Rise in Bonds Yields Strengthen the Euro Dollar

Rise in Bonds Yields Strengthen the Euro Dollar
November 16, 2016

The unexpected rally in the commodity prices supported the rise of the Aussie and made it look invincible against its rivals, including the Euro dollar. The EURAUD pair hit a low of 1.14070 last week, from a high of 1.5062 in early September. Since then, the EURAUD has recovered by about 200 pips. What started as a simple technical bounce back now seems to extend into a major trend reversal in the EURAUD pair. There are four main reasons for forecasting an uptrend in the EURAUD pair.

Iron ore, coal, natural gas, and copper are the major export commodities of Australia. In particular, the iron ore accounts for 20.2% of the country’s exports. The price of iron ore hit a high of $79.8 per ton last Friday. However, it had little impact on the Australian dollar. The reason is that several market participants believe that the current price of iron ore is unsustainable and a correction is long overdue. John Meyer, the analyst at SP Angel cautioned that the iron ore price would decline soon.

The analysts at Societe Generale believe that the bond yield differentials contribute to the strength of the Euro dollar. In spite of all the chaos created due to the US election results, the spread between the German Bund yields and the US bond rates remained range bound and did not drift to any particular direction. This indicates that the Euro may not decline further.

The victory of Trump is expected to trigger a phenomenon the analysts call ‘reflation’. The US President-elect has promised to spend more on infrastructure projects. A massive stimulus program of that kind would certainly force the Fed and the ECB to raise interest rates soon. This would discourage investments in the Aussie.

In light of Trump’s promise to spend more on infrastructure projects, the investors around the world have started pulling money out of emerging markets. The repatriation of funds back to the Euro zone has created short-term demand for Euro dollar. Considering the above facts, we forecast an uptrend in the EURAUD pair.

The level of 1.42 (S1) supported the EURAUD pair several times last month. The overwhelming support from the buyers ensured that the EURAUD pair did not stay below the support (S1) for long even when the market turned jittery during the broadcast of the US election results. The stochastic oscillator indicates an extremely oversold scenario. Thus, we can anticipate a bullish reversal in the EURAUD pair.

EURAUD - Technical Analysis - 16th November 2016

A Forex trader can consider taking a long position near 1.4200. The stop loss order can be placed below 1.4100 to limit losses from unexpected news. The profit for the long position can be booked near 1.4430.

A similar arrangement can be created in the binary market through the purchase of a one touch call option. The strike level for the call option should be preferably less than 1.4330. Finally, for the call option deal, the trader can pick an expiry date in the second week of December.



Sammy is our forex expert, with over 20 years experience in the financial sector, she will be keeping you up to date with the ups and downs of currencies around the world

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