wmeubank@ocp.kcmo.com
THOUGHTS ON AUSTRALIA:
SELL BONDS, BUY AUSTRALIAN DOLLAR
Prepared by Jack McIntyre
Strategy #1
Sell the March 98 Australian 10-year bond contract near 93.80. Target 93.50. Stop 94.00+. More conservative accounts can look at buying put spreads which have a defined maximum loss for the entire position.
Strategy #2
A riskier trade, buy the AUD$ on a close above 68.00 (yes, we are trying to pick a bottom which is always a risky venture). Stop on a break of new recent lows. Target 70.00+.
Even before yesterday's release of the Q3 GDP report the Australian government had some problems. Sellers had been dictating the trade pretty much during the latter part of November which suggests that both the domestic and international-bond fund managers are long as many Aussie bonds as they feel comfortable. We suspect that most of the selling since mid-November has been longs liquidating positions. After all, in local terms, the Aussie government bond market has been one of the top performing bond markets in the world this year (+11.80% as of December 2nd). It would make sense that portfolio managers who where long early in the year are going to now book profits ahead of the year-end close. Particularly now that there are growing signs that the Aussie economy is going to end the year on a strong note if the positive moment in the economy during the third quarter carries into the fourth quarter (which it should given that every quarter this year has experienced strong growth than the prior quarter (Q1: 2.40%, Q2:3.20%, Q3:3.60% y/y). In fact, growth during Q3 was the strongest it has been in over 2 years.
The technical picture for the March 98 10-year Aussie bond contract has experienced come deterioration of late. In fact, out-trend indicators show that although the contract is not in a bearish trend, it is maintaining a bearish bias. It would probably take only another day or two of lower prices to get this contract registering a new-bearish trend.
One sign which we are interpreting as being bearish is that the correlation between the U.S. Treasury market and the Aussie government bond market is waning. Historically this is typically not the case.
The second strategy is a play on the inverse correlation between the AUD$ and Aussie bonds. In fact, over the past 6 months the correlation between the two is —.68, which although still robust, is down from higher levels from earlier this year and last year.
December 4, 1997MCM, Inc.
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