Sonia: Levels, Ranges, Targets

Upon the Brexit announcement, Sonia in monthly average terms dropped from 0.4577 to 0.2478. At the August 2008 crisis, Sonia dropped from 0.8973 to 0.5224. Sonia’s overall slide began in Oct 2007 at 5.7751 and since, Sonia never looked back as it trades today at 0.2141. Since Sonia’s 1997 introduction, it traded lifetime highs at 8.60 in April 1998 but only for 1 day.
The sidebar issue is at Sonia 0.89 during 2008 crisis time, GBP/USD traded 1.98 and it appears the exchange rate was deeply misaligned to the interest rate. OCR and AUD/USD suffer the same consequences today. Against Sonia reforms, GBP appears, appears aligned correctly. Libor as the overall driver to GBP in 2008 was possibly misaligned.

Sonia currently trades between the 1 and 2 year monthly averages from 0.2119 to 0.3179. Next averages above at the 3, 4 and 5 year monthly comes 0.3613, 0.3772 and 0.3876.

At 0.30 bumps against current UK CD rates. At present 0.30 is down from July 2016 at 0.35. How vital is the drop to 0.30 is 0.35 CD’s traded from August 2016 to July 2016 then came the current drop at 0.30 since July 2016.

Below 0.2119 then daily Sonia must be viewed. For the past week, daily Sonia traded 0.2100 to 0.2400.

Sonia targets from monthly averages 1 to 10 years and every successive month range from 0.1954 at the 2 year to 0.3336 at the 8 year monthly average. Sonia is most oversold from the 6, 7 and 8 year monthly averages.

Why longer dated averages is current 4th Quadrant since 2008 runs 12.5 years with a mid point at 6.25. The point at 6.25 is a cycle, period average and overall driver to current Sonia as well as all market prices. The 6, 7 and 8 year averages are located at 0.4048, 0.4214 and 0.4277.

The 10 year is located at 0.9876 and is overall am irrelevant average as well as the 9 year at 0.5108.

Inside Sonia’s price is a Signal and currently far far to high. What drives far to high is new overnight rate reforms hold rates in tiny ranges. The price is contained and for now.

If an implosion ever hits markets, overnight rates will travel to exhorbitant levels. Its a location dilemma that drives the signal as overnight rates lack ability to trade at their proper levels. If a signal is to high, it means inside current price is nothing as the price just wanders and is completely lost. It needs variation in order to relieve the high signal conundrum. All overnight rates in every nation suffer the same effects. But other maturities as well are under the same dilemma. Interest rates are misplaced. If interest rates are misplaced then exchange rates and all market prices are misaligned. The signal dilemma is a constant from 1 to 10 year averages.

Sonia under current BOE guidance is undergoing  a massive 3 year reform and completes April 2018. Can the BOE raise or even lower Bank rate under such a reform. My answer is no way as far to much is invested to see reform end dates.
What is expected from Sonia is more of the same dead trading ranges.

Brian Twomey

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