G10 and Sonia Reforms: Levels, Ranges, Targets




UK’s main interest rate termed Sonia was introduced in 1996/1997 as an average calculated rate. The new reforms proposes to recalculate Sonia as a Volume Weighted Median and the same as the Fed’s changes to the Fed Funds rate March 2016. View the Fed’s Dot Plot for a chart. The volume transacted is then calculated to a Median price and its the trade able interest rate.
The difference between the average and Median price is 2 basis points. Most affected is Overnight Index Swap rates or OIS. Subtract 3 month Libor from Sonia rates and an OIS rate is derived.

Monday August 7th, GBP OIS traded 0.0692, Friday August 4, GBP OIS rates traded at 0.0133, August 1, OIS traded 0.0739 and January 3 OIS traded at 0.1525. Corresponding USD on August 7 traded 0.1513, August 4th traded 1.04, August 1 OIS traded 0.1505 and January 3, OIS traded 0.3387.

Most basic to OIS are borrow and lend rates for banks. Current OIS rates are cheap and extraordinarily low. See AUG 7 GBP Vs USD OIS at 0.0692 Vs 0.1513, a spread of 0.0821.  Low rates overall informs a proper functioning bank system. Should stress or crashes hit markets then the OIS spread skyrockets. USD OIS in 2008 for example jumped to 3.65 and 5.0 for the UK. The narrower the spread, the better are market conditions to borrow and lend as monies exist to borrow and lend. When OIS is high, the cost to borrow and lend is to high. The worst of OIS is money shortages may exit. US dollars might be to costly to purchase.

As OIS rates jumped in 2008, Central banks had no choice except to drop interest rates to bring the banking system back to borrow and lend normalcy by lower OIS rates. Market stress and crashes are threats to the banking system. Stimulus remains the questionable venture as banking systems became flooded with money and allowed OIS rates and overnight rates to remain extraordinarily low over years. Banking systems learned how to operate within OIS rates in far smaller corridors today as opposed to the historic wide channels from previous decades.

Note for example Sonia’s 2 basis point proposed changes to today’s overall UK’s 20 basis point interest rate corridor.. At 20 basis points is quite high and normally runs about 10 to 15 basis points wide. Missing links exist to today’s GBP interest rates and it will affect GBP.

For further interest read Guy Debelle’s speech at the RBA’s on the Basis. See the RBNZ papers as the RBNZ researchers write with an understandable and easily explainable style to market concepts. Ironically, it comes naturally to RBNZ writers.

GBP/USD break points today remains 1.2909 and 1.2938. Long time friends and followers understand break points are 200 pip moves thereabouts.

GBP/USD today msut breaks are located at 1.3010 and 1.3076. A break of 1.3076 sees next 1.3087 and 1.3108 to be lucky. Below 1.3010, then 1.2999 and 1.2993 becomes next target points. My advice as GBP is missing its triggers is leave it alone.

EUR/USD Break points for today 1.1770 or 1.1843 then sees 1.1777 and 1.1772 below or 1.1910 above.

EUR/JPY rough spots above at 130.93, 131.01 and 131.17.

USD/JPY break points are located at 110.46 or 110.73.


Brian Twomey


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