SHORT GBPUSD & FTSE RALLIES: GOV M.C SPEECH & BOE FSR HIGHLIGHTS

1. *Id say a 6/10 dovish reaction by markets, GBP falling across the board & FTSE gaining. Carney seems contempt with a lower GBP and is happy to continue talking the currency lower in an attempt to use the exchange rate mechanism as a leading instrument to buoy UK economic stability (GDP, CPI, Unemp) against the potential Brexit backdrop; thus I continue my view of shorting GBP on pullbacks (my near term <1.30 is imminent, with August end 1.25xx in sight) and FTSE on rallies near 6600.

2. I continue to be surprised by the lack of coverage/ rhetoric from media in general and the BOE/ Govs regarding the UK Political situation regarding Brexit e.g. failure to sign the Article 50, PM Cameron Resignation in Oct, 70% chance Brexit happens in 2017 vs 2016.

Govenor Mark Carney Speech Highlights:

- BOE Carney: Have A Clear Plan, Putting It In Place, And It's Working
- BOE Carney: Will Take Whatever Action Needed to Support Stability
- BOE Carney: GBP Fall Was "Necessary" To Support Needed Economic Adjustments
- BOE Carney: Continues to See "A Material Slowing" in Economy Despite GBP Fall
- BOE Carney: Evidence Since Brexit Vote Consistent With Expectation of Slowdown
- BOE Carney: Want to Ensure No Question About Availability of Credit
- BOE Carney: UK Banks Have More Capital Than They Need
- BOE Carney: UK Banks Can Be "Part of the Solution, Not Part of the Problem"
- BOE Carney: "Extremely Important" That Policy Decisions Well Targeted
- BOE Carney: Negative Rates Have Potentially Counterproductive Consequences
- BOE Carney: Commercial Property Not A Big Issue for UK Banks
- BOE Carney: General Sense of Heightened Risk Aversion in Global Markets
- BOE Carney: Have Wide Range of Tools If Monetary Policy Easing Required

Financial Stability Report highlights:

- BOE Lowers Countercyclical Capital Buffer for UK Exposures to Zero from 0.5%
- BOE: Expects to Maintain CCB at Zero Until "At Least" June 2017
- BOE Move is First Easing of Policy Following Brexit Vote
- BOE: Decision Will Raise Banks' Lending Capacity by GBP150 Billion
- BOE: Decision Will Lower Regulatory Capital Buffers by GBP5.7 Billion
- BOE "Strongly Expects" Banks Will Continue to Support Real Economy
- BOE "Strongly Expects" Banks Will Continue to Support Real Economy
- BOE: Ready to Take "Any Further Actions" Needed to Support Financial Stability
- BOE: Stability of Funding Costs Should Reduce Pressure to Tighten Lending
- BOE Sees Risk of Decline in Capital Inflows Following Brexit Vote
- BOE: Persistent Fall in Inflows Would Put "Further Downward Pressure" on GBP
- BOE: Prolonged Period of Brexit Uncertainty Could Weaken Eurozone, Global Economies

Comment:

- Also, its worth adding, in terms of Future expectations of the BOE's Bank Rate (0.5%), the current Option-Implied Short Sterling Interest Rate PDF, have recently aggressively flattened in the front end (3m), with a 25bps cut at 3-Months now pricing currently at 33% vs 16% on 29th July and 0% a month ago (1st June).
-- Back-end Short Sterling Implied probability has also restarted selling off, despite making a brief recovery, with the market currently pricing a 12-month 25bps cut at 47% vs 40% on 29th and 18% a month ago (1st June).
--- 6m's have shown stability in the tail-end probabilities but have nonetheless failed to recover (unlike 3m/12m), even in comparison to the implied prob of the Initial Brexit vote - when they first started pricing a >50bps cut, with the 6m short sterling implied probability of a 50bps cut currently at 10% vs 8.6%% on the 29th and 0% 1 month ago (June 1st). With June 24th (when rates sold off the most) Pricing at 14%.

This aggressive steepening of 3m 25bps cut probabilities i believe has arisen as speculation of a BOE cut in august has intensified, on the back of global central bank dovishness and Carney's seemingly unfaded willingness to support the UK no matter what (unlike rhetoric from ECB Draghi).
Also, given the untouched stability of the UK's CB rate environment of the last 7 years (bank rate unchanged since 2009), i think speculators are prepared to take these dovish signs as "gospel", given that Carney hasn't failed to deliver before - albeit he hasn't had to - but in contrast to investor confidence in other leaders such as Kuroda BOJ and Draghi ECB, Carney has been able to compound the effect of his rhetoric due to the default of other key CB leaders to deliver upon their words - as they are yet to be let down by Carney.

Comment:

PS it will be interesting to see the PDFs posted tomorrow, so we will be able to see the impact Carneys Speech/ the FSR had on rate expectations - will rates continue to flatten and tail-end probabilities steepen? Or has the Market priced Carney "The Deliverer" enough...