Forex Institutional Research: Credit Suisse GBP Ahead Of BoE
Key quotes from the Credit Suisse GBP report:
GBP Ahead of BoE
This Thursday’s long-awaited Bank of England meeting will be its first ‘Super Thursday’ since the EU referendum. The interest rate and QE decision, August minutes and Inflation Report’s forecasts will be released simultaneously at 12:45 LON – followed by a press conference at 13:30. Unfortunately, we believe it may be more of a ‘Duper Thursday’ than the ‘Super Thursday’ that many seem to be hoping for.
The MPC’s July minutes had already indicated “an immediate loosening of monetary policy, to be supplemented by a package of additional measures in August”. Since then we believe easing expectations have run rather high in the market, and short GBP positioning is a factor that could bias GBPUSD higher rather than lower. As such, we see better risk/reward playing for a disappointment rally GBPUSD than for a sharp move lower after the BOE.
We believe this for the following reasons:
■ The bar for the BOE to ‘deliver’ seems high. This is most visible in the way UK assets outside of FX have rallied over the last fortnight.
■ The UK OIS market shows a 25bp August rate cut is now taken as a given.
■ Anticipation for asset purchases has pushed UK 10y yields yet another leg lower this fortnight, while UK corporate bond indices have rallied significantly over July. It is only in the last two days that UK fixed income markets have retraced some of these gains, as anxiety about a BOE disappointment has grown.
■ Among other factors, the rally in UK equity markets over the last fortnight might be linked to hopes for a dovish BOE and a weaker resulting exchange rate. This seems to be certainly one reason that could explain why UK-orientated equity indices like the FTSE250 have been so well supported, despite very weak UK economic data and a range-bound pound.
■ Even economists’ forecasts for this meeting seem bold. Around half now expect QE to be announced as soon as this meeting, compared to just 3 of 43 for the July meeting. Potential corporate bond buying and further Funding for Lending has already gathered traction.
■ The only major aspect of pricing in other asset markets that seems modest to expectations for further rate cuts. OIS imply a second cut to 0% is not priced even by late 2017. However we believe this may even reflect the fact that most market participants expect the BOE to utilize unconventional tools like QE when rates reach 0.25%.
Positioning suggests potent upside risks for GBPUSD. CFTC speculative positioning shows GBP shorts have extended further in July while longs have fallen. The resulting 57% net short position is by far the most stretched in G10 and in recent GBP history. Indeed we believe such short positioning is already one of the reasons why the pound has stayed so range bound over the last fortnight – despite multiple shocker data points that have undershot even our own economist’s bearish expectations. Positioning may also have prevented the pound weakening in the lead up to this meeting; which is typically the tendency of most currencies before major QE announcements (e.g., JPY in Jul 2016, EUR in Dec 2015, EUR in Jan 2015).
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