The Bank of England will be glued to its market screens around the clock to watch out for signs of strain as Brexit enters what may be its final act.
With Boris Johnson’s exit deal facing a crunch vote in Parliament today, the BoE’s foreign exchange desk will be manned tomorrow night when Asian markets open to check all is functioning smoothly, said Dave Ramsden, the bank’s deputy governor responsible for markets.
Sterling has been buffeted by Brexit developments since long before the 2016 referendum, and the past week has been no different. A rally drove the pound up at the fastest pace since 1985 mostly evaporating after Johnson’s Northern Irish allies said they wouldn’t back an agreement reached with Brussels this week.
More volatility is likely, with Barclays predicting the currency could move 3% in either direction, depending on the outcome of the vote. The start of a week’s trading is also a particularly vulnerable time for markets because low liquidity can lead to outsized moves and uncertain pricing.
“In terms of our monitoring activities, that will begin on Sunday evening when Asian markets open, and that will be the market on which our forex desk will be focused,” Ramsden said in a Bloomberg interview on Thursday.
“If something happens, then we’ll get told about it through the night. Otherwise we’ll come in on Monday and get updates on movements, but also market functioning.”
Sterling has been susceptible to such moves in recent years, most famously in October 2016’s flash crash that saw it drop to as low as $1.1841, the weakest level since 1985.
The BoE will be particularly “on the lookout for any liquidity thinness,” he said.
As well as monitoring markets, the BoE has also kept in close contact with banks amid the Brexit uncertainty, which has seen the lenders step up liquidity planning and cancel leave for traders in the run up to the October 31 deadline. It’s told Britain’s biggest lenders to trim their exposure to currency swings and ensure they could withstand being locked out of foreign exchange markets for 14 trading days.
“As part of our heightened state of readiness and monitoring, we require of the institutions we supervise that they’re up at this 14-day level,” Ramsden said. “We’ve had to maintain this for a longer period because unlike the referendum, it’s an extended process.”
Banks will be stress tested on liquidity next year, he said.
Brexit also prompted the BoE to offer both euro and dollar facilities for the first time this year, and step up the frequency of its Indexed Long-Term Repo operations. This week it published a revamped guide to its market operations, aimed at boosting understanding of its offerings. Still, Ramsden isn’t relaxing.
“In terms of our operations and our state of readiness, I would never say we have absolutely done everything that we can,” he said. “Something might happen that we haven’t seen coming.”
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