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In addition to the package of measures announced at the last week’s unscheduled policy meeting, the Bank of England’s Monetary Policy Committee has sanctioned further easing measures at an emergency meeting. These included:
A further reduction in UK Bank Rate, this time by 15bp taking it to an all-time low of 0.1% - the Bank of England’s view of the effective lower bound.
We have disagreed with the market’s belief that UK fiscal exceptionalism would help to differentiate the UK economy and hence support GBP during a global downturn that should otherwise undermine a big current account deficit currency such as GBP.
The budget this week certainly delivered a decent dose of fiscal stimulus – our economists expect the boost to GDP to be 0.7% for this year (of which 0.3% from virus-related measures) and 0.4% next year – but the BoE accompanied this move with a front-loaded 50bp cut on rates.
As a result of both Brexit and now the virus, the UK has transitioned from a high-growth, high-yield country to a very low-growth, almost no yield country that still needs to finance a sizeable current account position (and of course prevent existing foreign capital from being repatriated).
Unfortunately we suspect GBP is vulnerable to a sense that the virus crisis in the UK is running a few weeks behind Italy and Spain which could expose GBP to increasing pressure in coming weeks. Unlike the EUR in recent weeks, the currency can expect to derive no support from an unwind of either a short investor base or a purge of locally-funded carry trades. If anything the market continues to be modestly long GBP.
Activated shorts in GBPUSD at 1.2399 levels.
Contemplating prevailing spot levels, tunnel spreads are advocated on trading grounds with upper strikes at 1.1792 level and lower strikes at 1.1409 levels.
Alternatively, activate shorts in GBPUSD futures contracts of April’20 deliveries with an objective of arresting potential slumps.
Short GBPCHF from 1.2575 on in mid-January, marked at +5.16%. stop raised to 1.21. Courtesy: JPM
