As the Australian stock market approaches former highs on a very fast rebound, complacency from this optimism is clouding the medium and long-term economic reality. This is reflected in falling sovereign credit default swap (CDS) prices, now at very cheap levels and the higher Australian dollar against most major currency pairs:
Add in concerns about the end of the mining boom and there exists a low probability, but high risk/reward trade here for those who want to take advantage of such complacencies, with very attractive market setups. As no product exists for a retail investor to go long CDSs, we’re suggesting a proxy through shorting one of three AUD crosses as the first step in a possible multi-layered trade.
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