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Friday, August 04, 2006

Will Global Bond Markets Decouple? Play it with the FXE ETF

By Yaser Anwar, CSC of Equity Investment Ideas

Monetary tightening in the major countries has often come to an end shortly after the Fed goes on hold.

The major exceptions were 1985/86 and 1989/1990. However, some foreign central banks were forced to continue tightening in these episodes because of either sharply accelerating inflation (the U.K. and Australia), or because of massive fiscal stimulus (German reunification). These conditions are not in place today.

The ECB and BoJ are unlikely to cut rates any time soon, but they are likely to put interest rate normalization on hold for a while as the U.S. economy decelerates.

Interest rate expectations in Europe and Japan have room to decline during this phase, allowing their respective bond markets to join the global rally.

Bottom line: long-term global bond yields will follow the U.S. when the rally gets underway, although U.S. Treasurys will outperform.

If you're bullish on the Euro vs Dollar, the Euro Currency Trust ETF (FXE) is one simple way to play it.

Source: BCA & Bloomberg

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