- Golden opportunity earlier today when EDM0/EDZ0 spread narrowed to +32. At the time, EU fears hit near term high panic levels with EUR/USD touching low of 1.3143 vs current 1.3225.
- Doubled up on short ED spread position at +32.5 so average in-rate now at +36.
- In making the trade. had to summon up all of my 18 years Money Markets trading experience to over-ride chart reading and break trading rule not to average losers.
- Logic : EDM0/Z0 = amount of future rate hikes priced in between Jun10 and Dec10. With ZIRP in place, and the market NOT likely to price OUT higher Fed Funds later in the year, I would imagine that the absolute floor on the spread would be somewhere between 25-30 bp. Thus, in the low 30s, the spread appeared too cheap to me. Any change in Fed language will easily see this widen out to +50.
- Would appear that the market agrees with my above assessment, with the spread back to trading at +37, just a few hours later.
- Risk : Greece/Portugal contagion spills over into interbank market which freezes up and puts upward pressure on the very short end of the MM curve. Then EDM0 will sell off a lot more than EDZ0 and cause the spread to narrow.
- Price action appears to suggest that the EU contagion trade has run its course in the short term and spike bottoms have been formed almost everywhere. (Squared most of EUR/USD at 1.3155 earlier).
- Game plan now is to let Risk On trades run their course before going back to sell EUR again.
2 comments:
The Greek tragedy is already impacting LIBOR, with May contract pricing 3-month at 0.40% and this expires in 3 weeks. European banks balance sheets are loaded with Greek debts. This analogous to the subprime crisis.
Yes. Watching closely.
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