Friday, June 6, 2014

Why Green Eurodollars are Getting Hit

Green Eurodollars underperform the balance of the Eurodollar futures strip today in the post-payroll declining price action.  In the last two sessions, the Greens outperformed the balance of the curve in advancing prices.  While we might just attribute this to greater sensitivity of the Greens in general, we should also look just a little deeper.

As a result of trade on Wednesday open interest declined by 149k across the Eurodollar strip.  54% of that decline (81k) came from Greens.  On Thursday, open interest rose across the Eurodollar strip (+30K), but declined in the Greens (-42K).  Over the last two sessions, positions have been removed from the heart of the ED curve, where much debate about the steepness of the Fed policy rate ascent remains. 

Declining open interest in a bullish price trending period is an inconsistency that indicates winning longs are removing positions.  This does not show trend health.  It will be interesting to see what changes to open interest today’s trade brings.  Generally speaking, open interest rises following the employment report as traders take stock in the implications of the payroll data.  We should expect open interest in Greens also rose.  If this is the case, it will indicate even more strongly than the rejection today of the post-payroll new weekly high that the bearish reversal signaled at the end of May is in force and that the recovery of Wednesday and Thursday is counter-trend in a strengthening bearish trend development.

I would have liked to see the Bund come lower today as this would have likely brought much greater selling in the States.  However, I suspect if the Bund continues to hold firm it will offer support more to the long-end of the U.S. curve and will not have like impact on the front-end. 

For me, I would not be terribly surprised to see the Green June 98.375 put trade at-the-money before it expires next Friday.  Green Sep 98.375 put is currently 0.25 (cab)/ 0.5 (half), better offered.  Reference future at 98.515/.52.  

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