Monday, November 24, 2014

Eye-catching - so little reason to be short Eurodollar futures?

Is there really so little reason to be short Eurodollar futures?    

The CFTC described ‘non-commercial’ accounts reduced net short positions (futures and options) by 58,000 in the week ending November 18.  More striking of course is the net short reduction by these accounts since the record net short posted in early August.  From a record of more than 1.5 million net short (nearly 2m for futures-only), this account classification has only 186k in net shorts remaining (578k for futures only). 

These relatively modest short positions come at a time of increased scrutiny as to when the Fed will begin to back away from zero interest rate bounds.  A closer look at the data indicates that ‘leveraged’ participants, a classification broken out by the CFTC has reduced their net short while their percentage of total open interest increased.  Their gross short was reduced by a mere 16% while their gross long nearly doubled (+94%), slicing their net short from 1.3m to only 115k, while their net participation rose from 30.5% to 33%. 

'Asset managers' meanwhile reduced their net long positioning by a striking 74% over the same period, predominantly discarding gross longs (-58%).  Their participation as a total of open interest fell from 17% to only 11%.  Along with ‘leveraged’ participants, ‘dealers’, taking up some of that slack, marginally strengthened their participation as a total of open interest (+2.5%).

Below is an excerpt from a note published on August 6, at the same time as the position extreme and shortly after recovery from a multi-month Eurodollar future low.  There is reason to believe that ‘non-commercial’ accounts, and in particular ‘leveraged’ accounts saw the inability for Eurodollar futures to push to new lows in early August as good reason to reduce net short positions.

From Aug 6th on ‘Diagnostics By Candlelight’  

“EDM6 (Green June Eurodollar):  The bullish hammer bottom of July 31 (Thur) marks recent low following consolidation test/break below.  Friday’s advance open to close the largest (9.5 bps) since April 4 employment report.  Yesterday’s pull-back unimpressive.  Still early in recovery to mark hard on yesterday’s stall.  (Bullish)” (see Aug 6 link above for chart)

To conclude, I suspect that while there is room for some further backing and filling, 'non-commercial' accounts and in particular 'leveraged' accounts are more likely to increase net short positions over the coming weeks.

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