(As written for My Paper on 29 November 2011. Click here to enlarge)
Traders and investors are highly concerned about the on-going debt crisis in Europe.
What is the one crucial clue that is a clear indicator that risk? The clue lies in bond yields.
By definition, a bond yield is the return an investor would earn if a bond was purchased and held to maturity.
It also represents the interest the bond issuer has to pay to borrow the money. Suffice to say, the higher the yield, the more money the issuer has to stump out to repay the bondholders.
What drives yields up or down? Yields move inversely to bondholders’ confidence. When confidence is high, yields are low. When confidence is low, yields are high.
Countries with low bond yields typically exhibit strong fiscal and robust growth.
Let’s consider 10 year government bonds in Singapore and Greece. The yield is under 2 per cent for Singapore, but about 29 per cent for Greece.
This tells us that investors demand a premium to loan money to Greece.
Despite the bad news, all of the risk currencies – EUR, GBP, AUD, NZD and CAD gapped upwards against the USD when markets opened yesterday. This was mainly due to a report by Italy’s La Stampa newspaper, which reported that the International Monetary Fund (IMF) may be preparing a loan of 600 billion Euros (S$1 trillion) to Italy. However, an IMF official later denied the report.
Until a concrete plan is seen in Europe to stem the crisis, traders will remain short on the five risk currencies mentioned above.
Trade Call
Short AUD/USD at 0.9815
On the hourly chart, a range of 233 pips is spotted, with resistance located at 0.9894 and support located at 0.9661.
The bias is still to the downside, with a strong preceding downtrend, and with the Australian dollar being one of the first to react with on-going problems in Europe.
An entry is taken at 0.9815, 79 pips below the resistance level. A protective stop is placed 85 pips above the entry price, located just outside the range. We will have two profit targets on this trade, exiting the second and final position at 0.9645.
Entry Price = 0.9815
Stop Loss = 0.9900
1st Profit = 0.9730
2nd Profit = 0.9645
Hi Mario,
With X’mas season and New Year coming. Do you think the US dollar will go up because people will be spending their money?
Hi James,
The US dollar will go up, but not because of that reason (cos spending internally in the USA doesn’t really cause the US dollar to go up).
It will go up more because of a flight to safety as traders and investors remain nervous about the story in Europe.
Hi Mario,
What is the next resistance level as i have shorted around AUS/USD @1.00314 today. Tks in adv.
Hi Shaz,
Do you mean support level; since you went short? Did you go short before the announcement of the liquidity boost by the 6 central banks?
I’m guessing you might have hit your stop already? Check out this week’s article I wrote for “My Paper”.
I went short on AUD/USD at 1.0165.
Re: CME Hikes FX Margins: AUD, CAD, JPY, RMB Impacted
Barely has the USD/Renminbi (or RMB) contract started to trade on the CME and already the exchange decided to hike the margin by 18.5%. And not only: in a broad action across the board, the CME hiked margins in some key FX contracts, including Aussie Dollar, Yen, Canadian Dollar, Forint, Zloty, and the Koruna.
In addition, CME hiked two Interest Rate products including EM and I3.
So if anyone was wondering why the AUDXXX dropped after hours, now you know.
Good article for knowledge – thanks!
Hi mario,
Regarding aus/usd short trade . Hw long the bias is down? And hw long can keep this pending order as the order is not filled yet..
Thanks
Siddique
Hi Siddique,
There’s a short today on AUD/USD. Entry price 1.0165.