Investment Clock insights

Post-referendum improvement in UK current account


Ian Kernohan 

3 April 2017

The large drop in the UK’s  current account deficit to 2.4% in Q4 2016 (see chart) was driven by an improvement in the trade balance, and the primary income balance.  With sterling significantly lower than a year ago, a rise in the value of overseas income in sterling terms has boosted the primary income balance, which has been the major reason why the current account deficit ballooned in recent years.

Although a widening current account balance has often been cited as a reason to expect weaker sterling, there is actually little statistical relationship between movements in the current account and movements in currencies, at least over the short term.  Instead, currencies tend to be dominated by relative central bank policy moves.  By pushing  sterling down post-referendum, the market has been trying to price in risk that the UK does not strike a “good” deal with the EU, and UK trade is disrupted.  The resolution to this issue will not be apparent for some time, and on balance we think Brexit uncertainty is not supportive for Cable (British pound relative to US dollar) in particular, at a time when the US Federal Reserve is raising interest rates and the Bank of England remain resolutely on hold.

Although a widening current account balance has often been cited as a reason to expect weaker sterling, there is actually little statistical relationship between movements in the current account and movements in currencies, at least over the short term. Instead, currencies tend to be dominated by relative central bank policy moves.  By pushing sterling down post-referendum, the market has been trying to price in risk that the UK does not strike a “good” deal with the EU, and UK trade is disrupted. The resolution to this issue will not be apparent for some time, and on balance we think Brexit uncertainty is not supportive for Cable (British pound relative to US dollar) in particular, at a time when the US Federal Reserve is raising interest rates and the Bank of England remain resolutely on hold.

The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. The views expressed are the author’s own and do not constitute investment advice.