BoE Asset Purchase and Interest Rate Non-News

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Liquid validity

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Looks like EU is done till 3 with ISM PMI,
unless someone in G20 / ECB drops a brainfart...
 

Purple Brain

Experienced member
1,613 179
Well, there's a certain logic at work here. Firstly, spot is affected by the market's expectations of future carry. This carry is affected by the expectations of where interest rates will be in the future. So what you have observed this morning was a move in spot that was driven by the repricing of future interest rates (as manifested by the move in short sterling futures). It's really as simple as that.
You have explained it in a way that makes it appear simple which is greatly appreciated. What is lost on me is why future interest rates were repriced based on nothing [obvious] changing. My guess is that there is quite a lot which is not obvious to me, but glaringly so to pros such as yourself.

I get a sense this comes back to a point I was struggling to make earlier this week in that I felt we are all in the business of trading expectations rather than the physical underlying as it is at any current point in time.

Martin, your explanations much appreciated. Thanks for taking the time.
 

Martinghoul

Senior member
2,690 276
You have explained it in a way that makes it appear simple which is greatly appreciated. What is lost on me is why future interest rates were repriced based on nothing [obvious] changing. My guess is that there is quite a lot which is not obvious to me, but glaringly so to pros such as yourself.

I get a sense this comes back to a point I was struggling to make earlier this week in that I felt we are all in the business of trading expectations rather than the physical underlying as it is at any current point in time.

Martin, your explanations much appreciated. Thanks for taking the time.
No problem, I am happy to help.

Indeed, you're right, what has been happening recently in the UK rates mkt is a little esoteric and hard to understand outside of context. Specifically, the important thing to remember is that the BoE released an unscheduled statement (it's a relatively rare event) after the July MPC meeting, the first one that Carney chaired. So Carney came in with a bang. The wording of the statement was something along the lines of "implied rise in the expected future path of rates was not warranted by the recent developments in the domestic economy". That was the signal why rates (and currency) should reprice lower, which they did after Carney subsequently introduced fwd guidance. Since that time, however, "developments in the domestic economy" have gone absolutely gangbusters and, all of a sudden, Carney has stopped talking about the "unwarranted implied future path of rates".

All of this has really been very painful for some people who positioned themselves for lower rates after the first statement. Some of these people who were still clinging on to their "rates lower for longer" positions were hoping that there will be a statement out of the BoE today, which would repeat the "unwarranted rise" comment. When the BoE didn't release any statement, these people got washed out, which triggered stops and moved implied mkt rates sharply higher. The sharp spike in the currency was just a result of the move in rates.
 
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Purple Brain

Experienced member
1,613 179
What a stunningly useful response. There are we retail traders piddling around with nothing more pressing than price levels and lines to concern ourselves with, while the reality of the wider trading world totally dwarfs our little universe with its complexity and richness.

How would anybody such as myself as an individual retail trader ever get into the flow of the fundamental data and human factors such as you have explained to us here? The awareness of who the players are and who's feeling the pain and under what circumstances and the likely result of of implied and unmet expectations. Is it possible other than by working in a professional environment?

To be honest, even if I had been aware of the issues you describe I wouldn't have known how to trade it and I wasn't in a gbp trade at the time, but I certainly would have given the event far more attention than I did based on my erroneous determination that nothing likely to change would mean no major move in spot sterling.

Thanks again for your expansive reply.
 
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Martinghoul

Senior member
2,690 276
What a stunningly useful response. There are we retail traders piddling around with nothing more pressing than price levels and lines to concern ourselves with, while the reality of the wider trading world totally dwarfs our little universe with its complexity and richness.

How would anybody such as myself as an individual retail trader ever get into the flow of the fundamental data and human factors such as you have explained to us here? The awareness of who the players are and who's feeling the pain and under what circumstances and the likely result of of implied and unmet expectations. Is it possible other than by working in a professional environment?

To be honest, even if I had been aware of the issues you describe I wouldn't have known how to trade it and I wasn't in a gbp trade at the time, but I certainly would have given the event far more attention than I did based on my erroneous determination that nothing likely to change would mean no major move in spot sterling.

Thanks again for your expansive reply.
Well, I don't think it's necessarily a function of whether you're retail or not. The point, I think, is that the ccy mkts that you look at are often driven by the rates mkts (especially now, during this period of unprecedented macro volatility). That means that, if you're involved in a trade like GBPUSD, it can go against you as a result of stuff that is happening in a different mkt that you're not necessarily following. Unfortunately, that is our current reality that we all have to deal with.

I, for one, have no idea how to trade it. I just sort of grin and bear it (or stop out, if that's called for). Ultimately, IMHO, it just comes with the territory. If you're trading, drawdowns are a reality and there's really nothing you can do about it.
 
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Liquid validity

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I, for one, have no idea how to trade it. I just sort of grin and bear it (or stop out, if that's called for). Ultimately, IMHO, it just comes with the territory. If you're trading, drawdowns are a reality and there's really nothing you can do about it.
Completely agree.

That's as refreshingly honest as it is comforting - especially after a day like today.
Its the same for everyone really.
Being better informed certainly does no harm at all.
As MG said though, it basically boils down to win some / lose some.

When it comes down to it, the only surefire known future event is
your own risk - its the only thing you have complete control over
(tech issues / hideous unprecedented slippage outliers aside).
Even with the above mentioned outliers, if your risk is
correct, you should be accounting for them as a worse case scenario.
 
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