UBS Morning Adviser

Despite the UK’s own fiscal challenges and the BoE’s current absence from the gilt market, there appears to be no let up in buyers for UK government securities. Downing Street is unlikely to worry too much about the composition of buyers as long as there is a marginal bid, but in an FX context, sterling should start to take notice of some subtle changes. Foreign investors are stepping back from the gilt market, and the UK’s capital account points to strong inflows into other sectors. However, in the absence of economic restructuring towards exports, to prevent any deterioration in the UK’s balance of payments, policies which could deter flows into the non-official sector must be avoided.