Wednesday, June 3, 2009

The Debts of the Spenders: Watch ECB and Fed Commentary For (Near Term) Eurodollar Top

This is another central banker week w/the ECB, BOC, BOE, and Feds all making announcements. Earlier, I wrote about the bullish positions in Eurodollar futures* in late May per the Commitment of Traders report. These are indicative of generally positive sentiment and higher risk taking among institutional participants that are benefiting from ( still relatively ) low government interest rates.


06/debts-of-spenders-cme-and-eurodollar.html )

*NOTE: Eurodollar futures ARE NOT the same as EUR/USD. It is a generic reference to foreign dollar accounts from the olden (pre-Euro) days of the 1970s-1990s when most foreign holdings of dollars (at least on the retail level) were held in European banks. However, there remains a strong correlation since a large percentage of currency trading remains concentrated in EUR/USD (USD/JPY is the second most popular).

Anyway, renewed attention will be focused on:

1) The ECB Thursday (e.g. tomorrow) regarding its unconventional policy assessments - namely the scope and duration of its covered bond purchases.

2) The Fed, or rather Bernanke, who has multiple public audiences scheduled for this week.

Why the attention on Eurodollar futures?

They are used to hedge interest rate swaps (3 month LIBOR ) as well as mortgage spreads. In fact, some traders prefer to use Eurodollar futures instead of Treasury futures or even Fed Fund Futures since they claim it is more accurate.

Here is how the Eurodollar futures contract is traded:

The contract is a number that is 100 -the specific interest rate. So, a contract for 95 Eurodollar is a bet on 5% rate . In other words, traders are betting (either way) that the 3 month LIBOR rate will or will not be 5% as of the contract's expiration. Given today's ZIRP environment, Eurodollar contracts are mostly trading in the 99+ range.

For more information, Wikipedia has a great explanation:

Disclosure: No position in Eurodollar futures. Trading can get hideously complex and is dominated by the "smart money." I know when I'm out of my league. However, I DO follow the trading action as a gauge of wider market sentiment.
blog comments powered by Disqus

Blog Archive