Wednesday, February 11, 2015

Employment Friday 2.7 Std dev Move Stands – Quiets Longs

Eurodollar futures open interest declined as a result of trade on Tuesday on declining price action that saw the Eurodollar futures yield curve steepen throughout first 5 years.  A shout-out from one of my colleagues here notes the call volume exceeded the put volume in Green, Blue and Gold Eurodollar options for the first time in recent memory.   

Otherwise, we saw a second day of consolidation across the fixed income curve and very small difference between opening and closing price levels.  This third session following Friday’s outsized decline is important in that a VERY strong advance would be required today before we would be willing to discount the importance of the price swing on Friday. 

For proxy, Friday’s 16.5 basis point opening to closing decline in EDH6 (Red March) as noted earlier this week was bigger than any in that slot (fifth quarterly contract from expiry) since January of 2011.  It was a 2.7 standard deviation move and should be taken seriously. 

The consolidation since is consistent with indecisiveness on the part of the long-term bullish participant. He has been unwilling thus far to view the information as significant and so decided not to change his position.  A small caveat should be offered here; Eurodollar open interest declined on Monday and Tuesday (total 148k) by more than the 133k added on Friday.  Still, were longs really interested in changing their position, they would have put pressure on prices rather than just allowing positions to be removed ‘at the pace of trade’.  The lack of advance or even a slight recovery from Friday’s decline also speaks of the encouragement that the bearish contingency has taken from recent events.

San Fran Fed Williams has come a long way over the last weeks and is edging ever closer to committing to a June policy move.  Others at the Fed have already indicated an interest in ‘normalizing’ policy sooner rather than later and the other side of that argument has been strangely quiet of late.

It would be particularly strange if Eurodollars (Front, Red and Green) prices were higher from here (EDM5-99.575; EDH6-98.91; EDH7-98.165) a week from now.      

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