January 18, 2022

Beginning to exit our Eurodollar Short Position

Three months ago, when I amped up my campaign to own Eurodollar puts, there was virtually ZERO opinion out there that the Fed would be raising rates, before, at the earliest, LATE 2022. However, unless you’ve been on Mars, you must be aware that all of Wall Street’s geniuses have now totally flipped and are all calling for at least 3-4 rate increases between now and year end…which I believe will likely become the reality.

BUT…In the markets, during the past 3 months, Eurodollar FUTURES have anticipated the Fed’s actions for the coming year and have already made fairly steep downside moves, to the extent that EURODOLLARS HAVE ALREADY PRICED IN FOUR 1/4% RATE INCREASES BY DECEMBER…such that I think that the odds are quite high that the money to have been made on the short side of Eurodollars is DONE for the year…or at least the next 2-3 months…and am now looking to exit 100% of our short positions as we head towards next week’s first Fed meeting of 2022.

The Reason?

I have traded through 4 rate raising cycles during my 4 decades in this insane futures predicting business…and though it absolutely does not have to happen the same way again, with the first two charts below, of how Eurodollars traded during the last two rate increase cycles (2004-2006 and 2015-2016), you’ll hopefully be able to see that Eurodollar FUTURES almost exactly anticipated ALL of the Fed’s raises for the ensuing year…In other words, in both of these cases, by the time the Fed actually made their first move to begin raising rates, the FUTURES markets had already done it for them FOR THE NEXT 12 MONTHS…meaning that, as regards trading TODAY’S market, my very strong opinion is that the down move in Eurodollars is DONE for a while, and that the next most likely move in the will be sideways to higher…for at least the next 2-3 months.

HOW RATES WENT UP THE LAST TWO TIMES THE FED TIGHTENED…

In late 2016, with rates down around 1%, the idea began to grow in the media that the Fed was preparing to tighten (same as we’ve recently seen again) and Eurodollar FUTURES began to decline some months BEFORE the Fed actually did anything…such that, by the time the Fed DID move on Dec 14, 2016…the FUTURES markets had already priced in 4 rates moves during the ensuing 12 months of 2017…the result being that Eurodollars spent the next 9 MONTHS basically trading sideways to higher…before drifting down to each contract’s last day of trade being almost exactly where it had been, to the day, when the Fed actually made their very first rate increase…3, 6, 9 and 12 months earlier.

My guess is that all that sounds a bit confusing but I’m hoping the two charts following, depicting what I’ve just described, will clear things up…And if it doesn’t, give me a call and I know I can do so…

1. Note that all of the futures contracts were declining, steadily to sharply lower, AHEAD of the Fed’s first increase on Dec 14, 2016.
2. Then look at where they all were the day of that first rate increase…and then look across the chart to where each contract eventually expired.
3. Note that the March contract, was maybe 3 ticks lower at expiration…while the June, Sept, and Dec contracts were ALL higher, with the Sept contract a LOT higher in that the Fed skipped doing any raise at all between June and December.
4. This does NOT have to happen exactly like this again, but this (and the other 3 rate rising cycles I have seen since 1980) is precisely why I have been HAMMERING away at the idea of getting short Eurodollars AHEAD of when the Fed finally wakes up and acts…And that NOW it is time to take the money and exit this trade.

Overkill I suppose, but one more time…The main thing here is to look at where they were on Dec 14, 2016…and where they were at expiration.

And here is how it played out (the same) in the first year of the 2004-2006 rate increase cycle…

Same as now, in the months leading up to the Fed beginning to raise rates, Eurodollars sold off as public opinion went from NO raises to "They’re gonna raise a LOT...and fast!" And most importantly, by the time the Fed DID begin, the markets had already built in a 2% increase all the way out to a year later...SUCH THAT WHEN THE FED DID ACTUALLY MAKE THAT FIRST MOVE, EURODOLLAR CONTRACTS ACTUALLY RALLIED FOR MONTHS, THEN DRIFTED BACK DOWN TO EXPIRE JUST ABOUT EXACTLY WHERE EACH CONTRACT HAD BEEN ON THE DAY OF THE FED’S FIRST RATE INCREASE.

HERE IS WHERE WE ARE NOW…A WEEK BEFORE THE FIRST FED MEETING OF THE YEAR…

A chart of how today’s Eurodollar FUTURES have been moving…

The Fed is meeting Jan 25-26, and while they are not expected to actually move then, a announcement of their intent to begin raising rates is now definitely expected, which has me leaning towards considering this as being the REALITY of their first rate increase, and thereby potentially ending this FIRST FUTURES STAGE of the move down in Eurodollar prices...And not wanting to try to be too perfect about this idea, WE WILL BE EXITING VERY CLOSE TO 100% OF OUR POSITIONS…MAYBE KEEPING SOMETHING ON, SMALL, AND LEVERAGED, IN THE EVENT THE FED DOES MAKE AN UNEXPECTEDLY AGGRESSIVE MOVE.

Give me a call if you are on this with me and let’s talk about getting this done.

Thanks,

Bill

770-425-7241

866-578-1001

All option prices in this newsletter include all fees and commissions. All charts, unless otherwise noted, are by Aspen Graphics and CRB.

The author of this piece currently trades for his own account and has a financial interest in the following derivative products mentioned within: Eurodollars