Monday, September 22, 2014

Post Lift-Off Eurodollar Futures Most Susceptible

Open interest in Eurodollar futures rose on Friday as yield curve flattened throughout the first six years on above average volume.  The index of leading economic indicators was the headline and sole statistic of note coming in at +0.2%, or half the gain forecasted by the Bloomberg’s survey.  Attention to economic variables was distracted however by the IPO of Alibaba.

Some of the Eurodollar contracts a year or a bit more beyond the widely expected mid-2015 lift-off date for the fed funds policy rate formed some interesting price patterns over the last two sessions of the week.  Specifically, EDM6, EDZ6 and EDH7 formed two consecutive ‘doji’ candlesticks, individually indicating indecision, and collectively suggesting likelihood for increased volatility.  It might also be noted that in the case of EDZ6, the consecutive session also found similar lows at 97.72, thus creating a ‘tweezers bottom’.   

More than at any other spot on the Eurodollar curve, a year of so beyond the expected lift-off date for policy firming is susceptible to increased volatility.  Both the lift-off date for policy firming and the slope of ascent in firming will act upon this part of the curve.  An earlier start could see the Fed progress toward ‘normalization’ slow and steady through this part of the forward timeline.  Conversely, a later start to policy firming may prompt a steeper ascent toward a longer-run equilibrium fed funds rate. 

Fortunately or otherwise, this part of the curve offers the most excitement for hedgers and position takers.  The ‘double doji’ seen in the contracts pointed to above suggests there will be some stronger price swings over the near-term as a consensus builds on the proper pricing for both Fed lift-off date and steepness of ascent in subsequent policy firming. 

EDZ6 and many nearby contracts traded at or below the four month low while creating these indecisive sessions.  This would normally prompt some to expect a bullish recovery. Currently higher opening levels on Monday may further help to attract some short covering following a 30-40 basis point decline over the last month.

There are plenty of Fed officials bringing their views forward this week which too may help to prompt some of the volatility suggested above:
Monday:  NY Fed Dudley; Minn Fed Kocherlakota
Tuesday: St. Louis Fed Bullard; Kansas City  Fed George; Minn Kocherlakota; KC George #2
Wednesday: Clev Fed Mester; Chi Fed Evans;
Thursday: Atlanta Fed Lockhart

Indecisive lows were made in front of a slew of Fed speakers this week.  We might expect those Fed officials to provide some guidance for pricing the timing of policy lift-off as well as how aggressively the Fed may need to push policy rates thereafter.  It is a very strong likelihood that EDZ6 and surrounding contracts will be well away from their Friday settlement by week’s end.  

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