FxWirePro: Deploy GBP FX derivatives trades as BoE qualms on cyclical effects of Brexit transition, SNB to relax with expansionary monetary policy

According to Bank of England Governor, Mark Carney, even though he hopes that the proposal Theresa May has negotiated will be accepted the risk of a chaotic UK exit from the EU is “uncomfortably high”, it seems that he himself is in a highly uncomfortable situation. Conclusively, the Bank of England’s (BoE) hands are tied until March, as far as its monetary policy is concerned. Of course, there is no urgent need to take action at present. However, 29thMarch is the key date for the BoE’s reaction function which it already explained in its last rate meeting in early November, and possible scenarios would be: 

1) Due to the possible economic effects, there will probably not be any key rate hikes foreseeable but rather rate cuts in case of a no deal Brexit even if inflation overshoots. 

2) Unless of course the collapse of Sterling due to a disorderly exit has to be prevented, in that case the BoE would even hike its key rate. Also in that case, there was going to be a massive supply shock of unexpected dimensions with a dramatic rise in inflation. 

3) If an amicable agreement is reached the BoE expects demand to rise, that in turn, would suggest that the key rate might be hiked even more quickly than currently planned under this scenario. 

Well, at present, the BoE cannot afford to do more than it hopes for an agreement and nonetheless, work out its reaction function for a worst-case scenario. And market participants do not have much of an alternative either, even if hedging against the worst case has become much more expensive since early November. 

On the flip side, the franc continues to have little of an independent existence. That is hardly surprising as signals from the SNB pointing towards a normalisation of monetary policy have been non-existent. It is not going to take action ahead of the ECB so as not to risk unwanted CHF appreciation.

The members of the SNB council continue to point out the fact that the currently expansionary monetary policy remains appropriate. The last person to do so was Andrea Maechler a couple of days ago. The franc remains highly valued for the SNB so that negative interest rates are indispensable. Moreover, inflation will remain at low levels according to its expectations. Also, a reduction of the SNB balance sheet is not yet appropriate according to Maechler. That means due to a lack of monetary policy momentum the franc is not going to develop an independent existence but will remain at the mercy of external events such as developments in Italy, Brexit or trade conflicts in its role as safe haven. Courtesy: Commerzbank

Trade tips: We activated a GBP long vs EUR in options on Brexit developments in the recent past. Additionally, we advocate buying 6M GBPCHF - GBPUSD vol spread, equal vega.

Currency Strength Index: FxWirePro's hourly GBP spot index is flashing at 15 levels (which is mildly bullish), hourly USD spot index was at -21 (mildly bearish), and CHF is at 93 (bullish) while articulating at (12:22 GMT). 

For more details on the index, please refer below weblink: http://www.fxwirepro.com/currencyindex