Dec 4. ECB today
–Ten year yield was unchanged yesterday, 30 yr bond fell 2 bps to just under 3%, 2.982.
–As Dudley and Fischer hint at normalization, perceptions have once again shifted forward somewhat for the idea of rates hikes beginning earlier in 2015. There was quite a bit of put buying in June15 euro$ puts, for example, EDM5 9962/9937p 1×2 bought for 4.5 in size of about 25k. But it’s kind of like the tube of toothpaste theory; squeeze on the front of the tube and the back end expands. If the market expects higher rates sooner, then that means lower rates later. For example, red/gold euro$ pack spread fell over 4.5 bps on the day, to a new low of 169.25, as reds -4.125 and golds +0.5. The blue pack (4th year) settled -1.375, gold (fifth) +0.5. In treasuries, 5/30 fell to a new low below 138 bps, -3.8 on the day. The market has no fear of inflation, and a tighter leaning Fed simply reinforces that sentiment.
–The thought of higher US rates also underpins the dollar. Dollar index went to a new high yesterday, though it’s now nearing a 38% retrace level from the high of 2001 to the low of 2008. EUR, having weakened to a new low yesterday just above 123, is getting close to the 50% retracement of the same move, low of 82.30 in 2001 and high of 160.38 in 2008. So there should be profit taking in the dollar near these levels, but the fundamental backdrop supports the strong dollar trend. ECB meeting this morning, with high expectations for a QE program. There’s no toothpaste left in that tube.
–Today’s US news includes Jobless Claims expected 295k after yesterday’s slightly weaker than forecast ADP. Emerging markets (and EEM) still weak. Brazil raised rates to 11.75%.
EUR nearing 50% retrace from 2001 to 2008
