The Daily Update - UK GDP beats, but sterling's losing face

19 years today President Bill Clinton announced: ‘I want to say one thing to the American people; I did not have sexual relations with that woman, Miss Lewinsky’. And, this morning, half of the world woke up to hear that President Donald Trump yesterday signed an order specifying that his much talked about ‘wall’ must be ‘a contiguous, physical wall or other secure, contiguous and impassable physical barrier; let’s hope this figurative and literal act will not be as well reminisced as Clinton’s ‘endeavours’.

Across the pond we saw the UK remain resilient in the face of the Brexit vote as better-than-expected UK GDP figures for the final quarter of 2016 were released this morning; at 0.6% qoq and 2.2% yoy. Growth was once again driven by the ever-growing, dominant services sector; which accounts for roughly 80% of Britain’s total GDP. Although great news for the economy, with little concrete indication at this juncture on the actual exit costs to the economy going forward, we suspect the rate of growth will weaken this year and in 2018 as the effects ripple through the economy; weakening business sector confidence and consumer participation.

Ahead of the GDP releases, sterling climbed to a 6-week high against the dollar, however collapsed shortly after. With the UK exiting the EU, more recent rhetoric of the currencies ‘irrelevance’ as a global currency is plaguing the pound. Before the first world war, ~60% of global trade was settled in sterling making it the world’s reserve currency. Since then its status has rapidly diminished and according to Deutsche Bank, ‘Brexit should permanently reduce its reserve status’. Although China’s USD 3.01tn worth of reserves - the largest globally - are kept ‘secret’, sources suggest that the country’s central bank has been cutting holdings in sterling. According to Deutsche Bank, since 2015 sterling's share of China’s reserves could have fallen from as much as ~10% to ‘low single digits’. China has also more recently expanded its holdings of other more ‘exotic’ EM currencies, and its position in the yen, thus diluting sterling exposure.

The most recent IMF holdings data show sterling's share of the USD11tn global fx reserves stand at ~4.5% (down from 4.9% in 2015), a long way from the euro’s portion at 20.3% and the dollar’s at 63.3%. In fact, ratings agency, Standard and Poor’s last year stated that if the share of world central banks’ holdings of sterling fall below 3% Britain will lose its reserve status, and the country’s AA rating could come under pressure.