FX And Oil Week Ahead: Frustrations Galore?

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Includes: BNO, CROC, DBO, DNO, DRR, DTO, DWTI, ERO, EUFX, EUO, FXA, FXC, FXE, FXY, JYN, OIL, OLEM, OLO, SCO, SZO, UCO, ULE, URR, USL, USO, UWTI, YCL, YCS
by: The Market Master

Summary

USD likely to weaken against the EUR and JPY ahead of the Non-Farm Payrolls.

Rebound in oil and CAD should take a pause before resuming shortly.

Non-Farm Payrolls may come in lower than expected.

Summary

This week has been rather mixed with currencies like the EUR rising more than expected before coming off on Friday, and the BOJ causing a little bit of chaos in the USDJPY pair following their negative interest rate decision. The AUD came right up to our stipulated resistance, whilst CAD and oil have finally begun to start firming up in the last week despite inventory builds after a potential plan to cut production was being considered by OPEC.

US Preliminary GDP data came in slightly weaker than expectations though month end flows helped the USD regain strength into the Friday New York session. For now, the tepid US economic growth may put a halt to the Fed's plans for further rate hikes this year unless the economy shows a quick turnaround in the coming quarters.

Next week brings the all-important Non-Farm payroll numbers with a headline 190k expected based on current consensus. Given the Initial Jobless Claims numbers trend in recent weeks, we think there is a very real potential that the numbers will miss the headline expectations this time round, which could lead to some USD weakness over the next 2 weeks.

Source: Bloomberg.com

Key economic data and events for the coming week for the pairs we cover:

Sunday, 31 Jan. 2016

2300 GMT - Australian AIG Manufacturing Index (Jan.)

Monday, 01 Feb. 2016:

0100 GMT - Chinese Manufacturing PMI (Jan.)
0100 GMT - Chinese Non-Manufacturing PMI (Jan.)
0145 GMT - Caixin Manufacturing PMI (Jan.)
0855 GMT - German Manufacturing PMI (Jan.)
0900 GMT - Eurozone Manufacturing PMI (Jan.)
1330 GMT - US Core PCE Price Index (Dec.)
1330 GMT - US Personal Income and Spending (Dec.)
1330 GMT - US Real Personal Consumption (Dec.)
1430 GMT - Canadian RBC Manufacturing PMI (Jan.)
1445 GMT - US Manufacturing PMI (Jan.)
1500 GMT - US Construction Spending (Dec.)
1500 GMT - US ISM Manufacturing PMI (Jan.)
1500 GMT - US ISM Manufacturing Numbers (Jan.)

Tuesday, 02 Feb. 2016:

0330 GMT - Australian RBA Rate decision
0855 GMT - German Employment Numbers (Jan.)
1000 GMT - Eurozone PPI (Dec.)
1355 GMT - US Redbook
1445 GMT - US ISM - NY Business Conditions (Jan.)
1830 GMT - US Truck Sales (Jan.)
2230 GMT - Australian AIG Services Index (Jan.)

Wednesday, 03 Feb. 2016:

0030 GMT - Australian Building Approvals (Dec.)
0030 GMT - Australian Trade Balance Numbers (Dec.)
0030 GMT - Australian Private House Approvals (Dec.)
0130 GMT - Japanese Overtime Pay (Dec.)
0145 GMT - Chinese Caixin Services PMI (Jan.)
0855 GMT - German Composite PMI (Jan.)
0855 GMT - German Services PMI (Jan.)
0900 GMT - EU Markit Composite PMI (Jan.)
0900 GMT - EU Services PMI (Jan.)
1000 GMT - EU Retail Sales (Dec.)
1315 GMT - US ADP Non-farm Employment Change (Jan.)
1445 GMT - US Markit Composite PMI (Jan.)
1445 GMT - US Services PMI (Jan.)
1500 GMT - US ISM Non-Manufacturing Numbers (Jan.)

Thursday, 04 Feb. 2016:

1230 GMT - US Challenger Job Cuts (Jan.)
1330 GMT - US Nonfarm Productivity (Q4)
1330 GMT - US Unit Labour Costs (Q4)
1500 GMT - US Factory Orders (Dec.)
2230 GMT - Australian AIG Construction Index (Jan.)
2350 GMT - Japanese Foreign Reserves (Jan.)

Friday, 05 Feb. 2016:

0030 GMT - Australian Retail Sales (Dec. & Q4)
1330 GMT - US Employment Numbers (Jan.)
1330 GMT - Canadian Employment Numbers (Jan.)
1330 GMT - Canadian Trade Balance Numbers (Dec.)
1500 GMT - Canadian Ivey PMI (Jan.)
2200 GMT - US Consumer Credit (Dec.)

Trading and Technical Strategy for the week ahead:

EUR/USD

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The EUR looks to have decided this week that the range for now will be 1.0795 to 1.0950 until further data points like the Non-Farm payroll numbers Friday push the pair to break out in either direction.

The coming week should see the trading range being established in the EUR. However, we do continue to prefer playing the EUR from the short side for now with any level at 1.0900 or higher being our preferred levels to sell the pair. At this stage 1.0911, 1.0940 and 1.0970 provide resistances to sell. We would use any move below 1.0795 to cover our short positions, especially ahead of the Non-Farm Payroll number. To the downside 1.0750 and 1.0710 provide supports.

In the larger picture, the rebound and structure of the move from the 1.07s to the 1.09s continues to look like a complex variation of scenario 2 may be playing out in the EUR instead of the primary scenario 1 expectation. Key level for the EUR to stay under remains at the 1.1090/1.1100 level to avoid our bullish scenario 3 possibility. For now though, we will take the view that scenario 1 is playing out.

Medium- to long-term trading strategy (1-6 months):

With the Fed in a rate hike cycle, we still think the next one to three months should see our primary scenario (Scenario 1) playing out with the pair making one final down move to the 1.0250-1.0300 level. However, we do want to give a fair warning that other than a complex scenario 2 playing out, the scenario 1 move to the downside is likely an ending diagonal pattern of some sort meaning trade will be choppy and overlapping, making it difficult to trade.

Those who established short positions in the spikes last week above 1.0900 can continue to hold their shorts looking for the 1.0630 level to square out in case scenario 2 is playing out. For those who did not manage to establish short positions for slightly, look for levels above 1.0900 for opportunities to establish medium term short positions. However, if you feel nervous holding out for the 1.0630 level, you can consider using the 1.0750 or 1.0770 levels to square out, or place a trailing stop ahead of the Non-Farm Payroll if the EUR is below your cost price. All short positions should be cut if the EUR spikes above 1.1090/1.1100.

Short-term trading strategy (Intraday, 1-3 days):

Our short term strategy, would see traders playing the new expected short term range of 1.0790 to 1.0950 with a bias to sell closer to 1.0900 with the shorts covered around the 1.0840 and 1.0810 levels before awaiting for a rebound to sell again. More aggressive traders could look for the 1.0870 level to sell to play the downside expectations if they choose not to wait for the 1.0900 level. All short positions should be cut if the EUR spikes above 1.1090/1.1100.

USD/JPY

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The USDJPY spiked following the BOJ decision to move to Negative rates. We continue to maintain a negative view for now on the pair with next week likely to bring downside for the pair. However, as we have often mentioned in our Medium term strategy, shorting the pair is perilous trade despite the bias, and Friday's BOJ announcement is a good example of that.

For now, if the pair is able to rally above 122.30 the pair would invalidate the downside bearish scenario for the pair, and we will update the changes accordingly next week if this happens.

Medium- to long-term trading strategy (1-6 months):

The BOJ announcement did significant damage to the USDJPY downside technical picture. However, the move continues to look corrective, and continue to maintain a downside bias. Nonetheless, we prefer to wait on the sidelines before taking a longer term position given the risks to the downside and upside for the pair at present from current levels. Our bearish scenario could see the pair move to the 114 level and lower if the downside scenario plays out where it would be a little more interesting to consider a long position in the pair.

Short-term trading strategy (Intraday, 1-3 days):

Short term traders can look to fade the current rally at current levels looking for downside of about 100-150pips in the pair. Any move above 122.30 would invalidate the downside move so short trades regardless of time frame should be stopped out above 122.30.

AUD/USD

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The AUD rallied to the 0.7100 figure as expected last week. We expect that this rally will be capped here and resume its downside bias next week to the 0.66-0.68 level as we laid out in our strategy piece here.

Nonetheless, given the inverse head and shoulders formation on the chart, there is a possibility that 0.7330 will be seen in the coming sessions before the decline continues, so it is important to bear this in mind.

Medium- to long-term trading strategy (1-6 months):

The medium and long term bias remains to the downside for this pair. Given the potential for a visit to the 0.7330 level we would consider using this higher level to average in any shorts taken from 0.7100 and higher, so traders should adjust their positioning accordingly given the potential of this alternative scenario playing out. A move above 0.7400 should be used to stop out the entire short position.

Short-term trading strategy (Intraday, 1-3 days):

Short term traders can consider closing any shorts taken at 0.7100 and higher around 0.7000 or lower. Trading into next week will be tricky given the upside potential and short term traders can consider playing the inverse head and shoulders scenario with the 0.6940/70 level as a possible level to establish the long positions with a stop at 0.6850. The target would be around the 0.7300 level.

USD/CAD

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The USDCAD came off to the key 1.4000 figure as expected though held above it into the Friday close. Next week should see the pair retrace slightly before downside resumes for the pair with the 1.4000 level likely to be broken into next week.

Medium- to long-term trading strategy (1-6 months):

With a bounce in oil occurring and the USDCAD finally coming off, it is tempting to start shorting the USDCAD at this time. Aggressive traders can look for levels closer to 1.4200 to start selling the pair, though we would personally wait for either the 1.4300 level to sell or a break of the 1.4000 level with the objective of selling on any pullback. Our stop loss would be placed at 1.4450 for any short position with the 1.30 plus levels expected to be seen in the coming weeks or months.

Short-term trading strategy (Intraday, 1-3 days):

Short term traders can look to play the 1.4200 and 1.4000 range with a sell bias when playing this range taking short positions just ahead or around 1.4200 and buying back the positions close to 1.4000.

WTI OIL (USO)

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*Note on our price chart:
Before we dive into the WTI technical analysis, we have decided to use the WTI continuous futures price as a chart instead of the original spot price posted in our article. This price will match the nearest dated WTI Crude futures contract which will switch automatically once the contract settles moving on to track the next nearest dated futures contract. We will also be only analyzing the technical aspect of the WTI price, given the fundamental aspect of WTI oil is well covered by many subject matter experts in the energy commodities section. At this time, the nearest dated futures contract being tracked by the above price chart is the March 2016 contract.

WTI oil has finally begun to find its footing last week though crude continues to be in dangerous perilous technical territory until the $38.30 is broken to the upside. We expect next week to bring further upside in crude oil prices to around the $36.50 level.

Medium- to long-term trading strategy (1-6 months):

Despite WTI Oil slightly exceeding our bottoming zone target, long term technical indicators are in oversold territory, which should fuel the next bullish bounce in the not so distant future. However, given that the bounce timing is less certain until a catalyst triggers it, we prefer to use oil ETFs like USO or longer dated WTI futures to go long crude at these levels. Whilst the USO and other oil ETFs are far from perfect, it will suffice for us given the hassle of rolling over WTI futures contracts. For now, we would use any retracement closer to the $30 mark to establish long positions with a stop if oil breaks $28.30 again.

Short-term trading strategy (Intraday, 1-3 days):

Our short term strategy is pretty much the same as our long term one with a long bias for oil with positions taken closer to the $30 mark with exits looked for around the $33 mark.

Thank you for your time, and we hope that you have enjoyed this weekly strategy piece. We look forward to your constructive feedback.

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Disclosure: I am/we are long USO.

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