Spanish bond yields on the way up – Euro further to fall

Spain’s 10 year bond yield rose to 5.85% last night after getting as low as 5.26% in mid October. The charts suggest yields could push up well above 6% on this move. If that’s right the current decline in the Euro pairs has further to go

Spain’s bond yields are a key driver for the Euro at the moment. Rising yields imply growing concerns about Spanish credit risk and are bearish for the Euro pairs.

As regular readers will know, one of my trading strategies is to pay attention only to charts that I can easily interpret and to ignore those I can’t.

As I see it, the Spanish 10 year bond chart has behaved in text book fashion in recent times. This has made it particularly valuable in interpreting Euro currency pairs.

For example, last time I posted this chart it was just breaking out of the blue wedge pattern shown at “4”. It went on to hit the Fibonacci cluster at the measuring target pretty well perfectly which gave a great leg up into the peaks and selling opportunities in the Euro pairs around the same time.

Spain 10 year bond yield index 8 November. Source: Blomberg

The decline from 7.43% to 5.26% took a 5 swing structure which I have labelled in blue on the chart. Now that this has been completed the chances are that we have embarked on a correction of the whole move down from the peak at 7.43% (marked with a black “2”).  Further evidence of this possibility is provided by the fact that yield has pushed up through the overlap resistance in a show of strength.

Corrections like this usually retrace at least 38.2% but if this interpretation of the chart remains correct, yields will not move back through the low labelled with a black “1” (6.58%).  You’d think Mr. Draghi may be getting ready to devote a bit of ECB firepower to the situation by that stage anyway

So a correction that goes at least 38.2% but stops below black “1” would see yields back up into a 6.1% to 6.5% range.

If this happens, we’re likely to see more Eurodollar weakness.  If things look like getting rocky with the Fiscal Cliff situation we could also see US dollar weakness. Under that scenario, Euro cross rates may trend down better than EUR: USD.

About Ric Spooner

Over 30 years market experience - professional trader, broker, director
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