UK banks recorded an increase of £6.6 billion in sterling-denominated deposits from overseas residents in July, according to data published on August 30 by the Bank of England.
In the run-up to Britain’s June 23 vote on its membership of the European Union, a negative £78 billion change in “external and foreign currency flows” in the six months to March was held as an example of how the vote was spurring foreigners and Brits alike to pull money out of sterling.
The data measures UK residents’ foreign currency deposits with British banks and overseas residents’ sterling deposits in the UK.
So, a negative figure indicates a decline in sterling deposits held by investors abroad or a rise in foreign currency deposits by UK investors, or both.
Reacting to those numbers, former Treasury chief George Osborne warned then of a “massive capital outflow” from UK assets if the country voted to leave.
That outflow, though, appears to have abated. A positive £124 million figure was recorded in the six months to July, signaling that foreign investors haven’t abandoned their sterling deposits, and British investors aren’t diving for foreign currency deposits.
The shift before the vote wasn’t capital flight in the traditional sense, since investors didn’t flee the banking system as a whole. The move from sterling to other currencies suggests investors were protecting themselves against a sharp move in the pound.
In retrospect, that was a pretty good idea. The pound dropped from $ 1.50 just after the vote was announced to below $ 1.28 in early July.
But if bank customers haven’t continued their move out of sterling assets, does that suggest that they aren’t so worried that the pound will continue to fall?
In the US, speculative investors currently have the largest short sterling position since at least 1988, according to US Commodity Futures Trading Commission data.
The view of most analysts is also that sterling has further to drop. Deutsche Bank believes that the pound will fall to $ 1.15 by the end of the year, while Goldman Sachs suggests it will hit $ 1.20 in the next three months.
The Bank of England figures are volatile and it’s early days in looking at the effects of Brexit. But even as analysts and speculators predict further falls in the pound, the numbers suggest that, so far, UK bank clients aren’t.
This story was first published by The Wall Street Journal’s MoneyBeat blog