So we’re back at BOE day again. Seems to have come round very quickly since we were last here and Mr. Carney slightly disappointed the market by leaving everything unchanged.
However, we do know that the July and August meetings were to be taken as a package. This was refered to at the outset and in conjunction with his comments of “easing will likely be required over the summer” the world and his wife are expecting action from the BOE today.
I shall avoid my political and economic rants for another day and focus on expectation and what to look out for, for once!
So we expect the following:
- Fully pricing in a 25bp rate cut
- A consensus that the QE programe will be expanded by £30BN
- Tweaks to the Funding for Lending Scheme (FLS)
Interestingly though, the latest set of data hasn’t been as bad as some may have been expecting. Yes the PMI data reflected a touch of weakness however the GDP data came in slightly better at 0.6% in the second quarter. I expect this is a total moot point though. Something is a given for sure.
In terms of the banks all are looking for that rate cut and in terms of QE Barclays seem to be at the top end with an expansion programme of £100-£150BN with Goldmans at £100BN, CITI and a few others at £75BN and MS at £50BN. Some do not look for an increase in QE giving, in my opinion, a read nearer £50BN as consensus.
But how to trade it?
We currently stand at 1.33 in the cable having been fairly range bound between 1.31 and 1.33 for a while now. The last 2 days have seen us pop higher to just shy of 1.34. And let us not forget the Head and Shoulders we have been developing since BREXIT with a break of 1.3420 triggering a wave up. See my Facebook post under FutexLive for pictures. As we are pricing in a rate cut and QE, here we need to really look at guidance as well as expectation.
Clearly, should nothing happen then expect a rally in cable. If a cut comes this has been priced in. We need to look for further guidance if trading the cable. Was it consensus? Is this the start of a new cycle of deeper cuts? My opinion is that extra QE will have a muted impact on cable and the better trade if trading the QE announcement will be in the Gilts (or follow the Gilts and trade Bunds) and the FTSE (or European equity markets). The cable could be brutally choppy.
So, to sum up.
No rate cut, watch cable rally. Gilts sell off. Equities sell off. Unlikely scenario though!
Rate cut with in line QE (say between £30BN and £50BN) Cable chops and takes direction from forward guidance. Gilts small up move but choppy, equities small up move.
Rate cut, more QE, deeper cycle of moves. Cable sells off, Gilts rally, equities rally.
That’s how I see it. Others may differ but that’s what makes a market. As ever the choice of trade is only ever yours to take.