Eurodollar's budding bear trend

Eurodollar Greens are lower and leading the charge on the Eurodollar strip, 4 lower as I write. The open interest grew by 79k across the Eurodollar curve as a result of trade on Friday. The Greens strip accounted for over 50% of that gain. These open interest gains on Friday are consistent with the developing bearish trend. We noted briefly on Friday that as Eurodollar prices advanced slightly on Wednesday/Thursday, open interest declined in that sector. This we suggested further that development bolstered the argument that the infant bearish trend was gaining traction.

Green Eurodollars (EDM6-EDH7) have attracted a lion’s share of pricing Fed action. Until 3-6 months ago, the Blue Eurodollar strip had been the focal point of that debate. The migration up the curve in Eurodollars to hedge Fed policy change risk has been in line with the passage of time and the somewhat steady Fed message of mid-’15 lift-off.

The CFTC on Friday reported that in the week ending last Tuesday, ‘non-commercial’ (large-spec) accounts increased the level of net short (futures only) Eurodollars to a new record. Futures and options combined remained near record net short levels.

We expect further declines in Eurodollars, centered for now across the green strip. There had been some heated hedging of short positions in this area of the curve in the last weeks. Shorts are held in stronger hands now. Economic data is light but is likely to be consistent with a 3+%, 2nd half real GDP.

Finally, we suggested that Green June 98.375 could trade ‘in-the-money’ by expiry this Friday. The Green June 98.375 put is 0.5/ 1.0 currently (delta -0.12; 4 days to expiry; fut last at 98.475).

About the Author

Martin McGuire, managing director at TJM Institutional Services

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