Wednesday, March 16, 2016

Eurodollar Fut Emrg Bear Trend; Gaining Momentum

Today, the June 2017 Eurodollar future is making an 11th new low since Feb 24th. Those looking for a catalyst might point to the report on February CPI (x-f&e) which ticked higher again to 2.3% YoY. However, we caution reading too much into this development as weaker year-ago monthly readings in CPI have now dropped out of the series. Higher YoY CPI going forward will now depend on stronger current readings.

In any event, USFI is lower and the Red June Eurodollar future (the current 5th from expiry) is lower by 5.5bps as I write. It is lower by 56 bps from the Feb 11th high. The contract has followed a fairly well defined channel lower. Of the last 14 sessions, only 2 have closed higher than the opening level.

Some may remember the data I presented following the January bullish advance which involved an out-sized increase in open interest. Those gains in open interest which accompanied strong bullish price action were strong warnings to would-be sellers to wait until the buying interest subsided. That buying interest has subsided and over the last 3 sessions (adjusted for the expiry of EDH6), open interest declined by over 350,000. That decline in open interest is greater than any non-expiry period since November 2014. I believe this is a development initiated by the long contingency and suggests continued interest by that group in divesting of their positions.

At this point, we are not as enamored by the bearish prospect as we might have been a week ago or several weeks ago. At the same time, despite the developments noted above, the newer bearish trend does not yet appear to be as stretched as might indicate a bullish reverse. There have been a number of multi-session pauses in declining price action since mid-Feb and this has prevented oversold conditions from becoming excessive.

The Federal Reserve meets again today and will deliver a statement of conditions following the FOMC meeting. The Fed’s message could offer further reason for selling and the emergence of short term oversold conditions. For now, we would imagine some support in EDM7 toward 98.74 and again toward 98.66.




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