Sonia, UK’s guiding Overnight interest rate, historically since 1997 found its comfort level in the area between 5.00 – 6.00. Its ranged between 5.0 – 7.0 from 1997 – 2008. Sonia was not only far higher in past decades but averages were higher. When the 2008 crisis occurred, Sonia traded at 5.5838 then began the slow grinding down slide. In February 2009, Sonia achieved its historic levels at 0 point. Levels at 0 are first ever traded since 1963. Once 0.9 was achieved in February 2009, Sonia has been on a multi year downtrend to finally see more historic lows at 0.34 December 2015. To understand the economic damage the 2008 crisis caused to many nation’s economic fundamentals and exchange rates and the long lingering effects, interest rates is the view as Sonia and most nation’s interest rates remain literally on the floor. Worse is the many many years it will take for the BOE to yet again achieve its long term Sonia rate at 5.0.
Sonia’s monthly averages from 1 – 10 years are severely out of line and it explains why GBP pairs are and has been for the past year in such disarray. Among the majors, GBP/USD correlates 80% to GBP/JPY but remainder pairs either lost correlations or correlations are so low, its insignificant. Even the Carney Cross GBP/CAD fully lost its correlations to CAD.
Sonia’s monthly average ranges longer term are found between the 10 year average at 1.81 to the 3 year at 0.43. In between is found the 2 year at 0.44, 1 year at 0.4557 and 5 year at 0.4593. Then comes the 7 year at 0.4763. Sonia closed today at 0.4668 and trades shorter term between the 7 year average above at 0.4763 and 5 and 1 year averages at 0.4593 and 0.4557.
What dictates price movements are averages 1, 2 and 3 at 0.4557, 0.4408 and 0.4366. Any price rises sees Sonia overbought as is the present severely overbought condition at 0.4668. The 3 year for example at 0.4366 sees current 0.4668 at most overbought. Price extremes at the 1,2 and 3 year averages reveal slim chances for the 7 year at 0.4763 to break anytime soon. The point at 0.47 hasn’t been seen since 2008 and that point was seen in a downtrend.
Targets in all averages also reveal 0.47 won’t break. targets from 1 year to 10 include 0.4628, 0.4570, 0.4516, 0.4971 ( Not likely) and 0.3629. The 10 year targets negative 0.28 but would require a drop of the UK’s 0.50 rate to see that target. Possibly a positive Brexit vote would see such travesties. What is expected in GBP and Sonia is more of the same without any dramatic moves in either direction.
Brian Twomey, Inside the Currency Market, btwomey.com