Last meeting three BoE members voted for a rate hike. Looking at Mar11 Short Sterling you'd think there was very little possibility of a rate hike at tomorrow's BoE meeting with £3m Libor at 81bp and futures implying 83-84 bps. I would say it's a closer call than the futures suggest, maybe odds nearer 40%... Is shorting Mar11 Short Sterling one of the best reward/risk trades of 2011? I think so.
No... The odds are low, given that it's not an inflation report month. It's unlikely they make a momentous decision about exiting an accomodative stance in a month like March. Hence the mkt pricing. To be sure, this isn't to say that it's definitely not going to happen, but going outright short front sht stg contract isn't a good way to do this trade, IMHO. I got smth in options that offers a 10:1 (or thereabouts) payoff if they go.
Thanks Martinghoul (as always) for commenting. I thought there must be a reason why the market was pricing in a low possibility. Not entirely convinced by your arguments however. From experience I learned to put most faith in the prior meeting voting patterns when it comes to assessing likelihood of rate changes. RR shorting front month is not far from 10x, perhaps 5x to 8x... eg. 2-3 bps downside if nothing happens, but if they hike 25bp perhaps 3m Libor would be nearer 1%, around 16-17 bp upside? I would say at least 90-95bp and a little more premium to price in possibility of a follow up hike within 3 months.. Where do think £3m Libor would be Monday if they hiked 25bp?
You see, the things that changed from last meeting are:- 1 Oil now well and truly anchored above $100 and rising = additional info about inflationary prospects. 2 ECB signal of likely hike at next meeting (80% probability after use of the words, "strong vigilence" IMO) So this is a great opportunity for BoE to demonstrate their inflation busting credentials, restoring credibility by beating the ECB to the inevitable rate hike...
Well, prior voting patterns are exactly the point. If you look at them, you'll see what I mean. But you do need to go back to the old regime when rates actually used to move. In terms of RR, you're roughly correct. I am not saying it's a bad trade to sell the front contract outright, but I do think there are better lottery tickets out there. If they hike, I believe LIBOR might fix at smth like 1.10 come next Wednesday (note the sht stg contract matures Wednesday, not Monday). As to the fundamental reasons for them to hike now, you don't know how the MPC works. Their logic coudln't possibly be further from that of the ECB, regardless of the similar wording of the mandate. They view high oil prices as a tax and, therefore, deflationary in the medium term. Moreover, the fact that the ECB is likely to hike makes the MPC move less, rather than more, likely. They're inclined to view it as the ECB doing the tightening for them. At any rate, we'll see.
No hike. King has dug in his heels. A hike now would mean King has lost total control over the MPC and would likely have to resign. My guess is he's got enough pics of the other 5 "hold policy steady" votes to keep them in line. The only way for King to save any kind of face is to hold off hikes until summer. The replacement of Sentance (who called for 50 bp of hikes last meeting) with the ex-GS guy will help as the GS guy talks a good game but is not nearly as hawkish as Sentance.
I think if prelim economic data that they have access to is decent enough then we could well see a hike Furthermore, don't be too sure that March comes off at 99.20 anyway; it *probably* will in the no hike scenario, but imagine if vote is 5-4 and that gets out...