Happy Friday the 13th! Here's a few observations from the last week of trade.
Over the past few sessions the White Pak in the EuroDollars has been on a tear. Since 01.05.12 they have bolting higher. The most obvious correlation has been the recent down ticking in LIBOR, which has moved from .58250% to its current level of .56700%. {a net change of -.0155} After relentlessly charging higher {or grinding to a halt only to uptick again} it has been steadily reversing. Helped by relatively positive auctions in Spain and Italy, the big boy banks have been easing a bit and thus we've downticked. However, with the rumored downgrades of Austria and France today, the EuroDollar futures have pulled off of the uber highs and are sitting still, just a touch below last night’s settles {future's prices}.
It is interesting to note a few highs/lows:
- Though LIBOR is currently printing only .567% the White Pak had an implied rate of .480% early Friday morning.
- Post downgrade rumors, they had repriced to ~.550% much closer to the .567% LIBOR print.
- The curve began to flatten again today with the back months steadily gaining in price.
Trades to have on:
We're currently keeping it pretty tight. Day trading the front quarterly spreads in the ED as well as some of the more stable 1x2 butterflies.
- We have a core position of short the June/Sept/Dec butterfly in the ED's. We initiated this at a price of 1.5 ticks. It has been as low as .5 and briefly traded 2.
- We think that some of the 2013-2014-2015 1 year butterflies are starting to look really attractive. On a daily chart, many are breaching their 2 standard deviation levels {Bollinger bands}We're looking to establish a few longs in this area.
- We are currently long Green March 9912.5 {2014} straddles in the EuroDollar.
- Our Fed Funds book is currently long spreads, though in terms of size, we're on the lighter side of things.
Euro Currency {courtesy of PrD}
An interesting trade to look at is long the Euro FX. Yeah, yeah, I know Europe is burning, and the Euro is surely headed for $1.20 at the very least and perhaps even par. Well, guess what the crowd is thinking the same thing as net long positions declined by 24% over the past week, while net short positions increased by 29% in the same period, leaving the long to short ratio at 1.06, or roughly 51% long. This is a HUGE shift in sentiment, warranted or not, when a trade gets too one sided, we all know what comes next, think of gold and silver in the fall.
Look at oil in the last week, everyone was long because they just knew that sanctions were going to be imposed on Iran and this would drive the cost WAY up, maybe as high as $150. Cooler heads prevailed and the market tanked $5 in two trading sessions. This is what happens when the crowd thinks they are holding a sure thing and are going to get something for nothing. Ever notice that the more hysterical the market gets the more people climb on board, throwing all caution to the wind and buy higher and higher prices, or vice versa?
My question for all those piling into a short Euro trade right now is, where were was you in October when the Euro was at $1.40? Wouldn’t it have made a lot more sense to get short then? That play would have required a little forethought and time spent in research. In my opinion, the Euro began its decline over 3 months ago because the smart investors did their due diligence and bet accordingly.
The fact is this; the ECB just gave European banks the lifeline they desperately needed with the LTRO, almost 500 billion Euros for 3 years at 1%. Accordingly, the basis rate swap has headed south as it should. This development should signal that one should be closing out short positions, not adding to them. There is a great possibility of a MASSIVE short squeeze. Such a move could launch the Euro back up to $1.35 or higher. For this reason, I recommend scooping up a lottery ticket to fade the herd mentality. The March $1.35 call can be purchased for 30 pips, or $375 bucks per one lot, with over 50 days to expiration, this is a trade you can’t afford to not take. If it doesn’t work out, no big deal, but I would imagine an outright short Euro position is going to expose your account to a much bigger loss than $375. Happy hunting!
Enjoy the long weekend with people that matter
~LH
