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Time To Short The Bund?

Courtesy of Tyler Durden

Submitted by Nic Lenoir of ICAP

As I have suggested a few days ago, there are not that many reasons to want to own German Bunds yielding 2.75%. The Euro currency is dropping faster than Britney Spears’ career, the yield is not exactly attractive, and the Bundesbank is one of the central banks that has been diluting its balance sheet in last week’s sovereign bonds buying in Europe. Overall Bunds are not exactly a winner for long term investors it seems at these levels. Then you have the confidence inspired by a market you cannot short… 60% of the time banning short selling works all the time. Except that it never works. Yesterday’s actions by Germany only highlight one thing: no one in Europe has a clue as to what do. Again we think the options are simple: dissolution of the Euro or currency debasement. But we can surely expect a lot of shenanigans before either conclusion materializes as politicians are trying to save the European dream.



If there is further currency debasement and socialisation of debt at the supra-national European level then clearly bunds should experience the sort of pressure all too familiar to PIIGS bond holders. On the other end if there is a dissolution of the Euro, or at least a partial break up with some of least financially sound countries being kicked out or walking out, the Euro should appreciate. Also in such a case we would know the German monetary views are clearly dominating the debate at the ECB, and Axel Weber will be back charging to demand rate hikes. Especially in the case of a full break-up, this would be very bearish for the Bund.



As a result we think risks are growing towards a weaker bund assuming there is not a complete meltdown of risky assets worldwide in the next few days. Yes it is asking a bit much, but as pointed out this morning AUDJPY which I will use as my barometer for the next few days held support well at 76.



Looking at technicals, we have seen almost tick for tick the 61.8% extension for the 5th Wave in Elliott today (Weekly chart). Also Weekly we are very close to the topside of the secular bullish channel. On the day we have a big reversal candle. Should we open below 127.42 the market is likely to sell off and we would consider a stop  on a daily close above 127.57.

Good luck trading,



Nic


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