LONDON — The pound’s role as an international reserve currency is going to be permanently diminished as a result of the UK’s vote to leave the European Union, according to new research from Deutsche Bank.
“The pound’s diminishing role in international capital flows post-Brexit should permanently reduce its reserve status,” Deutsche forex strategist Robin Winkler writes in a note circulated to clients on Wednesday.
Winkler argues that the pound’s role in the IMF’s currency composition of official foreign exchange reserves index (more often known as COFER) has likely fallen significantly in recent months, although it is yet to show up in official data.
Deutsche argues that China has begun to move its forex reserves away from the pound and into other currencies, but because China has only recently started to report the composition of its reserves. “China only started to report allocations over that period may have masked a drastic slimming in their former pound overweight,” Winkler writes.
He continues (emphasis ours):
“In a model of China’s currency allocation we describe elsewhere, we estimate that the pound’s share has likely fallen from close to 10% into low single digits since early 2015 (chart 2), consistent with the PBoC transitioning from wealth to currency management. The pound may offer value but is increasingly irrelevant.”
Deutsche Bank’s charts are included below:
Sterling’s diminishing status as a reserve currency should not come as any great surprise. As early as March 2016, credit ratings agency Standard & Poor’s warned that the pound could lose its place as one of the world’s most important reserve currencies if Britain voted for Brexit.
“Sovereigns controlling a reserve currency benefit from extensive external and monetary flexibility, which supports government creditworthiness. A U.K. departure from the EU could put sterling’s reserve status at risk by deterring foreign direct investment and other capital inflows into the U.K,” S&P Global Ratings analyst Frank Gill wrote at the time.
As its stands, sterling is — alongside the US dollar, the Japanese yen, the Chinese yuan, and the euro — one of the five currencies that are part of the International Monetary Fund’s reserve basket. That means, generally speaking at least, that central banks around the world hold onto substantial amounts of the currency for the purposes of international trade.