5 Dec 2014
Does the current account deficit matter for GBP? – BAML
FXStreet (Barcelona) - According to Bank of America-Merrill Lynch FX strategists, GBP is showing obverse behaviour as it trends higher while the increasing current account deficit in the UK should lead to a soft impact on the currency.
Key Quotes
“Over the medium-term, a large and deteriorating external trade position is ultimately negative for a currency and leaves it vulnerable during periods of heightened volatility. The UK continues to run a dual deficit with large public sector deficits alongside external imbalances. Yet, despite this, GBP is some 20% higher in TWI terms from its post-GFC lows.”
“Admittedly, the imbalances that the UK faces are not unique; indeed, the budget deficit has been nearly halved as a % of GDP. But the resilience of GBP to the deterioration of the current account has been one of the more curious aspects of GBP performance in recent years.”
“The Bank of England1 believes that the cyclical downturn in the euro area will keep FDI returns weak over the coming years but believes that the UK's net international investment position (NIIP) is far healthier than official data would suggest if the stock of FDI assets is marked to market. Under its scenario, the UK's NIIP would have been circa +30% of GDP in 2013 versus broadly balanced according to official estimates. The BoE concludes that valuation effects should keep NIIP broadly stable in future against the backdrop of the current account deficit.”
“For GBP, if the Bank of England is correct on its revised NIIP measure, this should come as some relief and alleviate concerns that the persistence of large current account deficits presents a clear and present danger for the pound.”
Key Quotes
“Over the medium-term, a large and deteriorating external trade position is ultimately negative for a currency and leaves it vulnerable during periods of heightened volatility. The UK continues to run a dual deficit with large public sector deficits alongside external imbalances. Yet, despite this, GBP is some 20% higher in TWI terms from its post-GFC lows.”
“Admittedly, the imbalances that the UK faces are not unique; indeed, the budget deficit has been nearly halved as a % of GDP. But the resilience of GBP to the deterioration of the current account has been one of the more curious aspects of GBP performance in recent years.”
“The Bank of England1 believes that the cyclical downturn in the euro area will keep FDI returns weak over the coming years but believes that the UK's net international investment position (NIIP) is far healthier than official data would suggest if the stock of FDI assets is marked to market. Under its scenario, the UK's NIIP would have been circa +30% of GDP in 2013 versus broadly balanced according to official estimates. The BoE concludes that valuation effects should keep NIIP broadly stable in future against the backdrop of the current account deficit.”
“For GBP, if the Bank of England is correct on its revised NIIP measure, this should come as some relief and alleviate concerns that the persistence of large current account deficits presents a clear and present danger for the pound.”