This MPC meeting is going to be a humdinger and I'm completely torn over it
Usually when trading I can separate analysing an event with my head or my heart. That's often pretty easy to do but for this event I'm finding it tough. Let me try and give you my reasoning.
Brexit isn't a onetime thing. It's uncertainty that's going to go on and on. No one knows what the real effects will be. You just can't plan a simple path through it, and so we can only take what's coming as it happens.
My heart says that the BOE should act but not throw the kitchen sink at it this early. What we need right now is a calming and authoritative hand. If the BOE go blood and thunder is that really going to help? Is £50bn in QE going to calm the nerves of a business whose customer base or main supply chain is European? No, it won't. What will calm those nerves will be trade deals or negotiations that show that there won't be major changes needed to be able to carry on that trading. That can't come from the BOE, it has to come from the government and that will take time.
Does the domestic economy need big rate cuts and a QE bazooka? Again, I don't believe so. What the UK economy needs is measures that provide explicit help, not carpet bombing monetary policy. Uncertainty and fear can become self-fulfilling and the recent data has shown a lot of fear, and that could manifest itself in much deeper negativity than perhaps should happen. It will be that which causes a recession, or worse recession. The BOE and government need to show that they've got the backs of UK firms and households. A rate cut might seem the best way but its effects could be marginal for both, especially if it's not fully passed on via mortgage rates or borrowing costs.
Is Carney ready to unleash the big guns?
What would work better is targeted policy with both the BOE and Treasury working together. Things like new or extended funding for lending schemes, where borrowing costs and risk are reduced, cuts in corporate or income taxes and VAT, things that actually make an instant difference to people's pockets and companies finances, while sending a message to overseas firms that the UK provides a competitive place to trade. The message from the BOE and government needs to be strong so that it inspires confidence and stops firms and households from disappearing into their shells, which will affect all levels of the economy from spending to investment to jobs. A confident message will do much much more than any policy change could. But therein lies my dilemma.
Some members of the BOE seem to have been struck by the fear stick, the fear of seeing the economy crash. Take well known hawk Weale. His change in tone recently does not show an ounce of confidence from the man. Changing your mind is fine but it's how you convey that change that's important. Jumping out your hawk suit and straight into a dove suit does not inspire confidence.
It's an old saying regarding central banks but it's as true now as it's ever been. The BOE are between a rock and a hard place. They shouldn't be thinking about big bold action just over a month after the vote, when we have not even had the tip of the iceberg in terms of fallout. However, as the institution they are, they can neither sit on their hands and take the luxury of waiting before acting.
The sensible part of me says that they should think carefully and use policy to target parts of the economy rather than throw the kitchen sink at it. My trading head says they're likely to go down the sink route because that's exactly what they've touted. I'm still not entirely convinced a rate cut is coming either way.
There was a reason we kept rates at 0.50% and not lower over the crisis, and that was to hold some margin for any future big shocks. Maybe the reason was that they had one eye on the Brexit vote all along? Even so, it would make sense to keep a rate cut in the back pocket in case the economy does take a real nose dive further down the line, or in case it doesn't. Trying to front run the Brexit possibilities now is like shooting in the dark.
I think we can safely say that there is action coming in one form of another. If that's a given, then we'll have to judge the impact of what we get. If it's the kitchen sink, then the pound will sell off. If it comes with targeted measures from the Treasury too, the reaction will potentially be larger. Unless we get something silly like a 50bp rate cut, talk of negative rates and £200bn per month QE, I'm going to look to hoover up any dip because the confidence effect will outweigh the easing effect over the longer term.
Have faith in the Old Lady
Given what we know about the markets expectation and its positioning, it's going to need something big to keep that momentum in place and keep the pound heading lower. I don't believe that we'll get that from Carney. We may get action that sends the pound lower by 1,2 or 3oo pips over the course of a day or two but it won't last. This will be the last gift for shorts and the time to go long for the long run, and that's what I'm planning to do. This won't be a blind or blinkered trade, I'll set myself up like I do for every longer-term trade. I'll find my levels, have my assessment points and scale in. If I'm wrong about this or if the economy does crater, I'll have my stops in place and I'll know my risk, just like any other trade. Right or wrong I'll be prepared and that's the minimum we should have when trading.
Look out below?
One way or another this event is likely to be very volatile. Just because the pound has shown some strength recently doesn't mean it won't undo all that strength as we head closer to the announcement. It hasn't taken much to throw the quid around by a hundred pips in either direction so be prepared. It will be messy, it will be dangerous, but at the end of we should have a clearer outline of the next short-term direction for the pound, be it up or down.
