One of our aims is to keep readers up to date with the technical outlook on markets like Spanish bonds and spot iron ore. These are key drivers of other major markets but the charts can sometimes be a bit difficult to access.
Spanish Bonds and the Eurodollar
While commentary and analysis is useful, there is often no substitute for market pricing when it comes to gauging current attitude towards risk.
The possibility of difficulties emerging with the “too big to rescue” Spanish economy lies at the heart of most concerns about a Eurozone break up. It’s not surprizing then that key trading markets like EUR: USD have often had a close relationship with movements in Spanish bonds over the past couple of years. High and rising Spanish yields led to a decline in the Euro while falling yields have been associated with “risk on” moves and a rising Euro.
Recently for example, the July low in EUR:USD came within a day of the peak in Spanish bond yields while the mid September peak in the Euro closely coincided with a corrective rally in bond yields
Technical Outlook – 5.55% a key level
The lift in yields since mid September took the form of a rising wedge or flag type pattern which I’ve outlined on the chart above.
This formation has also been associated with yields have chopping up and down through the 200 day moving average (green line) in low momentum, corrective type behaviour.
Friday’s sharp drop saw a break under the wedge support indicating the possibility that the down trend is set to continue. This coincides with a meeting of European Finance Ministers today. A further drop in yields would presumably be a bullish development for the Eurodollar.
The Stochastic on the higher time frame weekly chart is oversold introducing a note of caution on the bearish outlook for yields. The recent low at 5.55% represents the next major hurdle for this chart. It’s not difficult to imagine that the EUR: USD will need Spanish yields to break below this level if it is to resume its rally and exceed the recent peal a 1.3172.
A break below 5.55% could see a decline to around the measuring target at about 5.2%. This objective has been calculated by projecting the height of the wedge pattern from the point at which yield broke below the wedge support line.