FX And Oil Week Ahead: The Panic Subsides, Calm Before The Next Storm?

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

Summary

Markets have finally calmed, though the USD ended the week with a tepid performance.

US inflation data remains tepid, GDP eyed next week.

Uniform USD strength unlikely going forward.

Summary

Markets and risk sentiment have finally calmed somewhat this week, with the S&P 500 staging a nice rally to end the week up. The USD, however, had a little bit more of a mixed week climbing marginally against the EUR over the previous week, but continuing to show weakness against the JPY, AUD and CAD.

The key data this past week was the US CPI numbers which continue to reinforce non-existent inflation, as well as the FOMC minutes, which has acknowledged recent market volatility. Whilst there has been no explicit shift in the Fed's policy stance or rate projections, the weakness in the fed funds futures will continue to weigh on bullish USD sentiment as evidenced with the most recent COT report published.

US GDP data this coming week will be the key data point market participants look out for. On our end, we expect no surprises from the data, with the numbers likely to come in line with market expectations.

Source: Bloomberg.com

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

Monday, 22 February 2016:

0200 GMT - Japanese Manufacturing PMI (Feb.)
0830 GMT - German Manufacturing PMI (Feb.)
0830 GMT - German Services PMI (Feb.)
0900 GMT - Eurozone Manufacturing PMI (Feb.)
0900 GMT - Eurozone Markit Composite PMI (Feb.)
0900 GMT - Eurozone Services PMI (Feb.)
1445 GMT - US Manufacturing PMI (Feb.)

Tuesday, 23 February 2016:

0700 GMT - German GDP Numbers (Q4)
0900 GMT - German Business Expectations (Feb.)
0900 GMT - German Current Assessment (Feb.)
0900 GMT - IFO Business Climate Index (Feb.)
1355 GMT - US Redbook
1400 GMT - US Case Shiller Home Price Indices (Dec.)
1500 GMT - US CB Consumer Confidence (Feb.)
1500 GMT - US Existing Home Sales (Jan.)
1500 GMT - US Richmond Manufacturing & Services Numbers (Feb.)

Wednesday, 24 February 2016:

0030 GMT - Australian Construction Work Done (Q4)
1330 GMT - Australian Wage Price Index numbers (Q4)
1445 GMT - US Services PMI (Feb.)
1500 GMT - US New Home Sales (Jan.)
1530 GMT - US Oil Inventory Numbers
2350 GMT - Foreign Investment in Japanese Bonds & Stocks (Jan.)

Thursday, 25 February 2016:

0030 GMT - Australian Building Capital Expenditure (Q4)
0030 GMT - Australian Plant/Machinery Capital Expenditure (Q4)
0030 GMT - Australian Private New Capital Expenditure (Q4)
0700 GMT - German HICP (Jan.)
0700 GMT - German Gfk Consumer Climate (Mar.)
0900 GMT - EU M3 Money Supply (YoY)(Jan.)
1000 GMT - EU CPI Numbers (Jan.)
1330 GMT - US Jobless Claims Numbers
1330 GMT - US Durable Goods Orders Numbers (Jan.)
1400 GMT - US House Price Index (Dec.)
2330 GMT - Japanese National CPI Numbers (Jan.)

Friday, 26 February 2016:

0130 GMT - Chinese House Prices (Jan.)
1000 GMT - EU Business Climate (Feb.)
1000 GMT - EU Business & Consumer Survey (Feb.)
1000 GMT - EU Consumer Climate (Feb.)
1000 GMT - EU Consumer Inflation Expectations (Feb.)
1000 GMT - EU Selling Price Expectations (Feb.)
1000 GMT - EU Services Sentiment (Feb.)
1000 GMT - EU Industrial Sentiment (Feb.)
1300 GMT - German CPI Numbers (Feb.)
1300 GMT - German Preliminary HICP (Feb.)
1330 GMT - US GDP (Q4)
1330 GMT - US GDP Price Index (Q4)
1330 GMT - US Goods Trade Balance (Jan.)
1330 GMT - US Real Consumer Spending (Q4)
1455 GMT - US Michigan Consumer Sentiment (Feb.)
1455 GMT - US Michigan 5-Year Inflation Expectations (Feb.)
1455 GMT - US Michigan Consumer Expectations (Feb.)
1455 GMT - US Michigan Consumer Sentiment (Feb.)
1455 GMT - US Michigan Current Conditions (Feb.)
1455 GMT - US Michigan Inflation Expectations (Feb.)
1500 GMT - US Core PCE Price Index (Jan.)
1500 GMT - US Personal Income (Jan.)
1500 GMT - US Personal Spending (Jan.)
1500 GMT - US Real Personal Consumption (Jan.)

Trading and Technical Strategy for the week ahead:

EUR/USD

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The EUR continued its downside move, though the overall momentum to the downside has been much more sluggish than initially anticipated. We continue to have a downside bias for the EUR into the ECB meeting in March. However, the short-term oversold conditions in the EUR could see the EUR/USD move to the upside before this downside resumes. Hence, whilst we continue to have a downside bias for the EUR, we continue to remain cautious in our short positioning given the potential for a bounce in the pair to the 1.1200 level and higher. Next week's US GDP number will likely set the tone for the EUR/USD into the ECB meeting in March.

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

We continue to believe that the risk-reward tilts to the downside for the EUR at the present moment, as the ECB will likely act in March to stabilize the risk off environment and stave off deflation. Whilst a further rate cut is expected, the question of course that everyone has, is the size of the increased QE package, if any.

We think shorts can be established in the EUR at 1.1250, 1.1320 and 1.1370 if a spike in the EUR is seen ahead of the ECB in March, with a stop loss above 1.1470. Downside in the EUR should ideally break the 1.1000 figure following the ECB meeting if there is no disappointment with the easing package.

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

Short-term traders can look to play the EUR from the short side by selling at 1.1150/60, buying back the position around 1.1080. A stop loss on this trade would be the 1.1195 level. Those looking to play on the long side can consider 1.1030/40 for a short-term trade, looking for the 1.1120 level for an exit. The stop loss would be placed at the 1.0995 level.

USD/JPY

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Whilst the USD/JPY downside momentum remains intact over the last week, the pair has entered short-term oversold territory at this time. As such, the potential for a little more upside from current levels before one more attempt at the 110 level is likely. If this plays out as we expect, the risk-reward will likely tilt in favor of being the long the USD/JPY for the next few weeks.

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 110/110.25 level on the next selloff 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):

Whilst our expectations were right for a USD/JPY rebound, the pair did not quite reach our lower quartile 110 target zone for establishing a long position. Nonetheless, given the potential for another up move this week, traders can go long the pair at current levels with a stop at 110.80 and a target level over the 115 figure to square the position. If this occurs, we will be looking for levels to re-establish shorts to play the move to the downside.

AUD/USD

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The AUD continues to consolidate between the 0.7100 and 0.7200 level, defying our expectations for more downside this past week. An inverse head and shoulders pattern has also begun to form for the AUD, with a 0.7615 objective if the pattern were to play out. However, we continue to favor downside in the AUD, with the 0.7190/0.7200 level being levels where we would consider selling the AUD given the jawboning by RBA board member John Edwards calling for the AUD to move toward 0.6500.

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 0.7190/0.7200 level for this pair to enter a short position. Our stop would be placed at 0.7320. Our downside target in this scenario would be the 0.66-0.68 level as mentioned above.

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

Short-term traders can consider a short bias into next week selling around the 0.7190/0.7200 level and buying back the positions at the 0.7040 level. The 0.7260 level would be the stop loss for any short positions.

For those taking a contrarian view and betting on the inverse head and shoulders playing out, a clean break of 0.7200 would need to be seen with a pull back toward 0.7190 seen as a buying opportunity to play the upside.

USD/CAD

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The USD/CAD moved down as expected in our strategy piece last week. We decided to use a short-term oversold condition to square the half position we re-established at 1.4000 at 1.3680. We have also trailed our stop loss for the remaining half a position to the 1.4100 level which we do not think will be seen again in the near future.

Next week should bring more downside in the USD/CAD as expected with the 1.3600 figure likely to be broken in the coming week. Our take profit on the remaining half a short position is at the 1.3000 level.

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

Now that we have squared our re-established short position from last week, our stop loss is now placed at 1.4100 for the remaining short position, with the 1.30 plus levels expected to be seen in the coming weeks or months. We think any retracement to the 1.3800 level will continue to provide a good selling opportunity for the pair with a stop loss at 1.3920. The eventual downside target would be the 1.3000 level, though less patient traders can close their positions close to the 1.3500 figure.

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

Short-term traders can look this week to play the 1.3600-1.3800 range with a bias on the short side. Any short position taken should be stopped out if 1.3850 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 April 2016 contract.

WTI oil continues its basing process with the commodity much more stable in recent weeks. We continue to hold expectations that our $36-$38.30 price target zone will be met in the coming week or two so long as the previous swing low in oil is not broken. With OPEC's output frozen at current levels, and oil demand remaining robust for the foreseeable future, we think the risk-reward continues to favor the upside with any supply shock news likely to be the catalyst for higher oil prices.

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

We continue to be optimistic this coming week for higher prices, with new positions around the $30 or lower levels on the April 16 WTI Futures contract using the United States Oil ETF or April 16 Futures contracts with a stop loss at the $28 level. Our target would be to exit the trade around the $38.30 and higher mark. We think that most of the bad news for oil is already out at this time, and any shift to the downside in supply side dynamics could lead to higher oil prices very quickly.

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 or lower levels on the April 16 WTI futures contract with exits looked for around the $33-$36 mark. Our stop loss is at the $28 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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