Follow up to what’s ahead for markets and volatility. The BOE so far outlined the new Sterling Monetary Framework. The first goal is to align Bank Rate with the overnight rate. That’s not new since the Fed implemented this program in 2008. The US as Market and world leader means all central banks follow naturally. So since 2008, we’ve seen a compression of interest rates to not only steer nations monies into small channels but compression rescues the interest rate to not trade or go negative. The BOE is calling its new Framework “Monetary Control” but its a Floor System seen for example in the US, Europe and other nations. Why Floor System term is due to the managing of Reserves into small channels. Call it steer, manage, force but the money is targeted and it can’t be stopped. The BOE traditionally “Averaged” Reserves but its still undecided if reserves will again :Average”.
If interest rates fall or trade outside the channel then the BOE issues Bank of England Bills in 1 week durations to drain reserves to force interest rates higher. If reserves and interest rates are controlled so then is GBP contained within small ranges. Central banks despise volatility especially in their exchange rates because month to month management of various exchange rate levels is quite extraordinary in terms of reserves and interest rates. This management system has been in development since the late 1990’s when overnight and Repo rates were first introduced by nations. Exchange rate ranges since year 2000 has compressed every year ever since by 500 pip trading days to today’s ? 100 pips. What’s interesting about this management system is we go against the higher money supplies, lower interest rate equations. The new system says money supplies higher or lower doesn’t matter any longer because the CB’s have interest rate controls.They have their Keynesian cake.
With introduction of the US Bank Rate and GBP channeling reserves, all nations will follow although Europe had this system in place eons ago. They are the masters at it and its been the model for other nations to follow. Again volatility will die further as time progresses. It will take a true expert to trade and make money trading currencies.Trading systems, indicators and math formulas must change. If the Reop rate nations like ZAR, NOK, SEK, TRY, RUB decide to introduce another interest rate then all currency markets will see much reduced volatility. As preparation to this new management system, CB’s began hiding their interest rates. Average Joe trader sees interest rates on a delay basis. Expert traders with money see up to the second releases. Big advantage. Stay tuned.
Brian Twomey, Inside the Currency Market, btwomey.com