Thursday, May 26, 2016

Eurodollar Futures Limp into the Long Weekend

Strong gains in Eurodollar open interest accompanied yesterday’s modest trading range.  Eurodollar futures open interest rose 111K, the strongest positions add since May 9th and 100K above the 30 day average gains.  Price action was stunted and for the 4th consecutive session.  Over the last 4 sessions in EDM7 (the 5th quarterly contract) merely 4.25 bps on average separated the sessions highs and lows and only 1 bp on average separated the openings from the closing levels over that period.  Not since mid-April has this contract had such modest range showings.

Of course over this time Fed officials have pushed harder on the likelihood for a mid-year policy firming and while that prospect was fairly hard-priced immediately following the Wednesday, May 18th release of the April FOMC Minutes, little has been done to price more or less since. 

EDM7 finished yesterday higher by half a basis point from 98.87 to 98.875 showing the first higher settle in 8 sessions.  In bigger picture, EDM7 settled 26.5 bps lower from the May 6th 99.14 - three month high, while it settled 9.5 bps above the March 16th - four month low.

The Eurodollar futures yield curve steepened yesterday with the front end settling slightly stronger throughout the first 5 quarterly contracts while ending steady to lower and steepening very modestly thereafter throughout the balance of the Eurodollar futures curve. 

In sum, we are impressed with the jump in open interest and this indicates that traders on both sides of the equation are willing to take a stake in the game.  The slightly higher close ended a somewhat lengthy series of lower closes, but like the prior 4 sessions, was not particularly definitive in its showing.  The steepening of the Eurodollar yield curve is generally seen as a bearish signal.  However, because concentration on prospects for a Fed policy shift has directed attention ‘up the curve’, we give a greater than usual nod to the gains in the nearer to expiry contracts. 

A higher settle today would further help repair the bruised egos and pocket books of Eurodollar longs and more greatly encourage the new longs put in just yesterday.  Conversely a settle back below yesterday’s lows would promote more widespread position shedding by longs going into the lengthy weekend.   


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