March 11. EM weakness to forestall a June rate hike?

–Once again, yields are dropping as we go into the ten year note auction.  Yesterday tens fell around 6.5 bps to 213 on the w/i.  The curve flattened with red/gold eurodollar pack spread declining 4.375 bps to 127.  Stocks, oil and the Euro were pounded yesterday (SPX -1.7% and CL down 134 late to 4866).  EURJPY was down 186 to a new low of 129.61.  The Nikkei has gone from 15000 in October to 19000 in the beginning of this month.  If the Japanese economy is dependent on exports, and the EU is out-devaluing the yen in search of the same export markets, and the Chinese economy is slowing, then the Nikkei is a short.  Headlines on the FT this morning: China data point to sharper slowdown, Steep deceleration in virtually all economic indicators.
–Implied vol firmed slightly in interest rates as yields eased.  However, there was a seller of about 10k TYJ 126/128 strangle at 33, approximately 1/4% wide in terms of yield, so around 2.00 to 2.25 strikes.  Probably not a bad bet with expiration only two and a half weeks away.
–The plunge in EM currencies is intensifying, to the point that the Fed may want to sit on the sidelines at the June meeting.  I was looking back at the 1998 episode of the Asian crisis and failure of LTCM…at the time I had never even heard of Malaysian Ringgit, or Indonesian Rupiah or the Thai Baht.  But I do know that the rupiah is making new lows now, right along with Brazil, etc.  Perhaps next week’s FOMC will offer some clues in terms of further reference to “…financial and international developments.”  In any case, in eurodollars there was a large trade that would benefit if perceptions shift more toward a September rather than June hike.  Buyer of EDM 9962/9975 call spread vs selling 0EM 9887/9900cs for 0.25 bp in 40k.  Near spread is 2 out of money, the back end is 16.5 away.  This one could still have some risk in it if stocks plunge…

Posted on March 11, 2015 at 5:18 am by alexmanzara · Permalink
In: Eurodollar Options

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