“A major interest rate technical analysis signal” by Harold AGJ Davis

The Eurodollar futures chart has given a major signal that the short term interest rate regime of the last eight years is under attack and breaking down right now. Yes, the chart action indicates that we may finally be seeing the market warning of a rise in short term rates.

Since 2010, the Eurodollar futures chart has demonstrated price support in the 99.17 to 99.25 zone on three separate occasions. Today, Eurodollar futures prices have violated this support zone and are trading at 99.125. For chartists, this strongly suggests that something profoundly different is happening and that the old paradigm that generated the previous trading range environment has come to an end.

For those unfamiliar with the Eurodollar futures contract, the underlying Eurodollars are US dollar denominated deposits held at offshore banks (typically in Europe) or even foreign branches of US banks. Not subject to the Fed’s oversight, the Eurodollar market has become the global wholesale market for short term liquidity.

To calculate the futures, the Eurodollar interest rate is subtracted from an index value of 100 to make a contract price that can be traded. This allows participants to both see the prevailing interest rate (100 – 99.125  = 0.875 or 87.5 basis points) and to have a contract that behaves like a bond in that lower rates make higher prices and higher rates make lower prices. So, a Eurodollar futures price move below support is the equivalent of an interest rate breakout to the upside. That is what is taking place now. 

The reasons behind this interest rate move could be a combination of factors. First, some Federal Reserve Board members have recently made hawkish comments calling for official rate hikes sooner rather than later, possibly as early as the FOMC’s September meeting. Alternatively, global sentiment has been buffeted by a series of surprising developments in recent months, like Brexit, and suppliers of capital might be building a larger risk premium into their calculations. Or it might be something as simple as another bout of European economic malaise contributing to corporate and sovereign liquidity problems. Perhaps it is an Asian banking crisis. Time will tell. 

Whatever the reason, it is important to recognize that all previous challenges from late 2009 to the present were contained within a trading range that is now past history. This time, the Eurodollar market is doing something new and different that may be the early stages of an important interest rate spike. This has obvious implications for other asset valuations.

Harold AGJ Davis is the Author and Analyst at www.prairiecropcharts.com