Trading conditions would continue to deteriorate until the end of this year, they speculated, and liquidity risks would remain high as the end of the Brexit transition period, slated for December 31, approached.
Because of this, they noted, investor analysis of the pound sterling could not be conducted under traditional G-10 currencies. Instead, liquidity conditions pushed the pound toward price action more closely associated with emerging market (EM) currencies.
“A more personalized view of the pound and one that takes an EM-type view is required, particularly as the dynamics of the UK’s internal and external debt morphs into comparisons with some of the more developed EM nations,” they said. the authors of the note.
They added that winds against the pound were building, leading them to believe that “traditional valuation metrics greatly exaggerate the degree of undervaluation of the GBP.”
It was biased by a weaker pound against the euro, the Japanese yen and the Swiss franc, according to the note.
Risk currency
Speaking in March to CNBC’s “Squawk Box Europe”, David Bloom, global head of FX research at HSBC, compared the British pound to risk-linked currencies such as the Norwegian krone and the Australian dollar.
“Sterling has moved into a risky currency,” he said. “Why? Because we wanted to be global, we didn’t want to be part of the European Union, we didn’t want to be part of the big closed economy, we wanted to be an open economy. And now we are, our currency operates as a medium-sized open economy, so it swings very violently. “
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