Jan 15. SNB drops EUR peg. Vote of no-confidence

–The Swiss dropped their EUR peg this morning, sending EUR/CHF from 120 to nearly 85 instantly, now 104ish.  US stocks immediately spiked to yesterday’s lows but then came back, now just modestly lower from the close.  It seems to me that the decision by the Swiss is essentially a vote of no-confidence in the Euro, and of course against the USD, the euro dropped to a new low below 116 but has now bounced back to just above 117.  This move is likely a precursor to more instability and is likely disinflationary for the US.
–In US interest rates yesterday tens fell another 5.5 bps to 183.5.  Near eurodollar calendar spreads continue to post new lows. Peak 1-yr spread is still Sept 15/16 but it fell another 4 bps yesterday to just 78.  There was sizable capitulation in both futures and options on these spreads, for example, there was a seller of Short September (based on EDU6) 9825/9787ps vs buyer of front Sept put spreads.  Clearly looks to be liquidation from this morning’s open interest; the net effect is to compress the spread between near contracts and deferred.  Red/green (2nd to 3rd year) also made a new low of just 58 bps.  The market is taking the Fed out of the equation.  However, the back end of the dollar curve steepened just slightly, for example greens were +8.125 while golds (5th) were only +5.875.  Bears watching.  Red/green/blue pack fly settled 29.5 on Friday, and has fallen to just under 23 in just 3 sessions.
–India delivered a surprise 25 bp cut, and like every other central banker, Rajan is advising the government to make structural changes.  Sensex up nearly 3%, probably the only equity market worth being involved in from the long side.
–Today’s US news includes Job Claims expected 295k but will likely be above 300.  PPI -0.4 but +0.1 Core.  Philly Fed expected 20 from 24.5.  Retail sales were disappointing yesterday… as the price of oil weighs on energy firms I would expect data to come in softer than ‘official’ expectations.

Posted on January 15, 2015 at 5:12 am by alexmanzara · Permalink
In: Eurodollar Options

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