Wednesday, November 12, 2014

Eurodollar Futures Yield Curve and Weaker Dollar Give Pause

Eurodollar futures and Treasuries are enjoying a rather spirited bull advance this morning following BOE recognition that the Eurozone will negatively impact domestic growth prospects leading to a forecasted mid-2015 policy rate firming rather than anything sooner.  The Eurodollar futures yield curve has flattened throughout the first 4 years on moderate volume. 

This yield curve shift as much as anything else at this stage would offer a strong warning against the immediate prospects for still higher yields following the mini gyrations surrounding the employment report and thereafter.  Additional attention might be given to the trade in the U.S. dollar, mentioned yesterday in a quick note on recovering gold prices. 

The dollar advance appears to be at stall speed.  The November 7th, 88.19 high was just shy of the June 2010, 88.71 high.  Also on Nov 7th, the index reversed more than half of the prior session gains.  Subsequent trade has been unable to regain lost ground from the recent high.

If the Eurodollar futures yield curve remains flatter and the dollar continues weak, we might anticipate additional backing and filling from the higher yields seen in the last weeks. 

This is not anticipated, but the developments noted above suggest additional vigilance be attended short positions in domestic rates. 

My expectation for the EDH6-EDH7 Eurodollar spread remains for a move to 100 and beyond as trend growth supports policy moves of at least 25 bps firming every other FOMC meeting.  See ‘EDH6-EDH7 One Year Calendar Spread Not Respecting Fed’  

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