Technical analysis: Short Sterling

Short Sterling – Sep 2008

Wed, Jun 25 2008, 09:26 GMT
by Nicole Elliott

Mizuho Corporate Bank


Comment: Last week short-dated yields retreated from this year’s extreme highs, outpacing longer maturities because of the speed and extent of the prior rally. This should continue for a week or two but then the UK yield curve should invert a little further. We continue to feel that ten-year Bund and Gilt yields should converge. Credit spreads have widened this month and should do so all summer, US TBills yielding a lot less than three-month Libor, dragging European spreads with it. Over the last week open interest in this futures contract has increased, while in other months it has dropped quite sharply, suggesting increased uncertainty for near term policy decisions. The contract is still oversold and bearish momentum has eased. We shall continue to allow for a small short squeeze through increasingly pivotal resistance at 94.935 to 94.250.

Strategy: Attempt small longs at 93.820, adding to 93.700; stop below 93.500. Cover longs ahead of 94.250.

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Mizuho Corporate Bank  | 1-3-3, Marunouchi, Chiyoda-ku, Tokyo 100-8210
http://www.mizuho-cb.co.uk | Nicole.Elliot@mhcb.co.uk

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