Pound Risks Becoming Irrelevant as Brexit Dims Reserve Status

  • Deutsche Bank says the pound’s role as a buffer diminished
  • Currency reserve managers seen slowly moving away from pounds

How Is Brexit Moving the British Pound?

The fallout from the U.K.’s vote to exit the European Union includes the risk of the pound losing favor as a place for safe-keeping by global managers and their $11 trillion stockpile of reserves.

“To the extent that reserves serve as backstops against currency stress, rather than as sovereign wealth, the pound’s diminishing role in international capital flows post-Brexit should permanently reduce its reserve status,” Robin Winkler, a London-based Deutsche Bank AG strategist wrote in a note. “The pound may offer value, but is increasingly irrelevant.”

The pound has depreciated 15 percent since Briton’s June 23 vote to exit the economic bloc, trading at $1.26 Wednesday. It reached $1.1841 on Oct. 7, the lowest since 1985.

The British currency’s share of global reserves has fallen for the last two quarters to 4.5 percent, according to the most recent International Monetary Fund quarterly Composition of Official Foreign Exchange Reserves report -- dubbed as COFER data -- which runs through Sept. 30. The U.S. dollar holds the largest slice at 63.3 percent, followed by the euro with 20.3 percent.

Research shows that global currency reserve allocations closely mirror the relative size of major currency blocs, Winkler wrote. These models show that the sterling grouping has already been cut in half since early 2015.

Hopes for a slow exit have dimmed this month after U.K. Prime Minister Theresa May said that she will publish her plan for negotiations to leave the EU and promised lawmakers a vote on the final exit deal.

The slimming of the pound’s share of reserves may be even worse than the IMF data may signal, given China only recently began to report allocations, added Winkler.

“We estimate that the pound’s share has likely fallen from close to 10 percent into low single digits since early 2015,” Winkler said. This is consistent with the People’s Bank of China “transitioning from wealth to currency management.”

That doesn’t bode well for the pound.