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Strategies & Market Trends : Mish's Global Economic Trend Analysis
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To: CalculatedRisk who wrote (10637)8/13/2004 10:34:04 AM
From: mishedlo   of 116555
 
Short Sterling Investment Idea.
Short Sterling = UK equivalent of Eurodollar interest rate contract.
Right now this is my #1 idea.

Take a look at the yield curve on this.
Flat as a pancake all the way out to 2009
futuresource.com

Contrast that with Eurodollar curve where rate hikes are planned all the way out to 2013 (fat chance)
futuresource.com

At any rate I see little chance of UK rate curve staying flat for 3 more years let alone 6 more years. The furtherst out I could find any options was June 06 on the LSS.

Volatility players could buy ATM calls and puts both expecting some move one way or another, but I personally think the UK is done hiking or perhaps 1 more hike. Unlike the US, the UK has targeted inflation and a housing bubble and it is just starting to bite. If housing slumps not only might we not see any more hikes in the UK we might start to see cuts priced in. At 5% rates, compared to the rest of the world, the UK has plenty of room to cut.

Short Serling call options out to June 2006 seem very very attractive, and futures out as far as 2007 seem like a great deal. Calls and futures both win as long as the UK does not get more agressive in hiking. If one senses a worldwide recession, the UK over the next two years could actually cut a point or more. That would move those futures 200 points from here as well as give 10 baggers on some option plays.

For the record, I am in this play, with options.
Mish
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