PoundSterlingLIVE - Pound Sterling is very much a Developed Market currency according to a new research note from the FX research team at investment bank Nomura.
What should be an obvious statement is worth repeating given the fondness of analysts to tag it as an Emerging Market currency at various points in the post-Brexit vote era.
Sticking this label onto the Pound is a particularly effective way for research analysts to draw media attention to themselves: "We believe sterling is evolving into a currency that resembles the underlying reality of the British economy: small and shrinking with a growing dual deficit problem," said Kamal Sharma a FX analyst at Bank of America (NYSE:BAC) a few years back.
The last time we witnessed an explosion of Sterling EM headlines was around the time of the Liz Truss era.
Her mini-budget led to a blow-out in UK bond yields which would typically boost the Pound (DM currency behaviour) but the opposite happened with the Pound dropping sharply (EM currency behaviour).
Nomura analyst Jordan Rochester says the periods of EM-like correlations for FX and rates are evidence of capital flight out of the UK in periods of stress.
"However, that proved fleeting, with policymakers acting to eventually stem the flow (e.g., BoE interventions, Liz Truss resignation)," he says.
Rochester deals with what he calls the "recurring EM question" in a new note out on July 18. "Is GBP acting like an emerging market?" he asks, "no it is not," is his answer.
"In terms of trading, we currently see the opposite: GBP is acting in a very DM-like manner, following its rate spreads tightly," he adds.
Looking at the UK's risk profile going forward, the analyst says the UK's external financing risks are evident for the UK government, with 28% of gilts held abroad. 64% of UK corporate bond issuance is issued in hard currency.
"That sounds like a lot but that’s nowhere near as extreme as actual EMs such as Latin America, the UK credit market is relatively small and the hard currency exposure is due to the UK’s exposure to the global energy, mining and financial sectors (with revenues in USD making it less of an FX risk)," says Rochester.
Nomura is looking for a gradual and limited depreciation in the Pound-Euro rate into year-end but a firmer Pound-Dollar conversion.
An original version of this article can be viewed at Pound Sterling Live