FX And Oil Week Ahead: The End Of The WTI And USD Rally?

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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, UDN, ULE, URR, USDU, USL, USO, UUP, UWTI, YCL, YCS
by: The Market Master

Summary

Nonfarm payroll numbers beat as expected.

USD rally taking a pause but not over.

RBA may cut rates on Tuesday to stem the AUD's gain.

WTI oil and CAD rally at serious risk given the current OPEC member rhetoric.

Summary:

Nonfarm payroll data came in stronger than expected as we predicted last week, though the price action in the USD has been less than desirable, with several technical warning signs flashing at this time for the USD bulls.

The surprise this week was Yellen's dovishness in her speech to the New York Economic Club. Nonetheless, we do not think that the long-term USD uptrend is over at this time despite the events of this past week. Rather, we think that the USD rally is just taking a pause for the time being to work off long-term overbought conditions.

WTI oil, though, has been a notable loser this week despite the dovish rhetoric from Yellen, as the Saudis this week have certainly poured any cold water on hopes of them backing down from their hard line stance on their production. Given this backdrop, we think that an agreement in the April 17 OPEC meeting is not likely to materialize given Iran's reluctance to cut production, and our bearish scenario for WTI oil is likely the scenario playing out now vs. the previous bullish scenario to $46 which we have kept for some time. As such, we remain cautious on WTI and will be trading short-term trades until a confirmation for either the bullish or bearish path given in our update below is seen.

Next week's key data points are the RBA rate decision on Tuesday, which we think holds a possibility for a surprise cut given how worried the RBA is over the AUD's recent rise, as well as the Canadian employment report on Friday. Updates on technical expectations for next week are given below.

Source: Bloomberg.com

Trading and Technical Strategy for the week ahead:

EUR/USD (FXE)

The EUR moved up in the early part of the week as expected, though it continued to move significantly higher after Yellen's dovish speech and the nonfarm payroll numbers failed to blow away the trading crowd's expectations despite the better than expected read. Whilst it may look dismal at this time for EUR shorts, the lowest number of shorts since June 2014 as per the most recent COT report could be flashing a warning sign to bulls that this rally is nearing an end. For the coming week, we see limited upside in the EUR, with rallies likely capped at 1.1440/60. The key supports for the pair to break to the downside are 1.1340 and 1.1280.

Trading strategy:

Our medium-term trade last week did not do well, and based on our preset parameters, the trade would have been stopped out. Short-term traders would have fared better if they faded the first EUR rally earlier in the week to 1.1220; they would have been stopped out the second round. Unfortunately, the EUR/USD never reached the 1.1145 level for short-term traders to take a long position.

Whilst it is proving frustrating to short the EUR/USD at present, we think that the monetary policy divergence between the ECB and Fed will eventually weigh on the EUR/USD again, despite Yellen's recent comments. Given that a good number of shorts have cleared out from the market based on the most recent COT report, we think that more ideal conditions are now presenting themselves to play the EUR/USD from the short side.

Our strategy this week continues to be to establish shorts around the 1.1420/40 level with a stop loss at 1.1505. We expect that any upside in the EUR should stall around 1.1420/40 and move to at least the 1.1280 level. A break of 1.1280 would then be needed to confirm the further move to the downside with an eventual target at the 1.1090 level which medium- to long-term traders can hold for. Short-term traders can consider the 1.1340 and 1.1280 levels to square any shorts taken above 1.1400.

USD/JPY (FXY)

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The USD/JPY has finally continued its decline this week, falling back below the 112 level on broad based USD weakness, after showing resilience earlier in the week on JPY cross buying. Support for the pair is currently found at the 111.30 level for the pair, a break of which will likely result in the USD/JPY seeing the 110.25 level, where we expect support for the pair to be maintained.

Trading strategy:

Our short-term strategy was tested last week but did well into the week's close and would have netted short-term strategy traders about a 150 pips worth of gains. Unfortunately, current USD/JPY levels do not make shorting the pair a good trade, and we favor playing the pair from the long side at 110.25 with a stop loss at the 109.50 level. The target on the upside will be determined after a bounce in the pair is seen once the 110.25 level is hit.

AUD/USD (FXA)

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The AUD/USD moved higher as expected toward the 0.7560 level at the start of the week where we re-established our short position. The trade performed well initially until Fed Chair Yellen caused the broad based USD selloff with her speech. We think the pair is currently oversold on several time frames, especially the daily, and that the RBA is worried about the current rise in the AUD/USD over the last 2 months. As such, we do not rule out the possibility of a surprise rate cut in next week's RBA meeting to stem the rise in the pair. Our bias for the pair remains to the downside, with the 0.7400 level as the key level for the pair to break through in order for the bears to start regaining control of the pair again.

Trading strategy:

We re-initiated a short position in the pair over the previous week at the 0.7560 level, and will be looking at the 0.7480 and 0.7400 level closely to determine how long we should keep this short trade for. Our profit objective is currently the 0.7100 level, but will be subject to change if the pair shows no downside momentum when the 0.7480 and 0.7400 levels are reached. Our current stop loss on the trade remains at the 0.7780 level. For those looking to establish short positions, current AUD/USD levels and the 0.7725 level should be good levels to establish new shorts. The stop loss will be at the 0.7780 level, with a take profit at the 0.7100 level. Any updates to our take profit target or stop loss will be posted to our subscribers.

USD/CAD (FXC)

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The USD/CAD tumbled back to long-term support at 1.2980 following Yellen's dovish speech. We continue to favor the current support at 1.2980 holding, with upside likely in the next few sessions and a double bottom formation in place to form the potential spring board to the 1.3500 level. This week brings the Canadian employment report on Friday, which could mark the turn we have been expecting in the pair to the upside.

Trading strategy:

Unfortunately, none of our trading strategies for the USD/CAD worked out in the past week due to the surprise of the Yellen speech. However, given the risks of no agreement at the April 17 OPEC meeting, and oversold conditions on the daily time frame for the pair, we think the 1.2980 support will hold and as such will go long the pair at the 1.2980 level, with a stop loss at 1.2910 for shorter-term traders and 1.2855 for longer-term traders. The upside target for the pair is 1.3100 for shorter-term traders and 1.3500 for longer-term traders.

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 was one of the notable losers this week despite the risk on mode and broad based USD selloff in the past week. This was largely due to the continued hard line stance the Saudis and Iranians are taking in current discussions which is making any potential agreement about an output freeze at the April 17 OPEC meeting look less likely by the day. Technically, WTI may also be forming a bearish head and shoulders pattern that could take crude prices to at least $33. The bearish scenario only gets invalidated if the previous March swing high is broken.

Trading strategy:

None of our long positions on any time frames would have worked out well last week, with WTI moving much lower than we initially expected after the bearish rhetoric from various key OPEC members. For this week, we prefer a short-term trade buying at $36.30 and selling at $38.30 with a stop loss at $35.80. From there, we will see how the market plays out to decide if we should play the trade from the short side to play the bearish head and shoulders pattern (Red path).

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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