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Andreas Zanin
Analysis | March 1, 2021

Trading trend reversals: AUD/USD & EUR/USD

In a post last week we noted that rising Bond Yields in the US are bearish for equities and the SP500 has fallen back also – rising yields are bullish for the USD. In this post, we will update two trade setups we looked at earlier in the week EUR/USD and AUD/USD. Our view of the fundamentals, sentiment and key technical levels to watch below.

10 Year T Note Rising – Bullish for USD and Bearish for Stocks

 In terms of the Treasury Note, the yield moved up above 1.5 and hit high above 1.6 before easing back. The Bond Yield is now above S&P 500 dividend yield, wiping out a historically strong advantage that the stock market has held until yesterday: “The concern is that we haven’t been in an environment of persistently rising inflation expectations so it creates this new dynamic for investors…” ( Max Gokhman, Pacific Life Fund Advisors)

USD – Bad News Discounted and Due to Rally?

 The USD has been weak due to strong equity markets and on the view, the Fed will keep interest rates low for the foreseeable future and on this view, speculators have built up their biggest short position since 2011.

In terms of the Government stimulus package which boosted equities initially its now priced in and also the spending it will generate is clearly inflationary going forward: “At the beginning of February, the stimulus news was the driving force but now that it has been priced in, there is nothing on the distant horizon for equity investors to be excited about and there is a concern that upside is limited,” (Mike Zigmont Harvest Volatility Management)

Bond traders are seeing higher inflation and yields have risen and are likely to rise further going forward. The yield on the 10-year note who most forecasters thought would hit 1.5% by year-end hit the level yesterday – If yields remain firm and continue o rise this is bullish for the USD and also bearish stocks.

T NOTE 10 Year Daily

 After breaking above 1.20 we have moved sharply higher and see little downside from here– If the Note continues to firm from here up to the 2.00 level the probability of more stock weakness will increase in our view and yields will also help to strengthen the USD.

AUD/USD

The Aussie Dollar has been bought as a proxy to stock market strength and also on strong commodity prices as traders buy commodities on the view there will be a strong global economic recovery, but stocks have now started to weaken, commodity prices are a bubble and likely to fall and rising US yields will also weigh on the Aussie.

From a technical perspective on the chart below we view Friday’s candle as heavily bearish candle We view the Aussie as a sell back to first level resistance or on a break of support. Due to the bullish extreme and speculators being heavily long we think we should longer term target support at 0.76 then 0.74 with a possible run on to 0.72 if risk off were to accelerate.

 

EUR/USD

 The Euro has held up well in our view against a backdrop of poor economic growth, negative interest rates and poor bond yields. It’s been firm more on general dollar weakness than on euro strength and speculators are heavily long.

From a technical perspective we noted the key 1.22 level which we felt would hold rallies on a close basis and after spiking through the level we have reversed to the downside and now expect 1.21 to hold rallies a break of nearby support is likely to follow through to the downside in our view.

 

 

Research provided by LearnCurrencyTradingOnline.com

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