Saturday, October 16

Pound’s Worst Day in a Year Revives Emerging-Market Parallels

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By Greg Ritchie

(Bloomberg) —

Sterling’s worst session in a year has analysts once again comparing its gyrations to currencies like the Mexican peso or South African rand, rather than the dollar or euro.

The developing-market parallels were first drawn amid the UK’s tortuous exit from the European Union. They’re making a comeback after the possibility of early rate hikes by the Bank of England failed to stem the pound’s rout this week.

“Price action is beginning to resemble that of an emerging-market currency,” said Adam Cole, chief currency strategist at RBC Europe. “It is probably too soon to conclude that a major derating of UK assets is underway, though the trend bears watching .”

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Sterling’s volatility through years of Brexit negotiations often had more in common with commodity-dependent nations struggling with endemic corruption and weak institutions than the liquid Group-of-10 currency category it belongs to. Last year, Bank of America called the pound’s moves “neurotic ”And said they correlated more with developing nation currencies.

At stake this time round is the BOE’s credibility in both fighting inflation and ensuring the economic recovery isn’t knocked off track. Even former bulls are worried, with Nomura strategists saying on Wednesday they closed out a long position against the US dollar.

“Any support from sterling from a tighter monetary policy is being more than offset by concerns that an earlier tightening will simply exacerbate the slowing pace of economic recovery,” said Stuart Cole, head macro economist at Equiti Capital. There could be “negative consequences” if the central bank is forced into choosing between policy that supports the economy or curbs price growth, he said.

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It’s a difficult balance for a country still adjusting to Brexit and rattled by the recent surge in energy prices and panic-buying that left gas stations and supermarket shelves empty. The BOE now sees inflation exceeding 4% and has signaled a rate-hike could come before the end of the year.

While BofA analysts suggested on Wednesday that the pound’s moves were being amplified by the end-of-quarter rebalancing, some strategists have gone as far as to question its status as one of the world’s leading currencies.

“The pound is losing its inflation credibility,” said Nomura’s Jordan Rochester. “The concern for macro investors is if sterling becomes a market that will become truly unpredictable.”

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