Sterling loses haven status; flow data points to regime shift for GBP
Some believe further quantitative easing from the Bank of England will undermine sterling’s newfound haven status, but flow data from the Bank of New York Mellon suggests that ship has already set sail in the second quarter.
BNY Mellon, the world’s largest custodian bank, tracks the changing positions of investment managers and asset managers using its iFlow data. That data shows global money managers changed their attitude towards sterling following the inconclusive first round of Greek elections on May 6.
The vote, which prompted a wave of volatility on global asset markets, saw eurozone debt worries resurface as investors pondered the threat that Greece might leave the single currency.
As one might expect, BNY Mellon’s data showed an upsurge in demand for CHF immediately after the vote. No surprise there, given the amount that the Swiss National Bank has spent on maintaining the SFr1.20 floor in EURCHF in the last couple of months.
“Almost to the day that we find out there is going to be no government in Greece after the first election, you start seeing the big inflows taking place into Switzerland,” says Simon Derrick, head of currency strategy at BNY Mellon.
CHF in demand after Greek vote
Equally, there was an upsurge in flows into DKK. Denmark, like Switzerland, has been intervening to maintain the EURDKK peg as investors have poured funds into the country.
Fund also flow into DKK
Flows into commodity-linked currencies also picked up sharply as investors sought a refuge from the prospect of a break-up of the EUR. Flows in to CAD, for example, rose strongly.
But so much for sterling’s haven status.
Pound loses its haven status - outflows follow Greek vote
Flows into GBP, which had been rising steadily since late February, reversed abruptly. “Sterling has been the currency that everybody has talked about as being the safe haven trade of choice,” says Derrick.
Indeed, since May of 2010, that had been one of the key themes in the currency market. Every time there was an escalation in the European crisis, sterling rose. At the same time gilt yields declined as investors bought UK debt.
But that relationship broke down in the second quarter of this year.
Derek believes that worries over the UK’s exposure to Europe now trump its attraction as a haven.
Indeed, the Bank of England’s stability report in June highlighted that exposure as the biggest short-term risk to UK financial stability.
Evidence of that shift comes when sterling’s performance is compared to the extent of concern over the eurozone.
Sterling's fall coincides with escalating eurozone debt fears
|Source: BNY Mellon Global Markets|
As Derrick points out, it was not until the spread of the yield of Spanish government bonds over their German counterparts rose above 450 basis points – seen as a key indicator of economic distress – that sterling’s behaviour changed.
“That is exactly the point, within a day or so, that people suddenly stopped buying sterling and they stopped using it as a safe haven in quite the same way,” he says.
“Perhaps investors at that point were starting to recognise the UK definitely does have great exposure to Europe, certainly more than the US and Canada, and were starting to take that into account.”