Wednesday, December 9, 2015

EDZ5 PRICED FED…are you the greedy type?

December 2015 Eurodollar future expires next Monday morning early, two days before the Fed indicates its policy intent following its December 15-16 FOMC meeting.  An overwhelming majority (self included) expect the FOMC to indicate a desire to see the fed funds policy rate trade within a band of 0.25-0.5%.  For a number of reasons stated earlier, I do not believe the market will be willing/able to price a 3 month labor that satisfies a fed funds effective of 0.375% (the mid of the expected new target range 0.25-0.5%)…especially before the Fed in fact confirms a policy change.   

However, economic agents were only slowly willing to price in the prospects for a policy shift at all for the December meeting and begrudgingly, EDZ5 (and EDH6 and EDM6) have been pricing a greater likelihood for that happening.  In my last reports, I have continued to indicate expectation for still lower front end Eurodollar future contracts, emphasizing that a move below 99.47 was not expected.  Yesterday’s low in EDZ5 was 99.47.   

Only those looking for a greater than 25 bp shift in policy rate target at this December FOMC meeting or expecting back to back (Dec and Jan) policy moves should be selling EDZ5 here. 


EDZ5 currently trades 99.48-.4825.  Clearly there is less to be gained from a short position in EDZ5 than there was at following the September FOMC meeting where disappointment in the Fed language prompted consensus expectation to move toward a 2016 ‘lift-off’.  I have been advising of lower EDZ5 prices since the ‘Tweezers Top’ seen in mid-October (see: Nov 3-‘ Eurodollars and Fed Funds Aren't Priced for Consensus Employment Report’; Nov 24-‘ December FOMC Hike Almost Priced...’ and ‘Dec 2-‘ EDZ5 Lifted +30K Moments After 3mo Low Trade’.  Now I see a greater chance for 2 bp higher than 2 bp lower.   


It is time to remove this position and look for opportunities elsewhere.  Thanks for your support.  


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