EUR, GBP, Sonia Rate Curve

As the BOE rearranged its website, much changed yet much remained the same.

The first major change to affect interest and exchange rates is to hide the 3 month interest rate. The most important interest rate on the planet for 200 years to effect every market price is now hidden from public view. This is the same scenario as saying to market participants, we hid the gold and we won’t reveal the location. Certain central banks hide main interest rates to force market people to subscribe to a not needed and overpriced Bloomberg or Thomson Reuters.

The BOE methodology is to force Repo rates as trade vehicles rather than Sonia as the dominant interest rate. Traditionally, UK interest rate traders were forced to construct 2 separate interest rate curves in Repo and Sonia. By elimination of Sonia’s 1 week, 2 week and 1 month interest rate, Repo rates 1 week, 2 week and 1 month must replace the lost Sonia Rates. This move is smart for the BOE because past days when UK markets were volatile, traders had to factor or estimate to use Sonia or a Repo rate.

What becomes most vital for interest rate traders is rather than the BOE to show actual 3 month Sonia, 3 month Repo and 6 month Repo is to reveal the chart with the actual rates. The BOE on its own volition would never reveal this information.
The BOE today and over the past week for a medium term view protects the bottom side interest rate by 3 month Sonia and 6 month Repo at 0.44 and 0.445. Both rates should remain solid easily over the next 1 week to 2 weeks. Only a Brexit scenario would change both rates.

For the shorter term and for today’s perfect accuracy to trade GBP currency pairs, Sonia at 0.4615 and Overnight Repo at 0.46 protects interest and exchange rate bottoms.

The true expertise to trade interest and exchange rates is found in the new trade method of estimation. Estimation is forced upon traders against the new BOE methodologies. Yet estimation for certain central banks was always standard operating procedure. NZD and USD are most profound in estimations while the RBA rates are offered as is to view a few examples.
Estimation means to note the distance from 3 month Repo at 0.49 and 6 month Sonia at 0.585. This distance at 0.0950 is wide enough to encompass the area from the UK to NY. A GBP trader to use this distance in today’s trade would lost every penny and every Pfennig in their account.

Use 0.5137 and 0.5375 as insertions to cover the distance and then use 0.585 as the anchor to the end of the curve. Some traders to be smart and protect trades would possibly want to also insert 0.5018. For GBP traders in any GBP currency pair, 0.5018 is not required. Yet 0.5018 may require insertion to trade FTSE. The insertion depends on the financial instrument. UK interest rate traders however would also note to use 0.5018 requires a substitution. In this instance, replace 0.5018 against 0.475 and the trade will be just fine. The alternative is possibly replace 0.49 with 0.5018 once the overall 0.49 to 0.585 distance was covered.

For the longest term view, distance in Sonia must be covered from 0.585 to 0.775.

As I live everyday over the past 3 years inside Central bank interest rates, the BOE intent is to control an out of control exchange rate and at the same time coordinate UK distance to match USD. This means 0.125 vs 0.32. Tough job for the BOE.

 

The new methodologies forced GBP/USD ranges higher by 2 pips. This may seem minimal but its huge development. GBP/JPY ranges remain the same which informs USD Vs Non USD currency pairs are most traded yet the market struggles is the fight as USD Vs non USD as the dominant trading theme.

GBP/USD Break points today are located at 1.3854, 1.3897, 1.3916, 1.3938, 1.3960 and 1.3987. At 1.3987 is a range point and most important to the topside as a violation means GBP higher.

GBP achieves 1.3854 by a break at 1.3872 then 1.3854 and 1.3837.

EUR/USD Today break points 1.2247 then 1.2232, 1.2214 and 1.2201.

 

Brian Twomey

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