Forex Flash: GBP gets pounded as asset managers sell – UBS

The downgrade of the UK last week has already triggered a response in GBP. On Monday the currency underperformed nearly all G10 currencies – even against the EUR and JPY, both of which had some unfavorable event risk to reckon with. According to Research Analyst Gareth Berry at UBS, “Even though structural deficiencies had already been expected for the UK economy and the pound for some time, the selling triggered on Friday points to some active divestment flow. Our FX Flow Monitor did show heavy GBP/USD selling by asset managers last week (third largest on record by this community), but the bulk of selling still took place on Friday.”

Given such investors, especially those with more risk-averse mandates, have strict limitations on what they can hold, it is possible that the loss of 'three AAA' ratings for the UK triggered selling on this technicality, which began on Friday and continued into Monday.

Predicting a gilt market meltdown based on one well-flagged downgrade alone may be pushing it. As our UK Economist Amit Kara points out in his latest UK Economic Comment (February 25th, 2013), historically sovereign credit ratings have tended not to have a major impact on bond yields. This has been the case with the likes of the US and France in recent years. Given sterling still represents 4.1% (as of Q3 2012) of global allocated reserves, this will be reassuring for the government seeking to keep borrowing rates down, especially with the BoE temporarily on the sidelines. “Nonetheless, there is little room for complacency and some recent changes within the sovereign debt market may not be moving in sterling's favor in the immediate future and beyond.” Berry adds.