Short term
Trade view / 17 September 2015 at 13:52 GMT

Eurodollar finally easing back

Chief Investment Officer / ACIES Asset Management
Switzerland
Instrument: GEZ5
Price target:
Market price:
Background

The Eurodollar has been in a strong positive trend for twenty years. If that surprises you, you're probably mixing up Eurodollar with EURUSD, which is something different altogether. The unfortunate naming of the 3-month dollar interest rate market tends to cause some confusion at times.

The reason for the consistent rise in the Eurodollar is twofold. The obvious reason is the decline in interest rates for the past few decades. The less obvious is the persistent backwardation. Even if the actual LIBOR rate stays constant, the backwardation means that the futures price will keep rising. 

To put things into context, look at the long term chart below. It shows a very strong tendency for this market to move up, which really shouldn't surprise anyone. 

Long term Eurodollar futures price
ED Monthly

Source: CSI Data

The monthly view doesn't give you too much information on the latest developments, so we need to go down to daily to see the opportunity. 

Daily Eurodollar futures continuation, with trade signals
ED daily

Source: CSI Data

The daily chart shows the previous three signals given by the same logic as this trade idea. The idea is based on entering in the direction of the trend, in this case the long side, but only on a certain pullback.

We just saw three trades in a row with good results. Now we're backing down again and it's time to buy and try for number four.

Management and risk description

Buy into the December Eurodollar, GEZ5, on current levels. There are multiple liquid points for this market and for long term positions it often makes sense to trade further out, since that gives you a larger discount. For this trade idea however, we have a short enough time frame that it doesn't matter much.

Set a fixed stop and target from the start, for a known risk and potential reward.

Eurodollar dashboard
ED

Source: FollowingTheTrend.com

Parameters

Entry: Buy on current levels, around 99.49 USD.

Stop: Hard stop at 99.418 USD.

Target: Take profits at 99.634 USD

Time horizon: Around two weeks.

December Eurodollar
edz5

Source: ThomsonReuters

— Edited by Clemens Bomsdorf

Non-independent investment research disclaimer applies. Read more

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