Short Sterling – December 2010

Nicole Elliott from Mizuho Corporate Bank at 02/17/10

Comment: The UK yield curve is terribly steep as benchmark ten-year Gilt yields back up over 4.00%. Meanwhile Short Sterling calendar spreads continue to narrow (and have further to go, potentially moving back to the very long term mean of 18 for contract1/contract4) as glib assumptions on global economic recovery are reviewed. The money market exists in theory only as cash just isn’t changing hands. Futures contracts, despite being very overbought, have rallied further and faster than we had pencilled in, possibly as the Bank of England’s forecasts (‘the recovery is likely to be slow’) sink in. This December 2010 contract has been jet-propelled this year, nudged higher by the 9-day moving average, working in a steep ‘channel’. It is, in our opinion, still a ‘buy’.

Strategy: Buy at 98.760, adding to 98.680; stop below 98.550. First target 98.850 then 99.000.