Large Call Volume in EURODOLLAR indicates upside is limited: GOLD implications

Bloomberg reports that a big bet has been placed in the option market. About $30 million has been plowed into an options bet that the market has gone too far in pricing in Federal Reserve cuts this year. The trader expects that FED will not cut rates in 2019 and he has placed $30 million behind it.

The market has priced in over 40bps of rate-cuts in 2019 - while The Fed just told the market to expect no rate-changes in 2019.

The option volume this week shows the build of the call option.

To be sure, the trade may be a move to take advantage of opportunities in short-term rates after front-end volatility jumped in recent days. And with almost nine months until expiry, there’s plenty of time to adjust exposure while the Fed remains on hold. The position also stands to benefit from any year-end funding squeezes.

With expiry timed for the Monday after the Fed’s December decision, the position could be the first strong showing of resistance to the market’s dovish swing. The result of Wednesday’s five-year Treasury auction shows this wager may be on to something. Investor appetite seems to be waning for one of the bond market’s hottest maturities of late.

What does it matter to us ?
If yields do start to move back to 2.7% area, commodities esp GOLD will continue their long term downtrend. Gold charts here:

GOLD long term charts suggest that bounce to 1350 in 2019 is a minor retracement in its larger downtrend. We could have resumed the trend down this week.

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