Policy rate tightening

With all this talk about Fed tightening in the autumn with UK rises to follow in early 2016, it might be useful to remind ourselves of the strong inverse relationship between stir futures and policy rates. Of course, stir futures are LIBOR linked derivatives but LIBOR is very closely correlated with policy rates making stir futures ideal for the systematic trading of policy rate changes.

The first chart shows the front month continuous short sterling contact (orange RHS) and the BOE Base Rate (purple LHS) over the last 20 years.

UK Source: Reuters Eikon

The inverse relationship is clear and most importantly shows that when policy rates start changing, stir futures start trending.

Same with the US. (Eurodollar front month continuous in purple (LHS) and Fed Funds Effective Rate in orange (RHS)


Source: Reuters Eikon

It can also be observed that the US often acts preemptively to the UK. When America sneezes, the UK catches a cold.