Nothing Has Changed to Expect Changes in BOE Monetary Policy - Hedge Weaker Sterling Against Loonie

Nothing Has Changed to Expect Changes in BOE Monetary Policy - Hedge Weaker Sterling Against Loonie

11 May 2016, 12:29
Roberto Jacobs

Nothing Has Changed to Expect Changes in BOE Monetary Policy - Hedge Weaker Sterling Again

In UK, the central bank maintained an unchanged interest rate at 0.50% in previous monetary policy, all MPC members unanimously voted for this decision.

We expect a swathe of downward revisions to Committee forecasts in May’s Inflation Report, notably to domestic growth, given recent weaker-than-expected data.

UK’s preliminary GDP has also been reduced from previous 0.6% to 0.4% and PMIs of all segments (manufacturing, construction and service) have produced disappointing figures and indicates non-conducive business conditions in UK.

Further, we believe the MPC is likely to look through any weakness in these data, putting it down to rising EU referendum uncertainties ahead. Also, the Committee’s economic forecasts will be updated in the May 2016 Inflation Report.

Hence, no change is expected in the Bank Rate and the APF decision at the May BoE’s MPC meeting prior to the EU referendum result to be announced on 24 June as for the tone of the minutes.

We expect downward revisions to UK economic growth forecasts on the back of weaker-than-anticipated data since the February 2016 Inflation Report, and as a consequence we expect downward revisions to global growth forecasts.

Nobody expects the Bank of England (BoE) to change its monetary policy this week in view of the high uncertainty ahead of the Brexit referendum in June.

The BoE will not want to put any additional strain on the market and the British economy by allowing any speculation about an adjustment of its monetary policy.

On the flip side, in fact the BoC might have lowered its outlook – thus no doubt causing speculation about a further easing of monetary policy.

The stronger CAD can easily be explained with the rise of the oil price since the beginning of the year, the more optimistic Bank of Canada (BoC).

Technically, in just last nine and half months, GBPCAD has declined from the highs of 2.0972 to the current 1.8650 levels, (i.e. almost 11.07%), we think this itself is suffice to be convinced of major downtrend. The pair could not even test resistance at 1.8832. Despite the attempts of upswings the current prices have well below 21DMA, the downtrend seems intact as the both leading and lagging indicators converge the ongoing slumps.

Due to above mentioned reasons, we anticipate and advocate - GBP/CAD's further slumps and hence arrest downside risks with bearish derivative instruments.

We come up with suitable hedging strategies in our upcoming posts. Keep watching for more readings on hedging tools.

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