The pound is now an emerging market currency in all but name - BofA

Author: Justin Low | Category: News

BofA says that the pound has not been the same since the Brexit referendum

The firm's currency analyst, Kamal Sharma, says that since the 2016 Brexit referendum, movements in the pound have become "neurotic at best, unfathomable at worst".

Adding that there is a lack of clarity over the currency's prospects, underlined by higher implied volatility in the quid relative to major peers and also a drop in liquidity as investors are less willing to take views on the currency.

As such, the firm argues that the pound can no longer be analysed in the same framework as other major currencies and is instead taking after an emerging market currency:

"The pound increasingly resembles the more liquid emerging market currencies rather than a core G10 currency. We believe sterling is in the process of evolving into a currency that resembles the underlying reality of the British economy: small and shrinking with a growing dual deficit problem similar to more liquid [emerging market] currencies."
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More on this via the FT here (may be gated).

At certain stages in trading the pound over the last four years, I would argue that there is some sense to what they are pointing out above.

The issue is that Brexit uncertainty has been prolonged by so much so that it creates some sort of perception dystopia when viewing the pound outlook most of the time.

I reckon once we get past that, the pound can finally start to settle and find itself again within the major currencies bloc. But for most traders in general, I don't think much of us will be complaining about the added volatility over the past few years.

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