We all know the Fed recently sent a beacon to the market crowd that the FF’s target will remain at rock bottom for a long while. We want to put that decision of telegraphing ultra low rates for three more years, to advantage.
One reason for the FF’s forecast is that most believe it; the other is that Bernanke is using this as a stealth tool in an effort to flatten the term structure. The impact will be just the reverse.
Key is that the world market crowd takes Fed forecasts as gospel, as reality ahead. Thus, intended Fed generosity is priced in the Eurodollar strip. But we know conditions ahead will not cooperate; we know in fact that policy makers will change this forecast before most of them do.
Some are catching on, the Philly Fed’s Plosser and the Dallas Fed’s Fisher two of these. In fact, Fisher’s statement today the notion of another QE to be in the works is a “fantasy of Wall Street,” is very funny indeed. He is perhaps the most qualified of the bunch, but then neither he nor Plosser are voting this year.
Thus, we are keen for clients to own (L – S) the Euro strip. We recently used Mar/12 – Mar/13 as an illustration, last 99.54 / 99.43, or -11. We had hoped for the opportunity to own the spread near even, early Feb, but no luck and such a window is not likely now. Since course of least resistance for the Euro strip is wider over the intermediate term, look to own this or a similar spreads at or near present levels. A reasonable target on Mar/12 – Mar/13 would be -25.
We want this trade on or something similar in anticipation of policy makers coming to understand, which indeed they will, that their earlier forecast was wrong.
Robert Craven
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