We might be drawn to expect that should economic growth prove to be somewhat below forecasts which prompted the Fed to begin tapering the purchase program, back month Eurodollars (here referencing Green March 2016) might rise dramatically, implying a much lower than current 1.17%, 3 month dollar labor. However, if late 2011 is any guide, under similar circumstances, we could see a strong adjustment to the level of net short positions held by ‘non-commercial’ accounts without a significant rally in the back month Eurodollars.
It should be noted however that in 2011, the open interest in ED9 (the rolling 9th ED where EDH6 currently holds place) was less than half recent max (500K vs. 1.2M respectively). Surely, more positions have migrated out the curve as expectations for the timing of policy rate lift-off have similarly shifted. This might affect the way back month Eurodollars respond to position changes by ‘non-commercial’ accounts.
Aggregate Eurodollar open interest, while still well below the 12 million 2007 peak, is currently above the level reached at the November 2011 previous net short position extreme (10M v. 8.7M). Should there be realignment in ‘large-spec’ net short positioning, we might anticipate the greatest reaction to be in calendar positioning, where shorts in Green are pushed to Blue (’16 to ’17) or from Blue to Gold (’17 to ’18).
Finally, back in late 2011, the spread between the rolling 9th Eurodollar and Euribor was roughly 70 bps, Eurodollars over (Eurodollars with a lower implied). Today, the spread between rolling 9th ED and ER is 57 bps Euribor over (Euribor with lower implied). There appears room today for short positioning in back month Euribor against Eurodollar back months.
Bottom Line: While there is room for ‘non-commercial’ accounts to pare back their level of net-short positions in Eurodollars, there may not be the impetus to do so at this time. Dependent on where on the curve these positions are held there may not be reason to adjust until such time as the picture painted by economic statistics becomes clearer on its monetary policy implications. At that stage, the focal point for shorts on the Eurodollar curve can adjust either nearer or further away. To date, the variability of economic reports is consistent with general ebb and flow of 2+% real GDP trend-line growth and should not be expected to alter monetary policy intentions which include steady-state ‘policy path’ tapering and policy rate lift-off in 2015.