Fixed Income Weekly Technicals

Technical Analysis Research Fixed Income Weekly Technicals Friday, 02 September 2016 Weekly Outlook and Technical Highlights Karen Jones +44 207 47...
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Technical Analysis Research

Fixed Income Weekly Technicals

Friday, 02 September 2016

Weekly Outlook and Technical Highlights Karen Jones +44 207 475 1425 [email protected] Axel Rudolph +44 207 475 5721 [email protected]

For important disclosure information please see end of document. research.commerzbank.com / Bloomberg: CBKR / Research APP available

Technical Analysis Research | Fixed Income Weekly Technicals

Current Technical Views on EUR and US interest rates Shading denotes highlights

Market (click to see chart)

View

Bund Futures:

The 165.64/63 area remains key for the ensuing trend; while above it we remain bullish.

German 10Y Yield:

Is still attempting to stabilise but needs to rise above the -0.02 August highs.

EU 10Y Swap:

Huge divergence on the daily RSI still points to higher swap yields to come.

Bobl Futures:

Remain side-lined in a converging range.

EU 5Y Swap:

Remains side-lined below its July and August highs at -0.09.

Schatz Futures:

Continue to oscillate around the 55 day ma at 112.02 but have layers of support at 111.98/93.

EU 2Y Swap:

Is trying to negate downside pressure but needs to rise above its August high at -0.19.

EU 2-10Y Swap Curve:

New low at 0.47 was accompanied by positive divergence on the daily RSI, should bounce.

EU–US 10Y Swap Spread:

Another small narrowing rebound towards -1.10/-1.09 may be seen before it widens again.

10Y Bund Asset Swap Spread

Remains confined within the 200 day ma and 55 day ma at 41.10 and 38.51.

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Technical Analysis Research | Fixed Income Weekly Technicals

Current Technical Views on EUR and US interest rates Shading denotes highlights

Market

View

Italy 10Y Yield

Remains side-lined between its 1.03 2015 low and the mid-July high at 1.28.

Spain 10Y Yield

Formed a bottom at 0.91 and targets the August high at 1.11 and mid-July low at 1.13.

Portugal 10Y Yield

Consolidates below the 61.8% Fibonacci retracement at 3.11.

Credit ITRAXX 5Y Europe Index:

Is still expected to hold above the 78.6% Fibonacci retracement at 64.07 and should soon rise.

ITRAXX 5Y Crossover Index:

Positive RSI divergence near the 2015-16 support line at 300.45 still points to a trend reversal.

ITRAXX Senior Finan. Index:

Bounce off the 2015-16 uptrend line at 86.22 targets the 98.05/100.03 zone.

CDX IG CDSI GEN 5Y Index:

Still hovers above its 68.84 July low but will need to rally above 77.18 for a bottom to be formed.

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Technical Analysis Research | Fixed Income Weekly Technicals

Shading denotes highlights

Current Technical Views on EUR and US interest rates Market

View

US 10Y T-Notes:

Are looking increasingly toppish, target the June low at 130-215 next.

US 10Y Yield:

Is expected to have formed a major low at 1.32 but needs to rise above 1.78 to confirm.

US 10Y Swap:

A significant low was made at 1.24 but needs to better 1.63 for a bullish reversal to be confirmed.

US 5Y Swap:

Nears the 1.28/31 target zone above which lurks the 1.39/46 area.

US 2Y Swap:

Trades close to its May peak at 1.08, a break above which will eye the December peak at 1.21.

US 2-10Y Swap Curve:

Hovers above its August low at .39 below which lurks the November 2000 high at .35.

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Europe

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September Bund Futures The 165.64/63 area remains key for the ensuing trend; while above it we remain bullish September Bund Daily Chart September Bund futures continue to consolidate sideways but remain above the 38.2% Fibonacci retracement support at 165.64 and the late July low at 165.63. We can only assume at this point that the longer term up move remains intact and there remains scope to retest the 168.13 and 168.86 recent highs. The 2015-2016 uptrend is located at 166.38 and the 2016 uptrend at 166.83. Below 165.63 remains a massive gap left behind to 164.67. Should the uptrend at 166.76 be breached and a drop below the late July low at 165.63 be seen, we would allow for this gap to be filled. Above 168.86 we have nothing until 169.65/70.

2016 support line comes in at 166.83

Please be aware, though, that Bund futures are in the end phase of their long term uptrend and that the risk of a sudden, sharp reversal lower being made increases by the day.

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Bund Futures – Weekly Chart 2015-2016 uptrend at 166.38 underpins Bund Weekly Continuation Chart

2015-16 support line uptrend is at 166.38

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German 10Y Yield Is still attempting to stabilise but needs to rise above the -0.02 August highs German 10Y Yield Daily Continuation Chart The German 10Y yield has recovered from circa -0.20 in July and several times tested the 55 day ma. It is currently trying to break through the 2016 downtrend line at -0.06 but needs to rise above the August high at -0.02 for bullish momentum to be back on the cards.

Downtrend at -0.06

The market will find tough resistance offered by the 2015 low at 0.05. It will need to regain this in order to restore upside pressure. Support at -0.12 guards the recent low at -0.20. We have nothing below -0.20 apart from the next Fibonacci extension at -0.30.

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Technical Analysis Research | Fixed Income Weekly Technicals

EU 10Y Swap Huge divergence on the daily RSI still points to higher swap yields to come EU 10Y Swap Daily Chart The EU 10Y swap remains above its August low at 0.24 which was accompanied by positive divergence on the daily RSI. This, together with the 13 count and TD support at 0.21, suggests that the downside is now limited and we would allow for a reversal higher to soon be seen. Initial resistance is the 55 day ma at 0.32, followed by the 0.42 2015 low.

Positive divergence

The swap has a gap back to 0.49 to fill and we will regard it still in an overall negative light while we trade below 0.42.

The 2015-2016 downtrend encountered until 0.73.

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September Bobl Futures Remain side-lined in a converging range September Bobl Daily Chart September Bobl futures continue to range trade around the 55 day moving average at 133.54.

Resistance line at 133.75

While they remain above the 133.21 July low we will assume an upside bias to retest the 134.12 recent high. We have now seen three failures at 134.00/12 and we suspect that this resistance will again cap, if reached at all that is. Above 134.12 we have nothing until the top of the 2013-2016 channel at 135.57. Below the July low at 133.21, we have a gap below which extends back to 132.98 and while we cannot rule out that this will be filled it is not our favoured scenario.

Uptrend at 133.37

Initial support is seen along the five month uptrend line at 133.37 and more significant support between the July and August lows at 133.29/21.

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Bobl Futures - Weekly Continuation Chart Resistance sits at 134.00/12 September Bobl Weekly Continuation Chart Top of 2013-2016 channel at 135.57 Resistance at 134.00/12

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Technical Analysis Research | Fixed Income Weekly Technicals

EU 5Y Swap Remains side-lined below its July and August highs at -0.09 EU 5Y Swap Daily Chart The EU 5Y swap remains side-lined near term between the -0.09 July and August highs and its July low of -0.19. It is bid within these two limits very near term but is expected to approach the -0.09 level.

August high was made at -0.09

The recent low was accompanied by a TD perfected set up on both the daily and the weekly chart and, if tested, we would allow for this to again hold. We also note the 13 count on the weekly chart, but that the TD support is not encountered until -0.33. Directly above the market lies a gap to -0.04 and psychological resistance at zero. The 2013-2016 downtrend encountered until 0.04.

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EU 5Y Swap – Weekly Chart 13 count + TD perfected set up on the weekly chart suggests end stage of the down move

Downtrend at 0.04

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September Schatz Futures Continue to oscillate around the 55 day ma at 112.02 but have layers of support at 111.98/93 September Bobl Weekly Continuation Chart September Schatz remain side-lined.

futures Spike high at 112.295

55 day ma at 112.02

While the uptrend holds, the bull trend is intact and the market will retain scope to retest the 112.17 and 112.29 recent highs. This could be the case while the late June and July lows at 111.94/93 hold. Directly below here lies the 111.86 June 23rd low.

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Schatz Futures – Weekly Continuation Chart Channel support comes in at 111.83 September Bobl Weekly Continuation Chart

Channel support at 111.83

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EU 2Y Swap Is trying to negate downside pressure but needs to rise above its August high at -0.19 EU 2Y Swap Daily Chart The EU 2Y swap consolidates below its August high at -0.19. We still need to overcome this level on a weekly closing basis to alleviate downside pressure.

August high was made at -0.19

Failure here would re-introduce scope for a slide back to the -0.23/-0.24, the support line and recent low. Below -0.24 we have the June low at -0.25. Key resistance remains to be seen between the April and May lows at -0.17 and the 200 day moving average at -0.16. Spike low at -0.25

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EU 2-10 swap curve New low at 0.47 was accompanied by positive divergence on the daily RSI, should bounce The EU 2-10 swap is still attempting to recover. The market made a 13 count on the weekly chart recently and a TD perfected set up – we believe that we are looking for the end stage of the down move. However the 0.50/0.48 area needs to hold and is regarded as the last defence for the 0.34 2015 low. Since the market has seen a large divergence of its daily RSI on its fall to a marginal new low at 0.47 the near term risk for widening is growing.

In order to negate the narrowing bias the market will need to regain the 2016 downtrend at 0.59. EU 2-10 swap curve - daily

Downtrend at 0.59

Daily RSI has diverged on this move to a new low

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EU 2-5Y Swap Curve Is trying to base but needs to rise above 0.11 in order for widening to be back on the plate EU 2-5Y Swap Curve Daily Chart Downtrend at 0.07 has been breached

The EU 2-5Y swap curve is trying to stabilize. We note the TD perfected set up on the weekly chart and the 13 count and this suggests the end of the narrowing phase for now. We note TD support lies 0.06. The market will find that the previous high at 0.11, made in July, acts as nearby resistance and will need to be overcome in order to reassert a widening bias towards the 0.19 200 day ma.

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EU 10Y- US 10Y Swap Spread - weekly Another small narrowing rebound towards -1.10/-1.09 may be seen before it widens again The EU 10Y Vs US 10Y swap spread’s recent retest of the March low at -1.21 was followed by a rebound. This is likely to fail between the 200 and 55 day moving averages at -1.12/-1.10. From there renewed widening should be seen. Failure at the -1.21 March low will target -1.28 on the way to -1.36, the 61.8% retracement of the move seen since 2015. The market has recently failed ahead of a band of pretty tough overhead resistances, namely the -0.98 2013 low, the 200 week ma at -0.98 and the -0.87 2008 to 2016 downtrend. While capped here, an overall widening bias will be maintained. EU 10Y- US 10Y Swap Spread – Daily Chart

-1.20 August low

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10Y Bund Asset Swap Spread Remains confined within the 200 day ma and 55 day ma at 41.10 and 38.51 10Y Bund Asset Swap Spread Daily Chart The spread remains side-lined between the 55 day ma at 41.10 and the 200 day at 38.51. Dips should remain contained ideally by 38.51, the 200 day ma, and the 37.45 recent low. Failure to hold here will trigger another slide to 35.65/05, the 61.8% retracement of the same move and the March low. There is potential for 32.11, the 78.6% retracement, but we would expect this to hold the downside. A move back above 42.70 (11th February high) would shift the focus to the 48.80 recent high. Above 48.80 will target the 52.00/50% retracement.

Daily chart

55 day ma at 41.10

200 day ma at 38.51

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Technical Analysis Research | Fixed Income Weekly Technicals

Italy 10Y Yield – Weekly Chart Remains side-lined between its 1.03 2015 low and the mid-July high at 1.28  The Italian 10Y yields have sold off to and recovered from the 1.03 March 2015 low.

Italy 10Y yield – weekly chart

 The recovery took it to its August high at 1.27 before it dropped back to its August low at 1.03 before again recovering.  It will need to regain the mid-July high at 1.28 in order to alleviate immediate downside pressure.  Only once the 1.28 level has been overcome, will the 200 day moving average at 1.40 be back in the frame.  Below 1.00 we do have a daily P+F target of 0.75.

August low was made at 1.03

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Spanish 10Y yield – Daily chart Formed a bottom at 0.91 and targets the August high at 1.11 and mid-July low at 1.13 Daily chart

The Spanish 10Y yield has broken through the two month resistance line at 0.93 and risen above key resistance at the early July low at 1.05. Above it lurk the August high at 1.11 and the mid-July high at 1.13. While capped by 1.05, risks will remain on the downside to the next Fibonacci extension to 0.86 and a 240 min P+F target of 0.88. Above 1.11/13 the July high can be seen at 1.25.

Previous low at 1.05 has been overcome

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Portugal 10Y yield – Daily Chart Consolidates below the 61.8% Fibonacci retracement at 3.11 The yield remains side-lined below the 61.8%/23.6% Fibonacci cluster at 3.11. As long as it caps a slide back towards the May and July lows at 2.95/91 may be seen next week. A rise and daily chart close above the 3.11 level would alleviate downside pressure and put the mid-July high at 3.24 back on the map. Above it the April and May highs can be seen at 3.45.

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Credit

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ITRAXX 5Y Europe Index - Daily Chart Is still expected to hold above the 78.6% Fibonacci retracement at 64.07 and should soon rise ITRAXX 5Y Europe Index Daily Chart The ITRAXX 5Y Europe Index should rise further from its August low at 65.05. Since this low was made close to the 78.6% Fibonacci retracement of the 2015-16 advance at 64.07 and because it has been accompanied by positive divergence on the daily RSI we expect the index to rise further in the near future (meaning credit weakness). Upside targets are the mid-July and August highs at 71.82/72.94 and also the 55 day moving average at 72.57. Another upside target zone is made up of the 200 day moving average at 80.54 and the April high at 82.02. Should support at 65.05/64.07 be slipped through on a daily chart closing basis, though, the next lower 62.62 late July 2015 low could be reached instead. Positive divergence

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ITRAXX 5Y Crossover Index - Daily Chart Positive RSI divergence near the 2015-16 support line at 300.45 still points to a trend reversal ITRAXX 5Y Crossover Index Daily Chart The ITRAXX 5Y Crossover index has so far slipped to its August low at 302.68 which was made close to the 2015-16 support line at 300.45. In this vicinity we expect the index to bottom out and for another rally to be seen. The positive divergence on the daily RSI still points to a reversal likely to happen.

2015-16 support line comes in at 300.45

The August high and 55- as well as 200-day moving averages at 329.17/339.79 represent our first upside targets, together with the April high at 342.09. If bettered, the mid-January low at 361.65 will be back in the picture as well. Should two daily chart closes below the 2015-16 support line at 300.45 be seen, we would have to allow for the March and April lows at 289.96/286.31 to be reached instead. Positive divergence

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ITRAXX 5Y Senior Financial Index - Daily Chart Bounce off the 2015-16 uptrend line at 86.22 targets the 98.05/100.03 zone The ITRAXX 5Y Senior Financial Index’s bounce off its August low at 85.00 has so far taken it to its August high at 94.57.

ITRAXX 5Y Senior Financial Index Daily Chart

This level we soon expect to be bettered. We anticipate a trend reversal to be seen (bearish for credit) and for the 98.05/100.03 mid-July to August highs and the 55 day moving average to be reached in the days to come. The next higher April high at 104.01 could also be reached. We will retain our bullish forecast while the index remains above the April low at 79.78 on a daily chart closing basis. Were an unexpected drop below the April trough at 79.78 to be witnessed, the March low at 72.89 would be targeted instead.

Positive divergence 2015-16 uptrend line is at 86.22

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CDX IG CDSI GEN 5Y Index - Daily Chart Still hovers above its 68.84 July low but will need to rally above 77.18 for a bottom to be formed CDX IG CDSI GEN 5Y Index Daily Chart The index continues to hover above its June low at 68.84. Should the 68.84 level give way, the March and May 2015 highs at 66.47/38 would be targeted.

June high was made at 92.08

Further down the mid-July 2015 low can be seen at 64.07. While no daily chart close below the July low at 68.84 is made, we should see a recovery towards the 55 day moving average, the 2016 downtrend line and the August high at 74.39/77.18 unfold. Much further up the May highs and 200 day moving average can be seen at 85.82/86.74. Having said all of the above, should a drop below the recent low at 68.84 be seen instead, the August 2014 high at 68.16 would be eyed.

Further support can be seen around the May 2013 low at 67.63. July low was made at 68.84

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United States

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US 10Y T-Notes – Daily Chart Are looking increasingly toppish, target the June low at 130-215 next US 10Y T-Notes Daily Continuation Chart We still believe that US 10Y T-Notes formed a top at the June and July highs at 134-07/075.

July high was made at 134-075

Last week’s failure at 131-195 confirmed our anticipated top formation and put the late June low at 130-215 on the plate. Once this support level has been slipped through the March-to-May lows at 129-095/128-165 will be targeted. Minor resistance can be seen along the 55 day moving average at 132-12 and also around the 133-045 late July high. Were an unexpected rise above the 134-07/075 area to be seen, the 134-28/305 August and December 2012 highs would be back in the picture.

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US 10Y T-Notes – Weekly Continuation Chart Formed a top at 134-07/075 US 10Y T-Notes Weekly Continuation Chart Formed a top at 134-07/075

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US 10Y Yield - Daily Chart Is expected to have formed a major low at 1.32 but needs to rise above 1.78 to confirm US 10Y Yield Daily Chart We still believe that the US 10Y yield formed a major low at 1.32 in July.

Resistance line is at 1.62

The July peak at 1.63 has been bettered, as expected, but so far only the 1.65 level has been reached in August. Once the 1.63/65 resistance area has been overcome the late June high at 1.78 will be in focus. A daily chart close above this level will need to be made for our anticipated bottoming formation to be confirmed. Once this has happened the 200 day moving average at 1.82 and the March-to-May highs at 1.89/2.00 will be back in the picture.

Minor support is seen along the 55 day moving average at 1.54 and also at the 1.44 late July low. Below the 1.32 level lies the 1.25 mark. Still further down a 240 minute 0.001 x 3 vertical Point & Figure target can be seen at 1.18. This we do not expect to be reached.

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US 10Y Swap - Daily Chart A significant low was made at 1.24 but needs to better 1.63 for a bullish reversal to be confirmed US 10Y Swap Daily Chart The US 10Y swap is deemed to have formed a major bottom at the July low at 1.24 before stabilizing. Once the July high at 1.52 has been exceeded, the late June high at 1.63 will be in focus. A daily chart close above the 1.63 level would confirm a bullish trend reversal and put the March-to-May highs at 1.75/85 on the map. Should the 1.24 level unexpectedly give way, though, the 100% Fibonacci extension at 1.16 would be targeted. We do not expect to see a drop to the 1.16/1.15 zone or below to be seen but were it to unexpectedly happen, the psychological 1.00 mark would be targeted. The July low was made at 1.24

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US 5Y Swap - Daily Chart Nears the 1.28/31 target zone above which lurks the 1.39/46 area US 5Y Swap Daily Chart The US 5Y swap’s recovery from the February and June lows at .89/.88 has so far taken it to its August high at 1.26. This area is expected to soon be overcome with the 200 day moving average and seven month resistance line at 1.28/31 then being in focus. Our medium term upside target is made up of the March and May highs at 1.39/46, a rise above which would confirm a long term trend reversal and put the December peak at 1.79 back on the plate. Minor support can be seen between the mid-June and late July lows at 1.05/01 and major support at .89/.88.

Below this area sits the .72 December 2012 low which we do not expect to be revisited. Bounced off the February low at .89

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US 2Y Swap - Daily Chart Trades close to its May peak at 1.08, a break above which will eye the December peak at 1.21 US 2Y Swap Daily Chart The US 2Y swap still range trades below its May high at 1.08 but for the past week did so above the psychological 1.00 mark.

March and May highs were made at 1.08

Once the 1.08 level has been bettered, a long term bottom formation will be confirmed. In this scenario the December peak at 1.21 would be back in the frame. Slips should find support along the four month support line at 1.00 and, further down, between the 200- and 55-day moving averages and the late July low at .93/.89. If slipped through we would have to allow for the April, May and midJune lows at .82/.79 to be revisited.

We do not expect the next lower June trough at .63 to be retested. Should this level unexpectedly give way, the January 2014 high at .57 would be back in focus. Further down sit the August 2012 high at .52 and the October 2014 low at .48.

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US 2-10Y Swap Curve - Daily Chart Hovers above its August low at .39 below which lurks the November 2000 high at .35 US 2-10Y Swap Curve Weekly Chart The US 2-10Y swap curve continues to narrow and has so far dropped below the October 2007 low at .43 to its August low at .39. Below this level there is no support to speak of until the November 2000 high at .35. Minor resistance can be seen between the mid-July and August high as well as the 55 day moving average at .51/.54. Narrowing pressure will remain on the cards while the late June high at .72 caps. Above it the February and April lows can be seen at .74/.75. Trades in multi-year lows

For any kind of long term reversal and ensuing widening to be back on the cards, the next higher late February high at .82 needs to be bettered. Only then would a bottom be formed. We expect to see this scenario over the next few months or so, once the narrowing phase has run its course.

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Technical Analysis Research | Fixed Income Weekly Technicals

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Technical Analysis Research | Fixed Income Weekly Technicals

Other technical analysis reports we publish are: Monday:

Daily Market Technicals (FX), Strategic Technical Themes, FX Emerging Markets Technicals;

Tuesday:

Daily Market Technicals (FX), Bullion Weekly Technicals;

Wednesday:

Daily Market Technicals (FX), Commodity Weekly & Commodity Currencies Weekly Technicals;

Thursday:

Daily Market Technicals (FX);

Friday:

Daily Market Technicals (FX), Fixed Income Weekly Technicals.

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Technical Analysis Research | Fixed Income Weekly Technicals

Karen Jones

Axel Rudolph

Head of FICC Technical Analysis

Senior Technical Analyst

Tel. Mail

Tel. Mail

+44 207 475 1425 [email protected]

+44 207 475 5721 [email protected]

Zentrale Kaiserplatz Frankfurt am Main www.commerzbank.de Postfachanschrift 60261 Frankfurt am Main Tel. +49 (0)69 / 136-20 Mail [email protected]

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