FX And Oil Week Ahead: Panic Everywhere! What To Do Next?

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Includes: CROC, DRR, ERO, EUFX, EUO, FXA, FXE, FXY, JYN, OIL, UDN, ULE, URR, USDU, USO, UUP, YCL, YCS
by: The Market Master

Summary

US retail sales was a bright spot in a gloomy, difficult environment.

Expectations for ECB action in March should lead to a lower EUR.

USDJPY hit our 114 bearish scenario target and has exceeded expectations to the downside.

Summary

The undoubted star of the show this week was the JPY with the Japanese currency being the strongest gainer throughout the week following the risk off environment seen in the stock market, with the JPY only taking a break on its advance after threats of intervention by the BOJ.

The EUR was the other resilient currency throughout the week as markets continue to price in a higher probability that the Fed will not raise rates this year, and as markets await the ECB decision in March.

One bright spot we saw though in the US economic numbers were the retail sales numbers released Friday. We think that if the retail sales numbers, wages and spending can continue to show healthy increases with US employment numbers holding, that the US economy could surprise to the upside and be the stabilizing factor in a world of turmoil.

Source: Bloomberg.com

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

Sunday, 14 Feb. 2016

2350 GMT - Japanese GDP numbers (Q4)

Monday, 15 Feb. 2016:

*US Holiday - President's day

0030 GMT - Australian New Motor Vehicle Sales (Jan.)
0255 GMT - Chinese Trade Balance Numbers (Jan.)
0430 GMT - Japanese Capacity & Industrial Utilization (Dec.)
1000 GMT - Eurozone Trade Balance (Dec.)

Tuesday, 16 Feb. 2016:

1000 GMT - German ZEW Current Conditions
1000 GMT - German ZEW Economic Sentiment
1330 GMT - US NY Empire State Manufacturing Index (Feb.)
1330 GMT - Canadian Manufacturing Sales (Dec.)
1500 GMT - US NAHB Housing Market Index (Feb.)
2100 GMT - US Overall TIC Transactions and capital flow (Dec.)
2350 GMT- Japanese Core Machinery Orders numbers (Dec.)

Wednesday, 17 Feb. 2016:

1330 GMT - US Building Permits (Jan.)
1330 GMT - US Core PPI & PPI numbers (Jan.)
1330 GMT - US Housing Starts (Jan.)
1330 GMT - Canadian Foreign Securities Purchases (Dec.)
1355 GMT - US Redbook
1415 GMT - US Capacity Utilization Rate (Jan.)
1415 GMT - US Industrial Production (Jan.)
1415 GMT - US Manufacturing Production (Jan.)
2350 GMT - Japanese Trade Balance (Jan.)
2350 GMT - Foreign Investment in Japanese Bonds & Stocks (Jan.)

Thursday, 18 Feb. 2016:

0030 GMT - Australian employment change (Jan.)
0130 GMT - Chinese CPI & PPI numbers (Jan.)
0900 GMT - Eurozone Current Account & Net Investment Flow (Dec.)
1330 GMT - US Jobless Claims Numbers
1330 GMT - US Philly Fed Manufacturing Numbers (Feb.)
1330 GMT - Canadian Wholesale Sales (Dec.)
1600 GMT - US Crude Oil Inventories numbers
2330 GMT - Japanese Reuters Tankan Index (Feb.)

Friday, 19 Feb. 2016:

0700 GMT - German PPI Numbers (Jan.)
1330 GMT - US Core CPI Numbers (Jan.)

Trading and Technical Strategy for the week ahead:

EUR/USD

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The EUR continued to remain resilient as US equity markets languished with some selling seen only in the last day of the week as US retail sales numbers rebounded. Admittedly, the current resilience in the EUR has frustrated us and every day the EUR remains resilient, reinforces our bullish scenario 3 playing out (Green Path) with a potential test of the 1.1775 level. Nonetheless, we do continue to hope for the red path to play out in the coming sessions with expectations of further easing by the ECB being the key catalyst for this. These two key factors at present give us hope for a lower EUR:

1. Bundesbank Chief Jens Weidmann has in recent times softened his staunch opposition stance for more QE, admitting the credibility risk of undershooting the ECB's inflation target for three straight years warrants policy action of some sort.

2. The record CFTC shorts in the EUR have now been pared down below 100k contracts in the most recent COT report from previous record highs. If this gives some representation of the broader positioning of the market a good number of shorts have been squeezed out of the market at present which now make conditions more ideal for another decline over the next few weeks.

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

With the Fed in a rate hike cycle timing, now in some doubt given the tepid US data over the last few weeks, the possibility is very real that we could be headed for a period of USD weakness in the coming weeks and months unless other Central Banks like the ECB ease further. Any disappointment on that front could lead to a much higher EUR into March. However, despite our view being less optimistic for the USD in recent weeks, we think that the risk-reward tilts more to the downside for the EUR at the present moment, given a high likelihood of policy action of some sort by the ECB.

With the technical picture now clearer, we think shorts can now be established in the EUR at 1.1320 and 1.1370, with a stop loss above 1.1470. We would be looking for downside in the EUR to around the 1.10s or lower in the coming weeks.

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

Short-term traders can look to play the EUR from the short side by selling at 1.1320 and 1.1370 buying the positions back between 1.1150 and 1.1260. The stop loss on the short position would be 1.1405.

USD/JPY

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"Given that the pair is oversold in the short term for now, we expect some USDJPY buying into next week with the pair possibly testing the 118.30/118.80 level. From there, we expect the USDJPY weakness to continue as we think the BOJ is likely done for some time with regards to easing further."

The USDJPY exceeded our expectations from last week (above) with the pair falling much further than expected going straight through our 114 bearish scenario target. Having said that, the probability continues to tilt toward one more downside move in the USDJPY toward the 110 level. We do think though that it will be difficult for the pair to go much below 110 as the BOJ will step in to either intervene or announce another round of easing to stave off the selling pressure in the pair. Our personal expectations are that the pair will remain between 110-125 throughout the year with the potential to reach 130 by year end if substantial increases to the BOJ's QQE program are announced, which we think is very likely given how economic conditions have developed recently.

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

Given that the pair has hit our 114 target, we will be looking to take a long position in the pair closer to the 110 level on the next sell-off in the pair with the BOJ either intervening or announcing a new round of easing to push the pair higher as the expected catalyst. Any long positions we take will have a stop loss at 109.50.

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

"If you were lucky enough to be on the short side, do consider locking in profits early next week as a pullback in the pair is expected in our opinion. The 118.80 would be a good level to re-establish the short positions with a stop at 120. We would be looking for a break of 116 the next time round the USDJPY comes off, with any hint of dovishness from Yellen at next week's testimony likely being the catalyst for the move."

Our expectations for a lower USDJPY last week (above) came to pass after all. However, the catalyst was a risk off environment vs. dovishness from Yellen as initially expected. Nonetheless, we think that the pair is oversold at this point, and would look as with our medium term strategy for any move toward the 110 level as an opportunity to go long to play BOJ intervention or a new round of policy easing. Any such trades should have a stop loss at the 109.50 level.

AUD/USD

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The AUD continues to consolidate around the 0.7100 figure, and we expect that selling in the pair should continue seeing downside over the next week with the 0.6900 level likely taken out again over the next two weeks.

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

The medium and long term bias remains to the downside for this pair. As such, we would use any pullback close to the 0.7200 level for this pair to enter a short position. Our stop would be placed at 0.7400. Our downside target in this scenario would be the 0.66-0.68 level as mentioned above. We think a dovish RBA governor Stevens would likely be the catalyst for the next leg down in the AUD.

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

Short term traders can consider a short bias into next week selling around the 0.7100 level and buying back in the 0.69s. The stop loss for this trade would be the 0.7200 level and higher.

USD/CAD

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The USDCAD retraced as expected this week, with the pair finding resistance at the key 1.4000 level. We used this opportunity to re-establish half the short position we covered at 1.3710. We think the next week should see more downside in the USDCAD, and if OPEC really does agree to a production cut, the USDCAD should begin to fall aggressively in the next few weeks which is our primary expectation.

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

We have re-established our longer term short position from 1.4420 & 1.4586 which we partially covered at 1.3710, with the new short being established at 1.3995. Our stop loss is now placed at 1.4120 for our entire short position with the 1.30 plus levels expected to be seen in the coming weeks or months. We think any retracement to the 1.4000 level will continue to provide a good selling opportunity for the pair with a stop loss at 1.4120.

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

Short term traders can look this week to play the 1.3800-1.4000 range with a bias on the short side. Any long position taken should be stopped out if 1.4050 is broken.

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 continues to struggle and has failed to hit our expectation for upside in the past week toward the $36.50-$38.30 zone. Nonetheless, we continue to hold expectations that this could be met in the coming week or two so long as the previous swing low in oil is not broken. One potential near term catalyst on the horizon of course would be if OPEC members finally blink and agree to a production cut.

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

Our medium term strategy would not have done too well last week given the fall in crude prices. Nonetheless, we continue to be optimistic this coming week for higher prices with new positions taken at levels below $30 with a stop loss triggered by any break of the $28 level.

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 around the $30 mark or lower 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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