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Weekly Essay (Jan 8, 2017) – The Surge in Non-Quarterly FOMC Meetings:

We had a noticeable shift about how the quarterly vs non-quarterly meetings are priced.  I mentioned in an email last week that there was a large increase in open interest in FFX7.  Since then, there has been a larger increase in OI.  Open interest in FFX7 increased over 250% the past week, from 10.0K to 35.4K contacts.  The other FF contracts had no notable OI change (other than FFF8 which has no meetings in it).  I was speculating this was some kind of “September FOMC” deferral trade, since it is unusual for someone to want to take a large position in a less liquid contract otherwise.  My best guess is that a large market participant is playing for the September meeting to get priced out and moved into November.  The other possibilities are fading the Dec meeting (vs EDZ7) and/or combining a ED-FF spread narrowing view.

Idle speculation aside, the interesting repercussion is that most of the non-quarterly meetings have started getting noticeably priced in.  Compare the Fed meeting pricings from this past Friday, with the last Fed meeting summary I published just 5 weeks ago.  There are a number of interesting things that have happened:   CLICK TO READ THE REST OF THIS ARTICLE FROM THE CA WEB SITE

Next Week: I discuss the January fixed income rally we have had the past few years.

Other Delayed Market Comments from the CA Newsletter:

From the Value on the Curve Section

  • Look to buy cheap flies in the valley of the fly curve.  Favorable roll and stimulus should keep these supported.
  • Look to establish long double fly positions at the back of the curve.  The year double flies are back to the -2 level again.
  • Fade the Jan 2018 Fed meeting relatively.  This may be Yellen’s last (lame duck) meeting and comes after a potential hike in Dec 2017.

From the News Takeaways SectionThe Employment Report was solid.  The main thing missing from previous reports were signs of wage gains, and we finally got that.  Wage gains (if true) plus upcoming fiscal stimulus could push the Fed to 3 hikes next year.  But if you are a bull, you could take solace in that: (1) this is just one month of data, (2) wage growth for non-supervisory workers is still low, (3) this is in a seasonally volatile period, and (4) brick and mortar retail appears to have gotten clubbed so we could see some holiday hiring payback in coming payrolls.  The tail risks on interest rates have increased.

Trade Summary from the Delayed CA Newsletter:

FLIP TRADE UPDATE: I discuss what I think are the best bullish and bearish flip trades.  I also mention a Euribor flip trade theme for people who like making markets on the back of the curve.

OFFICIAL TRADE UPDATE: We added three new trades (and three additional variations).  I discus a major crisis trade for “zero” that we ended up putting on last week.  We also added some cautious bearish plays.

Forum Update:

The most notable posts from the Forum were:

My thoughts on hedging FX Forwards.  This is not my area of expertise, but this was my reply to a reader’s question.  If you want to contribute, take a look at the post.  CLICK TO READ THE REST OF THE POST ON THE CA FORUM

A reader’s comments on how trading BAs can be different than EDs.  CLICK TO READ THE REST OF THE POST ON THE CA FORUM

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