Mar 26. New high in dollar/stocks

Some big moves yesterday.  New high in the dollar.  Euro plunged as Trichet denigrated IMF involvement with respect to Greece.  Curve was much steeper.  Stocks rallied early but faded late, producing an outside day with close at the bottom of the range.  Yields on the long end of the curve broke out of recent ranges, with tens now around 3.90%, up 7 bps on the day.  However, near eurodollar contracts and FF were unchanged.  This action indicates a supply problem more than anything else, and increased tensions with China aren’t helping. 
–The stronger dollar is likely to encourage deflationary impulses. Certainly higher rates at the long end could derail housing, especially given the end of home-buying tax credit and Fed’s MBS purchases.
–Red/gold pack spread rose over 6 bps.  The next FOMC meeting is the end of April.  However, April/May FF spread is sitting at only 1 bp.  Clearly the market perceives no risk of a hike, or even a change in language at that meeting.  However, more deferred FF contracts do begin to price the possibility of higher rates, though not aggressively.
–While treasury vol has firmed in response to this week’s price action, eurodollar vol remains subdued.  Worth selling FV vol and buying reds?
–Today’s news includes GDP revision.  Consumer Sentiment expected 73.0.

Posted on March 27, 2010 at 8:39 am by alexmanzara · Permalink
In: Eurodollar Options

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