Friday, I gave this as a trade for the show:
The EUR has been highly correlated with US 10 yield since April. From a low correlation of 0.26 in April, the correlation soared to 0.9148 in August. Subsequently, it has fallen to a still significant 0.61. US 10 year has shot up from a low yield of 1.57% on 12/6 to a high of 1.74% on 12/14.The EUR put in a low on 12/7 at 1.2877 and put in a high today at 1.3140. Today(12/15), the US 10 year yield dropped from a peak of 1.74% to 1.69%, but the EUR/USD put in a new high and is staying above 1.3125.
ST trade: I want to sell the EUR/USD based on the US 10 year yield dropping.
- Sell EUR/USD
- Entry 1.3175
- Stop/Loss 1.3225
This was stopped out at 1.3225 yesterday.
While the trade turned out to be a loser, I thought the correlation held up well overall. Clearly, the news on the fiscal cliff dominated the markets and the enthusiasm towards buying risk. Also, the Japanese election certainly drove interest to sell yen and buy EUR which put upward pressure on EUR/USD, too. Finally, the US 10 year Treasury yield held at 1.70 and is now at 1.81 further propelling the correlation.
With all counter-trend trades, the key is to have a tight stop and then be able to adjust (get out) quickly if it appears not to be working.
Here's the plan for today's EUR/USD trade: Keep it simple and go with the flow.
Let's face it, the markets love buying stocks and buying the EUR on the potential for a deal on the fiscal cliff. While it wasn't a bad idea to try to sell the EUR/USD ahead of the highs since September at 1.3175, we've clearly broken that level and should get continued momentum to the upside.
Let's keep this simple, we want to buy near the 1.3175 level
Trade: Buy EURUSD
- Entry 1.3180
- Stop/Loss 1.3130
- T/P 1.3330