July 26, 2006
Eurodollar futures are basically the international equivalent of 90 Day Treasury Bills---or short term interest rates (and have nothing to do with Europe, or the Eurocurrency). Like the Bond market, Eurodollar futures go down when rates are rising...and go up when rates are falling.
While everyone is still debating if the Fed is done raising rates, I am of the opinion the next move in short term rates will be to fall, and as they do, Eurodollar futures will be going up (as will the Treasury Bond market).
I believe the Fed "squeeze" of the past few years has finally begun to seriously kick in...which is exactly what the Fed intended. During the past 3-6 months, industrial metals prices (zinc, tin, silver, platinum, palladium, nickel, lead, gold, copper, aluminum) have fallen close to 20% on average and virtually all of them appear to have built potentially major tops. Lumber prices as well have fallen roughly 20% in the last three months...These markets would not be acting this way if demand was outstripping supply or if inflation was not beginning to be under control...or if industrial economic activity was not slowing.
The financial markets typically move AHEAD of public opinion and my guess is somewhere during the next 6-8 months, the press will be be FULL of economic hand-wringing, and calls for the Fed to lower rates will be rampant...and Eurodollar futures will already have reflected that need for the Fed to act...In other words, Eurodollar futures will be significantly higher than they are now....I would also add, in the event of further escalations in the Middle East, a so called "flight to quality" would also probably benefit the Eurodollar market as international investors look for safe places to park their money.
At its current level, the March 2007 Eurodollar contract reflects the idea that eight months from now rates will be exactly where they are today...that nothing will have changed. I do not think this will be the case and I am now buying futures and call options with expectations of at least a 75-100 point move before March expires.
Give me a call if you are interested...