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

Where Does The EUR/USD Go?

Summary

         EUR/USD, two of the biggest economic areas.

         Macroeconomic fundamentals, indicator comparison, GDP, CPI, PMI, Unemployment.

         Technical Analysis, simple moving averages, weighted moving averages, RSI, MACD.

We have seen the EUR/USD between 1.0802 and 1.1616 in 2016. The first half of the year the dollar was weaker than the euro but in the recent months the dollar has strengthened.

   Own elaboration, EUR/USD, daily, 01/01/2015 - 09/08/2016

The referendum in United Kingdom was a inflection point in the financial markets. After it, the dollar USD has performed very well. There are a lot of doubts about the future of the eurozone. A negative outcome of the Italian referendum could break Europe. The US macroeconomic data is strong. We saw a hawkish Fed in its last statement. I think the fed will raise the interest rates before 2017.

Macroeconomic outlook

Let me compare the two economic areas:

I have chosen the CPI, GDP, Manufacturing PMI and the Unemployment rate. The main reason is that these indicators provides us a quick insights about how the economy is performing.

    Own elaboration, GDP Comparison

We can see that the European economy is growing at a slow pace. In contrast the American economy is dynamic.

   Own elaboration, Unemployment Comparison

There is a big gap between the two economic areas. The Europe's main problem is that there are two speed economies (or more) and it's difficult to adapt the economic policy to the different needs. We can see a strong US data. In my opinion the Fed released the economic stimulus at time, avoiding or smoothing the impact of the financial crisis.

    Own elaboration, Manufacturing PMI Comparison

in terms of manufacturing PMI, Europe is doing well and its data is consistent. The US ISM PMI is more cyclical but it's peaking in 2016.

     Own elaboration, CPI Comparison

A growing CPI indicates that the economy is getting stronger, considering normal conditions. We can see a poor EU CPI. This indicates that the risk aversion is really high and everyone is delaying the most important expenditures (like buying a car or a house). Nowadays it's different, the macroeconomic releases don't impact the markets as they used to. Right now the Central Banks move the market.

Technical Analysis

Once I briefly explained the fundamental view, it's time to check the technical analysis. I analyze through R Programming. I modified the data you will see 11200 instead of 1.1200.

    Own elaboration, EUR/USD, daily, 01/01/2015 - 09/08/2016

I'd like to start explaining the color code: the blue line is a 50 SMA, the red one is a 20 SMA, the green line is a 100 SMA, the grey line is a 200 SMA and the orange line is a 20 WMA. We can see the RSI and the MACD under the main chart. The short period moving averages are bellow the 100 SMA (blue line) but they are slightly above the 200 SMA (grey line). The MACD indicates that this par could rebound a little bit. I think that if the price goes under 1.1000, it will look for the lows of the year (around 1.0802).

Conclusion

I think we will see a stronger USD in the coming weeks, so probably the EUR/USD and the GBP/USD will be lower. The American economy is getting stronger while there are some doubts about the future of the Eurozone. The European Central Bank will continue its asset purchases which means a weaker euro. In the case of GBP/USD, the Bank of England started its stimulus measures yesterday. In addition the BoE warned that they can cut even more the interest rates and boost the government bond purchases if the economic downturn in U.K. deepens.