Looking at LS Crude Oil and its opportunities with calendar spreads

Introduction

As you know, the oil futures are on the move. Everything indicates that the LS Crude oil is heading to 80 according to Goldman Sachs and JP Morgan. I believe that it’s possible to reach 80 before 2019 considering the current price and its momentum. It´s an 11% upside from the current price. The LS Crude Oil Oct18 started the year at 58.58$ and yesterday, it closed at 72.27$.

LS Crude Oil Oct18

    LS Crude Oil Nov 18, daily, source: TradingView

This is the perfect chart to explain how this commodity has performed this year. It represents 24.39% up in the year. After the last OPEC meeting seems that has more upside potential because they didn’t agree on any increase in the oil production.

The Spreads

    LS Crude Oil Dec18-Jan19 Spread, daily, source: TradingView

Probably this is the best spread for new traders or even for experienced traders because they will have a lot of opportunities with limited risk. The spread has been ranging between 0 and 0.80 the most part of the time.  You can see that each time that it opened above this level was a clear sell signal.

   LS Crude Oil Dec18-Mar19 spread, daily, source: TradingView

We can see a bigger range in the 3-month spread as it was expected. I´ve never been involved with energy products but looking at the chart. I would consider buying below 0.60 and selling above 1.80. This is an easy conclusion, however, trading this spread is not that simple.  

     LS Crude Oil Dec18-Jun19 spread, daily, source: TradingView

To be honest, this spread seems an outright. When the front contract falls, the spread falls really aggressively at least in the first 7 months of the year. Both outrights have been converging in the last 2 month.

Conclusion

As I said, I haven´t been involved with energy products and this is why this post is not as big as the other ones. It´s a great product and there are so many ways of trading it. I think the Oct contract will keep going up. I’m not sure about the movement of the spreads because the back of the curve is converging with the front (as we saw in the 3-month and 6-month spread). Probably the producers are buying futures because they expect higher prices of this commodity in the future. I hope you like.

Have a good trading!!

FGBM vs FGBL

Introduction

I love macroeconomics, this is why I have some preference for the interest rate derivatives. If we check the main European fixed income futures, we need to have a look at the Eurex exchange. One of my favourites futures is the FGBL (bund future). However, it’s difficult to trade for individuals with small accounts because it’s easy to get stopped out. If the 10-year bund future is to volatile for you, I would recommend having a look at the FGBM (5-year bond future known as bobl) It has the same tick value as the FGBL and it´s less volatile. And if you are starting, I would definitely go for the FGBS (2 German bond future called Schatz).

Can we trade these products only looking at the macroeconomic indicators?

Well, I believe that you can, it depends on the size of your account, the trade size, the strategy (risk management, money management) …

If you have a big balance, you can trade according to the macroeconomic data as far as you trade a small size and you look for the medium term or long term. The problem here is that you need to create your own indicator that shows you the health of the economy. In the current environment, I find this challenging because some assets are influenced by the central banks' decisions and political uncertainty (it’s very difficult to measure these factors and include them in a model). I highly recommend to set up a stop if you are going to trade like this.

    FXandFixedIncomeTrading logo, own elaboration

What are the alternatives of trading trends?

If you don’t like to trade trends you should be looking for market neutral strategies.  This kind of strategies are used by hedge funds. It basically consists of hedging. It seeks to avoid the market risk. The way to apply this strategy with futures is with intra-product spreads or inter-product spreads.

FGBM-FGBL Spread

I’ve been looking for a trading strategy like this for a while. I decided to spread the FGBM and the FGBL at the ratio of 3 to 1. I have checked only the charts but they look good to me.

     FGBM-FGBL Dec18, daily, source: TradingView

As you can see it has been moving in range since the middle of June. The range of the spread has been 160 ticks (234.60 and 233) while the bund range has been 291 ticks. I wouldn’t recommend holding overnight positions because these futures can open with a gap.

Conclusion

Sometimes is worth to consider market neutral strategies. Their main advantages are: there are multiple of entries, they are less risky than the outrights, you can consider as an alternative strategy if there is a lot of uncertainty in the market.  Obviously, the ratio 3 to 1 used in the example is random. I could have chosen a different one. Ideally, we should compare the DV01 of these futures and get the ratio from there. On the other hand, you can consider the different volatilities of the products involved or the correlation to get the spread ratio. Also, you should think about the trading commisions and the margins because it’s not the same to trade a 1 to 1 spread than 100 to 200. Having in mind all of these factors is not easy and requires a lot of work. Sadly, after testing the system or the strategy you can be disappointed with the results. Don´t give up and keep trying to improve it.

Have a good trading!!

Disclaimer

I wrote this article myself, and it expresses my own opinions that shouldn't be used as a trading advice. Trading carries considerable risk due to the high leverage involved

Eurodollar, looking to the year to date behaviour and the spreads

Introduction

I consider that we should follow the central banks' steps. It´s very useful to adapt your strategies to the economic policy applied and the central bank recommendations. This applies more to investing in a medium to long-term that for day trading. However, it can be interesting to test a trading system with a variable that tracks if the central bank is bullish on the economy or if it has a negative outlook. Today, I will focus on the Eurodollar futures situation.

Outrights

According to the Fed’s positive outlook on the US economy and due to the accelerating growth and rapid job creation, it’s expected that we will see two more interest rate rises this year. With this scenario, the futures should be falling at least  the  next expiries (December 18 and March 19)  

    Eurodollar Dec18, Daily, Source: TradingView

The front-month contract has behaved as expected during the last year. However, the uncertainty about the trade war between US and China has stopped the bearish trend.

    Eurodollar Dec19, Daily, Source: TradingView

This chart is similar to the previous one but this contract is more volatile. 

   Eurodollar Dec20, Daily, Source: TradingView

Again, the volatility is higher for this contract because it expires 1 year later than the previous one.  It closed at 97.06 which implies a lower interest rate than the Dec 19 contract. we will see later how this affects to the interest rate curve.

    Eurodollar Dec21, Daily, Source: TradingView

This contract is more interesting for trading purposes because the daily range his higher and it can offer more opportunities to go in and out.

Comparison

   Comparison Eurodollar Dec18-Dec19-Dec20-Dec21, Daily, Source: TradingView

In this chart, we can see the differences between the 4 contracts showed before. Probably, one of the most interesting aspects of this chart is that the closest expiry shows a smoother price than the other price. This is related with the volatility. At the beginning of the year, the contracts were trading as expected with widen spreads however the trade wars speculation from the middle of May has made the contracts to converge and the spreads have narrowed.

Spreads

    Eurodollar Spread Dec18-Dec19, Daily, Source: TradingView

We can see that that the spread Dec18-Dec19 widened in the first three months of the year and after that, it has been in the range 0.28-0.40. The main resistances for me are 0.38 and 0.40. The highlighted in yellow shows the reversal of the spreads due to the trade wars and the FOMC meeting that showed certain worries about the economy overhitting. The Fed officials didn’t give any indication about how willing they were to speed up the pace of interest rate increases. They weren´t worried about allowing the inflation to rise above 2% for a temporary period as far as the economy would expand. You can see this reversal in the previous charts as the eurodollar futures rallied on these days. 

   Eurodollar Spread Dec19-Dec20, Daily, Source: TradingView

In contrast to the last graph, we can see that the spread has narrowed and this means that the interest rate curve is flattening.  The closing price of -0.02 implies that the 3-month interest rates will be lower in 2020 than in 2019.

   Eurodollar Spread Dec20-Dec21, Daily, Source: TradingView

We can see the same pattern that the Dec19-Dec20 spread has. Again it implies that the 3-month interest rate will be lower in 2021 than in 2020. This can be temporary but in my opinion, it means that the US economy probably will slow down in the medium term. According to the spreads, it should happen in 2019-2020.

Sum up

We have seen some of the Eurodollar futures. We can see that the front months are moving in a different way than the back months. This implies narrow spreads and finally, an interest rate curve flattening. The ongoing uncertainty about the trade wars will continue. As far as the US economic growth continues and the labor data keeps as good as it is, the Fed will keep the interest rate increases expected. Hopefully, the Fed will act independently even if Donald Trump puts pressure to change its monetary policy. I don´t think that the international issues will affect to the US economy at least in the near term, however, we need to keep an eye on Argentina and Turkey. I hope you like it. Thanks.

Have a good trading!!

#trading #interestrates #Fed #inflation #US #macro #economicgrowth #eurodollar #GE #ED #spreads #opinion

Disclaimer

I wrote this article myself, and it expresses my own opinions that shouldn't be used as a trading advice. Trading carries considerable risk due to the high leverage involved

Recommended article

Hi. I have been reading a lot these days. One of the best articles I´ve read lately is the following:

http://www.zerohedge.com/news/2018-06-16/global-bond-curve-just-inverted-why-jpm-thinks-market-crash-may-be-imminent

It doesn't matter if it comes from JP Morgan (like this case) or from a top Hedge Fund. The analysis is excellent. I'm a big fan of the interest rate curve. Its movements are only monitored by top traders and portfolio managers but you can extrapolate a lot of investment ideas. The main problem, as always, is getting the data. I would like to congratulate ZeroHedge for bringing this kind of content. Thanks.


Have a good trading!!

Europe situation, Euribor, one of the best trades from 2017

Mario Draghi didn’t surprise the market with his speech. He acknowledged a moderation in the pace of the eurozone recovery but he said that it´s early to change the monetary policy. Some analysts believe that the ECB will wait until July to provide forward guidance. I don´t want to speculate but maybe the dovish message was due to the strength of the euro. I would like to remind you that the ECB is buying assets for the value of €30bn a month. The question here is what is going to happen with these markets as soon as the central banks stop these quantitative easing programs.

Euribor Spreads

I will use the Euribor contracts listed in Eurex because I don´t have access to the ones listed on ICE. Sadly these contracts aren´t traded as much as the ones on ICE but they show similar prices. 

     Euribor Jun18-Jun19 spread, source: Barchart

The difference between these contracts is narrowing what indicates a flattening of the Euribor curve. It seems that the current level can act as a support.

     Euribor Jun19-Jun20 spread, source: Barchart

As you can see the curve steepened from September 2017 to March 2018. At the moment is near the support at 0.400. The Jun20-Jun21 spread has the same shape and this is very interesting for me. In the case of the Eurodollar, you can see how the spreads show that the curve is steepening for one period in flattening after 2020. The truth is that the ECB hasn´t changed the policy in the last 8 years and the inflation is still low. Can we see any movement in the outrights?

    Euribor Jun18 futures, source: TradingView

This contract changed the trend one year ago. In my opinion, the European economy looks pretty much the same as 2017.

     Euribor Mar19 futures, source: TradingView

This contract is more volatile but it shows exactly the same movement as the previous one.

Euribor Dec19 futures, source: TradingView

The last 3 charts show how the different futures went up in 2018. What are they discounting? Is the current European economy worse than in 2017? Will we have a global recession in 2020?

One of the best trades

We have briefly seen how the Euribor futures behaved during the last year. As I said the European Central Bank hasn´t changed the economic policy while the Fed has been raising rates for a while. Considering this, the idea was clear: long Euribor futures and short Eurodollar futures.

    Euribor Dec18 – Eurodollar Dec18 Spread, source: TradingView

This trade has been amazing (and I think that it can continue at least for a couple of months) and probably we will read about it in the next “Hedge Fund Market Wizards”.

Sum up

The ECB delivered the words that we expected. Draghi has a difficult job and the protectionism threaten doesn’t help. The Euribor futures are not moving at all, their movements are tied with the European Central Bank forward guidance and the data. The Euribor-Eurodollar spread has been one of the best trades from 2017. It has captured the different economic policy in two economic areas. 

Disclaimer

I wrote this article myself, and it expresses my own opinions that shouldn't be used as a trading advice. Trading carries considerable risk due to the high leverage involved

Fed Funds vs Eurodollars futures

The interest rate markets offer a lot of possibilities and strategies. You can trade the outright, the intra-product spread (calendar spread or calendar spreads combinations) and you can create your own spread with different futures (inter-product spread) Sometimes I analyze the outrights and certain spreads but today I’m going to introduce a strategy used by some of the biggest market participants. 

      CME Interest Rate Products, source CME

The spread

I’m not going to focus on the back of the curve. The products to make this strategy are Eurodollar futures and Fed Fund futures. Before I explain the strategy lets define these products:

• Eurodollar futures are based on a 3 month LIBOR.
• Fed Funds futures are based on the average daily effective Fed Funds rate and calculated the last business day

Considering the different  value per basis point we need to calculate the spread ratio:

Spread ratio, own elaboration                                                  

In order to get the ratio, we should divide the Eurodollar value per basis point by the Fed Fund value per basis point. In our case, we will trade 10 Eurodollar contracts and 6 Fed Funds contracts. Considering the forward-looking aspect of Eurodollar futures, the Sep contract will cover from September to December. We need to choose 2 different Fed Fund contracts between these maturities, in the example October and November.

Spread calculation in basis points, own elaboration                 

In the example, the spread in basis points has been calculated as (Fed Funds average price – Eurodollar price) *100

    Eurodollar-Fed Funds spread, source TradingView

What and why are we trading on this spread? Basically, we are betting that the spread between these 2 products will narrow or wide in the future. Having in mind that the eurodollar is based in 3-month commercial loans will be more volatile (for the duration and the credit risk) than the Fed Funds (1-month loan between banks insideUnited States)

We can use this spread to bet that the interest rate curve will change. Let’s say that if there was a high probability of an interest rate hike, I would position myself short Eurodollars and long Fed Funds.

          Fed Funds Rate, source TradingEconomics

If you compare this chart with the previous one, you can see why you need to be right and always taking the direction of the market with the Eurodollar contracts.

Sum up

I hope you like this brief introduction. This spread will allow you to diversify the strategies. There are 2 main risks: taking the wrong side of the position and the execution risk. The second one is obvious because there are 2 different products on this strategy.  It´s easier to make a calendar spread because you can find them listed on the exchange. 

Have a good trading!!

Disclaimer

I wrote this article myself, and it expresses my own opinions that shouldn't be used as a trading advice. Trading carries considerable risk due to the high leverage involved

US Bond and Interest Rate Futures Spreads, US Interest Rate curve inversion

It’s been a while since my last post. I’ve been busy but I will try to write more frequently. Today, I’m going to talk about US interest rates and bonds. In one hand the US economy is performing pretty well, at least for now. The GDP is good but not as the government promised. The employment is strong but the figures show that it’s been driven by part-time jobs and this doesn’t help in the long term. The bank earnings usually reflect the economic performance, and they have reported better than expected profits. On the other hand, the Federal Reserve is tightening. The debt hasn’t been reduced. The protectionism won’t help. This is not new and I believe that you have already read about this.

Fed’s Williams warned earlier this week that the yield curve inversion can be seen as a warning signal. An inverted curve has always been a recession signal.

How can we understand if the curve is flattening or steepening?

Basically, if we simplify the process and we only do the yield difference between 2 different products or the same product with different maturities. If the difference grows over the time, the curve is in a steepening process. If the difference decreases, we will see the curve flattening. Once we understand this we can have a look at different markets:

US Bond Spreads

    5Yr T-Note  - 2Yr T-Note futures spread, Barchart 

In this case, I’ve chosen the price difference between the 5 Yr T-Note and 2Yr T-Note futures. It’s not as intuitive as if I had taken the yields but it’s easy to understand. Obviously, an investor would look for a higher return on a long duration investment than in a short duration investment. If I have 2 assets with a different duration that offer the same return, I will choose the short duration asset. The reason behind this is that I would be able to compound the returns. When there are good news and the economy is doing well, the traders sell the bond futures and considering that the longer duration is more volatile the spread between them will increase. In our case, we can see that the 5Yr-2Yr spread is decreasing.

    10Yr T-Note  - 2Yr T-Note futures spread, Barchart 

The 10-2Yr spread is decreasing and it’s very close to the 8 year low (12.71)

3 month Eurodollar futures

     Eurodollar Sep18-Jun19  spread , Barchart 

This is a 6-month spread in which is going up. You can think that the traders are discounting more interest rate hikes during 2018.

    Eurodollar Jun19-Jun20  spread , Barchart 

This is a bigger spread that covers 12 months. It’s more volatile than the previous one and it´s testing an important support. The most interesting thing is that shows how the interest rate curve is flattening between 2019 and 2020. 

   Eurodollar Jun20-Jun21 spread , Barchart 

If you were surprised with the last chart, take a look at this. Basically, the curve is flat between 2020 and 2021 and probably it will be inverted in the coming weeks or months.

Eurodollar quotes 

     Eurodollar futures quotes, CME

I would like to recommend this short article that offers a different perspective with the same conclusion:

https://www.ft.com/content/f24fbc80-431c-11e8-803a-295c97e6fd0b

Highlights and future questions

All the experts are warning about a possible recession between 2020 and 2022 and as we have seen the curve is inverting at this point. How will the central banks react? Will the Fed choose between fighting inflation or the job market? How will the governments try to reduce the debt? What will happen with the private debt? 

Disclaimer

I wrote this article myself, and it expresses my own opinions that shouldn't be used as a trading advice. Trading carries considerable risk due to the high leverage involved

US CPI is King, at least for the interest rate derivatives

I’m a big follower of the economic data. I follow closely the inflation figures because the interest rate markets usually move. It’s difficult to say what you should trade in this situation but it´s easy to predict the direction of the movement. Let’s see what happened and how the markets reacted.

US CPI surprise

I expected a figure in line with the expectations. Maybe, my expectation was driven by the lack of surprises in the European inflation, but I was wrong this time. The US CPI (YoY) was released showing a better than expected figure, 1.8% vs 1.7% expected. At the same time, the US CPI (MoM) showed 0.3% vs  0.2% expected. The party started and the futures markets started to move.

Market reaction

The sell-off in eurodollar futures was expected after the economic indicator release. Let’s start with the 10Y T-Note Futures.

10Y T-Note Futures March 18

    Source: TradingView, 10Y T-Note March18 future, 30 min

Good downside move, you can see the importance of this movement in the traded volume in the 30 minutes after the release. It’s not valid to sell at any point, as you can see this future went up after 14:00 London time.

Eurodollar December 18 future

    Source: TradingView, Eurodollar Dec18 future, daily

This is a great example of how the American economy has improved from 2016.As you can see it´s in a downtrend since September 2017.

    Source: TradingView, Eurodollar Dec18 future, 30 min

You can see the importance of the data and the scale of the movement in the 30 min chart. It´s funny to think that 7 ticks move is big but you should consider that the size of the trades is usually higher than other futures with more volatility. If there is not a release or news is strange to see big movements in this kind of products.

Different examples, across the interest rate curve 

     Comparison Eurodollar futures Dec19, Dec20, Dec21, Dec22, own elaboration

All the maturities behave exactly as the December 2018 contract shown before. The December 2021 is different, someone sold at market just in the moment of the release or a little bit before, this is why there is a big gap. The most important thing is that the dec21 move was smaller than the dec20 and dec22. I can see that in the volumes increased in the bounce back for Dec20 and Dec21. It means that the traders don’t want to be short in this maturities. It’s difficult to say if there will be a possible slowdown in the US economy in one year time but I  don’t dismiss this scenario.

Eurodollar Spreads

     Source: TradingView, Eurodollar spread Dec18-Dec19, daily

We can see that this spread is trying to go up from the min of 0.1400, this means that the outlook for the next year is positive. The main problem, and it will be highlighted in the next chart is that the long-term chart shows how the spread is tightening. 

     Source: TradingView, Eurodollar spread Dec20-dec21, daily

I´ve selected this spread because shows a clear downtrend. After checking, the Dec19-Dec20 spread shows the same pattern and we can think about the slowdown scenario mentioned before.

Sum up and opinion

I hope you like it. Following the economic indicators and how they affect the markets is one of my hobbies. I’m looking forward to bring this interesting subject and explain the concepts clearly. As you have seen, the better than expected US CPI generated a sell-off in the US bond futures and in the interest rate futures across the whole curve. This doesn’t mean that the rally in equities will last forever and there are signs that could be a slowdown in the US economy in the coming year or year and a half. In terms of the US equity market, I think that it will keep going up in 2018. I use the bank earnings as a leading indicator of the economy.

Have a good trading!!

Disclaimer

I wrote this article myself, and it expresses my own opinions that shouldn't be used as a trading advice. Trading carries considerable risk due to the high leverage involved

Concerns about the US inflation

Yesterday, we saw the FOMC meeting minutes and they delivered what the market expected. They held the rates unchanged and they confirmed that the process of balance sheet normalization will continue. The Fed highlighted the performance of the economy and the low unemployment. It’s true that the US economy is strong and the last GDP reading was better than expected. However, everything is not as the Fed would like it, and FOMC members expressed their concern about the inflation outlook. Let’s see how the markets reacted:

EURUSD December 2017 future

     Source: TradingView, EURUSD Dec17 future, 1 Hour

The Euro has been rising since the beginning of November. If we add to this trend the inflation concerns the result is a weaker dollar. We didn´t see a significant movement, the candle highlighted in yellow shows the upside movement after the FOMC minutes, as you can see the biggest movement was earlier in the morning.

10 Year T-Note December future

     Source: TradingView, 10 Year T-Note  Dec17 future, daily

Everytime that there is a negative outlook the bond futures raise, and this is what the 10Y T Note future did yesterday. I’ve been following for a while this contract and there is a clear triangle that if broken, I believe that it would go up to the resistance at 125.75.

2 Year T-Note December future

    Source: TradingView, 2 Year T-Note  Dec17 future, daily

In contrast with the 10 Year T-Note, the 2 Year T-Note hasn’t swung. The bearish trend is remarkable.

10 Year T-Note - 2 Year T-Note December spread

     Source: TradingView, 10 Year T-Note-2 Year T-Note Dec17 spread, daily

I’ve chosen to spread 1 contract of the 10 Year T-Note future versus 3 contracts of the 2 Year T-Notes. In my opinion is the best spread you can make with these two futures.

Yield between the 10 Year T-Note and the 2 Year T-Note

    Yield between the 10 Year T-Note and the 2 Year T-Note, source: St. Louis Fed

Historically this yield spread is an indicator or the recessions. We can see that it has narrowed during the last 4 years. This indicates the flattening of the interest rate curve.One of the reasons is the improvement of the US economy is pushing the short-term yields higher. The second reason is there is a strong buying pressure in the long maturities that doesn´t allow the yields to go up.

Conclusion

The Federal Open Market Committee statement doesn´t  significantly affect the markets if it delivers what the analysts expected. If it had been hawkish on the inflation outlook, we would have seen a strong bond selloff and buying pressure in the USD. The macro indicators are important but in trading is better to focus on the difference between the figure and the value expected by the market participants. I would use the yield spread introduced in this post for a medium or long-term investment. I will publish a strategy based on the yield spread between the US 10 year bond and the US 2 year bond in the future.

Have a good trading!!

Disclaimer

I wrote this article myself, and it expresses my own opinions that shouldn't be used as a trading advice. Trading carries considerable risk due to the high leverage involved

Eurodollar futures, examples and strategies to trade the interest rate curve

Introduction 

As you know, the Eurodollar futures represent the 3 months interest rate futures. I like the interest rate derivatives because they don’t usually have big movements like indexes, currencies or commodities. Another advantage is that there are a lot of contracts listed on the exchange and you can apply different strategies. The liquidity is very high, unfortunately, it’s not a fast market and getting filled is not easy due to the exchange algo.

We will talk about trading but understanding macroeconomics helps a lot in this kind of products. Let me show you why:

Current Macro view

The U.S. is showing its strength every time they release its macroeconomic indicators. Last week we showed a better than expected GDP growth (3.0%). October has been really good: strong durable good orders (2.2%), better than expected ISM manufacturing PMI, strong services PMI, an increase in Existing Home Sales, 4.2% as an unemployment rate. On the other hand, the Non-Farm Payrolls were worse than the market forecasted due to the effect of the hurricanes. The consumer price index wasn’t as good as the Federal Reserve would like it. But in general terms, the macro data was very good.

Considering all of these facts and a hawkish FED that expects three rate hikes in 2018, the Eurodollar futures should be falling at the moment.

Quick look at the Outrights

 Eurodollar December 2017

     Source: TradingView, Eurodollar Dec17, daily

This is the December 17 contract. It was lower at the beginning of the year because everyone expected a hawkish FED. The USD was really strong at this time. The FED delivered the first rate hike in March and obviously, the interest rate futures fell. After that, this contract rose to set up the maximums of the year in June. This movement was driven by the doubts about how a quick normalization and interest rate hikes could affect the economy. The main concern was the high level of personal debt and how the people could resist and pay in an environment where the interest rates were going up but the salaries were stagnant.  The Fed raised the interest rate in June for the second time of the year, and this contract fell until July. It seemed that everything was going well but the shadow of some geopolitical problems appeared. The front contracts rose. The Fed September meeting was a turning point and the confidence came back to the market. Janet Yellen announced that the Fed will start cutting its balance sheet in October, and she said that the normalization process would be gradual and predictable. At this moment, the sell side was the correct one.

 Eurodollar June 2018

     Source: TradingView, Eurodollar Jun18, daily

The June contract movement has been similar than the December 2017. The main difference is that the Jun18 is trading at the same levels of the beginning of the year, which in my opinion indicates that the market expects that the economy will continue growing in 2018.

 Calendar Spreads

If you think that trading outrights involves a lot of risks maybe you should consider calendar spreads and bet in the yield curve. Basically, you are betting that the difference between two contracts will wide or narrow. You can use technical analysis, macro analysis, quantitative analysis.

Eurodollar December 2017 - March 2018

    Source: TradingView, Eurodollar spread Dec17-Mar18, daily

Looking at the chart, you can see a clear trend that started in September. Does it sound familiar to you? The reason why this spread is going up is that the March 2018 contract has fallen more than the December contract. The economy is performing well, the market expects a rate hike in the beginning of 2018 and 2 more alongside the same year. At the moment, it’s trading at 0.1450, which I consider an important resistance.

Eurodollar March 2018 -  December 2018

      Source: TradingView, Eurodollar spread Mar18-Dec18, daily

This is a 9-month spread. You can see how well the spreads trend. It follows the same pattern as the other outright or strategies mentioned above. It was trending very well in September but it’s moving sideways and showing some weakness at the current levels.

Eurodollar September 2018 – June 2019

     Source: TradingView, Eurodollar Spread Sep18-Jun19, daily

This spread is different. The traders are pricing several interest rate hikes the yield curve is flattening. It has just crossed the 200 EMA and I think this movement will continue.

Eurodollar March  2019 – December 2019

     Source: TradingView, Eurodollar spread Mar19-Dec19, daily

This spread has been falling almost the whole year. The 200 EMA is very significant, every time that the spread closed above it the movement was reversed in a few days. As well as the previous one, it shows weakness.

Butterflies

If you agree that the spreads in 2018 are trending up while the spreads in 2019 are trending down and you would like to trade both, the best thing you can do it´s making a butterfly. This strategy consists of buying one spread and selling another one in which the middle leg is the second leg of the first spread. 

                       Butterfly structure, Step 1 and 2 are the spreads that create the butterfly, own elaboration

You can sell a butterfly if you do with 2 different spreads, you should sell the first one and buy the second one.

Let’s see these butterflies:

     Source: TradingView, Eurodollar Butterfly Mar18-Dec18-Jun19, daily

This is a very volatile butterfly but it’s a good example of this strategy. It supports the theory of buying the 2018 spread (Mar18-Dec18) and selling the 2019 spread (Dec18-Jun19)

     Source: TradingView, Eurodollar Butterfly Jun18-Dec18-Jun19, daily

This is less volatile than the first one. The best aspect is that it ranges all the time.It can rise to the levels drawn on the chart, but there is only my opinion.

Conclusion

I hope that you like. This is only a brief article but I hope that it will help you to understand how this kind of product behaves and the different strategies you can apply. Knowing about macroeconomics helps. I will be promoting this articles on the following twitter account: @fxfincomtrading

Thanks.

Have a good trading!

Disclaimer

I wrote this article myself, and it expresses my own opinions that shouldn't be used as a trading advice. Trading carries considerable risk due to the high leverage involved

#trading #eurodollar #macroeconomics #calendarspreads #butterflies #InterestRates #US #Fed