FxWirePro: BoE Monetary Policy Preview, GBP OTC Updates and Hedging Strategies

The Bank of England (Thu) at midday is likely to announce no change to Base Rate at 0.75%. There is no press conference after the policy announcement. The big surprise last month was that two MPC members, Michael Saunders and Jonathan Haskel, voted for an immediate rate cut.

It is not that long ago, to me it seems like yesterday, when BoE governor Mark Carney pretended that all that was required was for the Brexit risk to be off the agenda and then the BoE wold be able to happily continue its rate hike cycle. Nothing of the kind. A third member of the MPS might cave in today and demand an easing of monetary policy.

Admittedly, the Brexit risk is far from off the agenda. That is creating pressure. However, the realisation is increasingly taking hold amongst MPC members that even an island is not isolated from what the economy in the rest of the world is doing. The fact that the British PMI is in free fall is only partially due to the Brexit chaos. An increasing number of MPC members understand that.

We understand that it is difficult to admit one’s own mistakes. But waiting is no good. The British central bankers will have to admit sooner or later that their cautious attempt of a normalisation was a failure. That is not going to happen in one go today. But if a third member were to cave in today at least that would make it clear for everyone that this process is taking place. That would be bad for Sterling, already badly beaten about by the Prime Minister’s politics. But the MPC can probably increasingly put up with GBP weakness. For cyclical reasons of course, but also as that means that Brexit risks have been sufficiently priced in. The pound has given up its post-election gains on concerns about the potential for a new Brexit deadline at the end of 2020.

GBPAUD has been edging higher amid short-term corrections in the major uptrend as you could observe in the monthly plotting.

We advocate 3-Way Diagonal Options Spread as 1st hedging option.

Ratio: (Long 1: Long 1: Short 1) at spot reference: 1.9010 levels.

The execution: Initiate long in GBPAUD 2m at the money delta call, long 2M at the money delta put and simultaneously, Short theta in 2w (1.5%) out of the money put with positive theta or closer to zero.

Rationale: Contemplating IV skews, short-term and long-term trends that are well balanced on either side, we could expect both minor price dips in short-term and major uptrend remains intact.

The positively skewed 2m IVs stretched towards both OTM calls and OTM puts, we reckon that the Delta instruments are conducive to monitor directional risk so as to be aware that how much of option’s value would increase or diminish as the underlying market moves as this option tool measures the value of an option as the underlying spot FX moves.

Alternatively, hedging no.2, we advocated directional setup in our earlier post, shorts leg was expired, we wish to roll over shorts in GBPAUD futures contracts of January’19 delivery and simultaneously, we wish to uphold the long leg of December’19 deliveries. Thereby, the foreign traders, who are exposed GBPAUD receivables/payables, can arrest their FX exposures. The above options strategy with cost-effectiveness that could hedge regardless of the swings on either side. Courtesy: Commerzbank & Sentry