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Time to consider a Interest Rate spread???

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Consider interest rates and the yield curve. Again, market-driven US rates traditionally make their seasonal peak in April/May. Monetary liquidity is tightest then after payment of income taxes has transferred a massive amount of financial assets from out of the private and into the public sector by April 15.

By June, however, that liquidity begins to loosen, continuing to do so through the end of the US fiscal year September 30 as governments need to borrow less and that tax money already collected filters its way back into the private sector. As it does, Treasury instruments all along the yield curve have tended to trend higher, especially into the last days of September. In fact, MRCI has found that December 30-year Treasury Bonds have closed higher on about September 29 than on about September 20 for the last 12 consecutive years and in 24 of the last 27 --- with one of the other three years at breakeven and no loss greater than 0~06.

As discussed here several times, when rates move, the long end of the yield curve usually moves sooner, faster, and farther. Big money is most concerned about long-term survival and advantage, and change is magnified through time. Thus, for example, the Long December 30-year Bonds/Short December 10-year Treasury Notes spread has closed more favorably toward bonds on about September 29 than on about September 20 for the last 17 consecutive years --- suffering no daily closing drawdown whatsoever in 11 of those 17 years and none greater than 0~06. (Each 0~01 is worth $31.25; notes trade in half that amount, quoted as 0~005. Because MRCI plots these spreads in decimal points, we will provide both in the text.)

This spread made its seasonal low right on time last May at 24.4219 (24~135). It then rallied sharply into late June before falling back into a typical interim low in July of 25.8594 (25~275). Once again it rallied sharply, rising to a new high earlier in September of 29.8594 (29~275) --- a move of exactly 4.0000 (4~00).

It has since been pulling back, as is normal seasonally. The seasonal entry this year coincides with the final day of the FOMC meeting, which will be watched closely for clues of future Fed moves to tighten (or loosen!) rates. The market(s) is often volatile immediately after the meeting and even the next day as the potential impact of any rate changes or comments is digested. Will this spread retrace 40-60% of its recent move higher going into the meeting --- and then once again enjoy a final surge into the end of the US fiscal year?

If you have any questions or comments, call me at 541-484-7256 or email This e-mail address is being protected from spambots. You need JavaScript enabled to view it .

Trade 'em

Jerry Toepke

MRCI - Editor & Spread Expert

541-933-5340

PS Sign up for a Free 14-Day Trial into Jerry's Weekly Spread Commentary here: http://goo.gl/VIt756

Each weekly version selects two upcoming spread strategies, reviews their seasonal dynamics, provides current fundamental and technical perspective, and discusses their potential risk/reward and any relevant alternative trading ideas. A new Weekly Spread Commentary, along with access to the relevant historical data and charts updated daily on our website, is sent via e-mail each Friday.

PLEASE REMEMBER:  These are NOT trading recommendations.They are provided for informational purposes only and are intended only as potential ideas based on the market's own performance in the past, but past performance is not necessarily indicative of future results.  Futures trading involves substantial risk of loss.

SEASONAL TENDENCIES ARE A COMPOSITE OF SOME OF THE MORE CONSISTENT
COMMODITY FUTURES SEASONALS THAT HAVE OCCURRED OVER THE PAST 15 YEARS.
THERE ARE USUALLY UNDERLYING FUNDAMENTAL CIRCUMSTANCES THAT OCCUR
ANNUALLY THAT TEND TO CAUSE THE FUTURES MARKETS TO REACT IN A SIMILAR
DIRECTIONAL MANNER DURING A CERTAIN CALENDAR PERIOD OF THE YEAR.  EVEN
IF A SEASONAL TENDENCY OCCURS IN THE FUTURE, IT MAY NOT RESULT IN A
PROFITABLE TRANSACTION AS FEES AND THE TIMING OF THE ENTRY AND
LIQUIDATION MAY IMPACT ON THE RESULTS.  NO REPRESENTATION IS BEING MADE
THAT ANY ACCOUNT HAS IN THE PAST OR WILL IN THE FUTURE ACHIEVE PROFITS
UTILIZING THESE STRATEGIES.  NO REPRESENTATION IS BEING MADE THAT PRICE
PATTERNS WILL RECUR IN THE FUTURE.  HYPOTHETICAL PERFORMANCE RESULTS
HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW.  NO
REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO
ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN.  IN FACT, THERE ARE
FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS
AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING
RESULTS PROGRAM.  ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE
IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT.  IN
ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO
HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF
FINANCIAL RISK IN ACTUAL TRADING.  FOR EXAMPLE, THE ABILITY TO WITHSTAND
LOSSES OR ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING
LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL
TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE
MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING
PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF
HYPOTHETICAL PERFORMANCE RESULTS AND ALL OF WHICH CAN ADVERSELY AFFECT
ACTUAL TRADING RESULTS.  RESULTS NOT ADJUSTED FOR COMMISSION AND
SLIPPAGE.

Last Updated on Monday, 18 September 2017 08:08
 

Time to consider a Canadian (C$) and Australian (A$) dollars spread?

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Did you know?  The Canadian fiscal year runs April-March; the Australian, July-June?

The C$ has tended to run higher during the first month of the new Canadian fiscal year and then to decline moderately into mid/late May before turning higher again. The A$ has tended to perform in a similar manner but even more so.

In other words, the A$ has usually underperformed the C$ during May. That may sound like an underwhelming endorsement, but, in fact, the Long June Canadian Dollar/Short June Australian Dollar spread has closed more favorably toward C$ on about May 31 than on about April 30 in 18 of the last 20 years --- albeit rarely without drawdown. (The minimum increment for both the C$ and the A$ is worth US$10.00 --- although the C$ can now trade in half that.)

This spread has been gently cycling downward from the high in mid 2015 when the C$ was at a premium to A$ of +7.04. After posting its most recent rally high of +2.90 in January, by March it had fallen to a new low for this move of -2.19 --- barely below its last cyclic low in November of -1.90. It then quickly reverted to a small premium in mid April of +0.47.

But now it has declined again, trading down this past Friday to -1.23 --- a little more than 63% back toward its March extreme. Will that low hold? Will the spread turn back up as it normally does? Again, traders may find better entries, but certainly the high point of its last run up at +0.47 will serve as a pivotal point for any larger rally.

Trade 'em

Jerry Toepke

MRCI - Editor & Spread Expert

541-933-5340

PS Sign up for a Free 14-Day Trial into Jerry's Weekly Spread Commentary here: http://goo.gl/VIt756

Each weekly version selects two upcoming spread strategies, reviews their seasonal dynamics, provides current fundamental and technical perspective, and discusses their potential risk/reward and any relevant alternative trading ideas. A new Weekly Spread Commentary, along with access to the relevant historical data and charts updated daily on our website, is sent via e-mail each Friday.

Last Updated on Thursday, 03 August 2017 07:54
 

Weekly Spread Commentary - Time to consider a Gasoline & Heating Oil spread?

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Onward to Even Money?


A trader entering a spread with the long side at a discount would love to see it go to a premium. But first it must go through even money. Will two candidates this week be able to do so?

Consider gasoline and heating oil. Their patterns of consumption vary inversely, of course. That of gasoline peaks in July/August, the height of the summer vacation and driving season, just when temperatures are hottest and consumption of heating oil at its nadir. In contrast, consumption of heating oil peaks in winter, just when driving conditions are worst.

In between those two peak seasons are so-called shoulder months. For example, the driving season traditionally ends Labor Day (first Monday in September). Children return to school, and families drive to soccer practice rather than to national parks. Temperatures cool but are not yet cold. Refiners use these months to make the switchover from maximizing production of gasoline to that of heating oil, temporarily slowing production of each.

One would logically think that gasoline for delivery in October, for example, deserves a lesser price than heating oil for delivery then. After all, gasoline consumption is slowing whereas the industry is accumulating inventory of heating oil for cold weather. And it normally does. But even that spread can vary considerably during driving season when gasoline demand is greatest.

From 1986 through 2004, these spreads fluctuated quietly around even money. But in 2005, the character of the market changed drastically. Volatility rose sharply, and gasoline most typically traded at a discount --- sometimes an exceptionally large discount. The 15-year seasonal pattern for the October relationship, for instance, suggests gasoline starts trading at well under value to heating oil as the prior heating season begins but then outperforms heating oil throughout winter.

With the arrival of spring, it actually stalls for a while, but then it has usually made a final runup throughout the first month of summer. For example, the Long October Gasoline/Short October Heating Oil spread has closed more favorably toward gasoline on about July 21 than on about June 20 in 13 of the last 15 years --- suffering a daily closing drawdown greater than 1.60 cents/gallon in only 4 of those years. (Each 1.00 cent/gallon is worth $420.)

This year the spread began trading last October with gasoline at a discount to heating oil of about -23.00 cents/gallon --- near the middle of the range for the last decade or so. That discount then narrowed sharply, trading through even money and actually to a modest premium of 2.79 in January --- traditionally the coldest month of the year! It then retraced 60% of its rise as it pulled back into February to trade at a discount of -12.30. But then it made yet another run into April, reaching another albeit even more modest premium.

The spread has now returned to a discount and is actually testing the February extreme. In fact, it traded as wide as -10.70, narrowed to -8.62, and ended to week retesting -10.00. Will this area hold? If so, can it generate another run toward even money as the Fourth of July holidayopens up summer to cross country driving and weekend cruising?

Please remember: These are NOT trading recommendations. They are intended only as potential ideas based on the market's own performance in the past, but past performance is not necessarily indicative of future results. Futures trading involves substantial risk of loss.

If you have any questions or comments, call me at 541-484-7256 or email This e-mail address is being protected from spambots. You need JavaScript enabled to view it .

Trade 'em

Jerry Toepke

PS Sign up for a Free 14-Day Trial into Jerry's Weekly Spread Commentary here: http://goo.gl/VIt756

Each weekly version selects two upcoming spread strategies, reviews their seasonal dynamics, provides current fundamental and technical perspective, and discusses their potential risk/reward and any relevant alternative trading ideas. A new Weekly Spread Commentary, along with access to the relevant historical data and charts updated daily on our website, is sent via e-mail each Friday.


Last Updated on Monday, 20 June 2016 10:05
 

Forex — Wild & Woolly!

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Forex — Wild & Woolly!

'Tis the season — when the US dollar has tended to reach an interim peak in mid/late November before trending at best sideways but usually lower through the end of the calendar — and tax! — year.  It being the world’s reserve, other currencies thus tend to rally through December.  But they do so at their own respective paces.  Who’s hot — and who’s not?Read More

Consider the Australian (A$) and Canadian (C$) dollars.  The Australian fiscal year runs July-June; the Canadian, April-March.  The two countries and their economies are similar, but their seasons and hemispheres are opposite.  Furthermore, one country exports to the world’s largest economy and the other to the world’s largest emerging economy.  Thus, their currencies are closely related but also pulled in different directions at different times of the year — ideal for seasonal spreads.

The seasonal pattern for the A$ illustrates how it has tended to behave in the Southern Hemisphere’s spring and early summer.  It rises (against the US$) from mid/late November into early December, pulls back into mid December, and then runs higher into early/mid January.  In fact, MRCI has found that March Australian Dollars have closed higher on about January 13 than on about November 12 in 14 of the last 15 years.

In contrast, the seasonal pattern for the C$ suggests it has tended to bounce modestly from mid/late November into early December before trending at best sideways but more typically lower into early January and a frozen Canadian winter.  The net effect has been for the A$ to regularly outperform C$ from late November into early/mid January.  For example, the Long March Australian/Short March Canadian Dollars spread has closed more favorably toward A$ on about January 10 than on about November 25 in 14 of the last 15 years — in only 4 of which suffering any daily closing drawdown greater than 0.98.  (The minimum increment of 0.0001 for both CME futures is worth US$10.00.  Brokers accept nominal spread orders.)

For the last four years, these two currencies have fluctuated from A$ at a premium to C$ of +7.26 to A$ at a discount of -8.23.  This year’s spread traded with A$ at a premium of a little more than +1.00 several times into early September before falling by late September to a discount of as much as -3.12.  The spread then retraced about 50% of its loss, narrowing its discount back to -0.88.  Since then it has widened again back toward the September extreme, closing the week within about 0.50 from it.

How much of an effect will China’s efforts to stimulate its own economy have on the A$?  Enough to reinforce normal seasonal influences on its tendency to outperform the C$?  Will the September low at -3.12 hold?  The last minor rally failed at -1.26, a penetration of which might signal a normal seasonal trend is underway.

Now consider a relationship between the Eurocurrency and Japanese yen.  The fiscal year for the European Monetary Union runs January-December; that for Japan, April-March.  The euro, like the D-mark before it, has exhibited a tendency to establish an interim low (against the US$) in mid November and then run higher into mid December on its way into the new year.  In fact, MRCI has found that December Eurocurrency has closed higher on about December 12 than on about November 30 in 12 of its 15 years as a futures market.

In contrast, Japanese accounting methods consider the half fiscal year to be as important the whole.  In fact, Japanese multinationals typically repatriate yen going into the end of the first half fiscal year to dress up their balance sheets.  Thus has the yen tended to rise from April into a peak, established by no later than late November, and then to decline again into April.

The net effect has been for euro to outperform yen late in the calendar year.  One of the more reliable segments of that seasonal trend has been going into expiry of December futures.  For example, the Long December Eurocurrency/Short December Japanese Yen spread has closed more favorably toward the euro on about December 12 than on about November 29 in 14 of 15 years — albeit not without a few painful drawdowns.  (The minimum increment for both CME futures is worth US$12.50.  Thus, brokers accept nominal spread orders.)

This spread reached its all-time high in 2008 when the euro traded at a premium of +63.21 to yen.  But by 2012, it had fallen to a discount of -7.28.  The spread has been recovering with a vengeance since, reaching +42.71 last March.  But then it weakened again, trending in orderly fashion down to only +32.99 by October.

But then it reversed yet again.  By this past Thursday, in fact, it reached +40.73 and was poised to challenge its March high.  Overnight, however, the European Central Bank announced it was prepared to whatever was required to stimulate Europe’s economy, leading most analysts to believe a massive stimulus package was in the works.  As a result, the euro dropped hard and the spread backed off nearly 1.8o in the most significant correction of the current trend.

Will it need to correct further?  A 40% retracement would come in just below 38.00.  Notice how well this spread trends in daily, weekly, and monthly time frames.  Further note that Japan eagerly wants the yen lower, although Europe wants the euro lower, also.  Have the currency wars commenced?

Traders already in platinum/gold may wish to know that the Long 2 April Platinum/Short April Gold spread has closed more favorably toward platinum on about February 2 than on about November 27 for the last 18 consecutive years — albeit, again, not without drawdowns.  This past week the spread again tested even money and rallied sharply.

If you have not already done so, you are encouraged to visit spread charts.
(Both for future convenience and for reference to past Commentaries, you can bookmark the WSC Index.) Please remember: These are NOT trading recommendations. They are intended only as potential ideas based on the market's own performance in the past, but past performance is not necessarily indicative of future results. Futures trading involves substantial risk of loss.
If you have any questions or comments, call me at 541-484-7256 or email This e-mail address is being protected from spambots. You need JavaScript enabled to view it .

Trade 'em

Jerry Toepke

 

The 1980 Silver Market High - long-term nearby monthly charts don't show the true picture!

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May 2011 Silver traded up to $49.82 overnight --- just below 1980's all-time high of $50.36 traded by January 1980, in delivery and thus reflecting cash prices.  Below are links to 1980 charts for January, March, May, and July Silver.  (The latter three were constrained by daily trading limits, which are no longer in effect.)  Expect the exchange to raise margin requirements SOON as $11,745 is a bit low for a $238,600 contract at 47.72.(only 4.9% - lots of leverage!)

 

Last Updated on Thursday, 03 August 2017 06:41
 
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