USD Demand

April 24, 2019

–It’s pretty clear that there’s demand for dollars and USD assets as DXY rallied to a new high for the year, as did stocks (on earnings reports) while yields fell.  Almost all trades going through eurodollars are for possible Fed eases, with all contracts from EDH20 through the golds (5th year) up 2 to 3 bps.  At the same time, the Fed effective rate is printing 2.44, reportedly due in part to money market fund outflows related to the recent tax date.  In any case, there seems to be demand for short term USD funding, but a stronger dollar is contributing to disinflationary impulses at the same time.   For example, gold was down another $4 to a new low yesterday.  I have attached a chart with DXY and the BBG base metals and grains indexes; DXY at the high of the year with grains making new lows and metals treading water.

–As mentioned, nearly all ED option plays are for eases from Q3 forward.  Heavy buys in EDZ9 and EDH0 9775/9787 c spds as a package.  A new 40k position featured a buyer of EDZ20 9775/9812cs vs sold 9737p for 0.5 credit.  This settled at 0.75 credit vs 9774.5.  Position has +0.30 delta so equivalent to about +12k futures.  There was also a large ratio call spread in EDZ9, 9775/9800c 1×2, where the top strike was bought for flat (settled 6.25 and 3.25).  The 9800c settled unchanged at 3.25 with EDZ9 +1.5 at 9749.5, but it’s again worth noting that the equidistant 9700p settled at just 0.5.  Heavy buying in July and Sept calls are targeting the 9762.5 strike or higher.  Example +10k x 15k EDN 9762/9787c 2×3 for 4.0.  With 3-month libor just under 2.59%, the 9762.5 (2.375%) strike requires near certain probability of an ease.

–It’s rather surprising that yields are falling as equities surge to new highs, but markets have lost any lingering concerns about possible hawkishness out of the Fed. (Yes, stocks ARE the economy).  It’s also surprising that volatility in the oil market is falling even as prices print new ytd highs (though oil is a bit lower this morning).  — In treasuries 2/10 notched a new high at 20.7 bps, up 0.4.  There was a new buyer yesterday of TYK 123.25 calls for 7 to 10, (settled 8 v 123-04, OI +11k).  May treasury options expire Friday, and as of this writing that strike is 7 in the money with TYM printing 123-115.  Also worth noting with respect to the demand for dollars is that the Turkish lira is printing new ytd lows at 5.87.  While european banks have rallied with the rest of the market, the possibility of spillover effects if Turkey crumbles may become an issue.

–5 year note auction today. 

Posted on April 24, 2019 at 4:58 am by alexmanzara · Permalink
In: Eurodollar Options

Leave a Reply