FX And Oil Week Ahead: USD Bulls Playing With Fire?

|
Includes: FXA, FXC, FXE, FXY, USO, UUP
by: The Market Master

Summary

USD range bound for now, likely near interim bottom.

USD/JPY may be bottoming out, WTI awaiting OPEC meeting results.

Possible FOMC rate hike surprise in April.

Summary:

The highlight for this past week was undoubtedly the FOMC minutes which continued to show a cautious stance by various FOMC members though the rhetoric was less dovish than market participants had expected, which helped the USD recover losses following the minutes. There were no surprises from the RBA though the AUD fell after large AUD/JPY long position liquidations across the board as the USD/JPY capitulated this week with BOJ rhetoric having no effect on the decline as market participants failed to give the BOJ's intervention threats any credibility.

Key data for this coming week will be the Chinese Q1 GDP data and Australian employment data, which should determine the moves for the AUD/USD in the coming week. Whether a recovery in the USD/JPY can be seen will be determined by the market believing the BOJ intervention threats as well as the , though the current move off the lows is showing promise. The rest of the major pairs should see a range bound week with the exception of the AUD, JPY and CAD which have key data points or events this week.

Whilst it may be tempting to call an end to the USD rally, it is important to note that the Fed has recently called an extraordinary meeting which could be signaling a rate hike at the April 26-27 meeting given that the last time the Fed called such a meeting was before the December rate hike. So this meeting in April will certainly be a live one in which USD bull faithfuls may finally be rewarded for keeping the faith.

Click to enlarge

Chinese GDP growth

Trading and Technical Strategy for the week ahead:

EUR/USD (FXE)

Click to enlarge

The EUR did very little this week with the pair capped at the 1.1440/60 level and held at the 1.1320 short term support just ahead of the 1.1280 key support. The technical pattern continues to suggest that current levels are at or near an interim top, especially with the most recent COT futures data suggesting that USD long positions are at their lowest since March 2014. The key catalyst at this point would be a surprise hike in the April FOMC meeting, which is certainly on the cards at this moment, which could result in the larger downside move we have been expecting for some time to play out.

Trading strategy:

"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."

Following this short term strategy from last week, would have done pretty well given the range that the EUR/USD held throughout the week. We would continue this short term trading strategy into this week, with any upside stop losses for short positions at 1.1480.

Whilst we believe in continuing this short term strategy over the coming week, we believe that it is important to try to hold at least one of the short position for the pair from the 1.1440 level if sell orders there were to be triggered for the medium term. This position would be used to play the larger expected decline in the pair toward the 1.1090 level, which we continue to believe will happen in the not too distant future. The stop loss on this short position will be at the 1.1480 level.

USD/JPY (FXY)

The USD/JPY had a horrible week after sell stops below the 110 figure were triggered. Large AUD/JPY liquidations hit the pair sending the pair to a low of 117.68 before barely closing over the 108 figure into Friday's close. The pair remains technically very oversold on several time frames and should see a bounce higher into the coming week, as long as the 117.68 level is not breached. We project that a bounce toward the 110.50 level should materialize in the next one or two weeks before the pair decides what to do next. The primary pattern for the move down now remains corrective, though whether the pair will regain the highs by the end of this year remains a tough question to answer given recent developments.

Trading strategy:

Our short term trading strategy last week would have resulted in any long positioned being stopped out with a 75 pip loss which is fine given that the market fell much more thereafter. Given the structure of the current move off the 117.68 level, traders can go long the pair at current levels to play an upside bounce in the pair, but with a tight stop loss at the 117.60 level. The short term upside targets would be the 109.50 and 110.50 levels. We will not be projecting a longer term upside target for now until the current move up develops further.

AUD/USD (FXA)

Click to enlarge

The AUD/USD was one of the losers this week as AUD/JPY long positions were liquidated following the slide in the USD/JPY. Next week's key data for the pair is the Australian employment report, which could help make some decisive moves for the pair. On the technical front, there is a head and shoulders pattern forming for the AUD/USD and as such, we favor selling at the 0.7650 level to play the technical pattern.

Trading strategy:

Traders for this week should look to sell the pair at the 0.7650 level to play the bearish head and shoulders pattern targeting the 0.7320 level. The stop loss on this short trade would be the 0.7730 level. How the pair bounces from around the 0.7300 level will then be used to determine whether the trade can then be ridden all the way down to the 0.7100 level.

USD/CAD (FXC)

Click to enlarge

The USD/CAD tumbled back to the 1.2980 support again this week following the better than expected Canadian employment numbers and broad based USD weakness across the board. It does look as though the bottoming process for the pair is taking longer than expected, though a long bias remains at this time for the pair.

Trading strategy:

".... 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."

We continue to believe that current levels in the USD/CAD present an attractive long opportunity with short term upside targets of 1.3050 and 1.3100. Any long trade taken should have a stop loss at the 1.2850 level. We will re-look our 1.3500 medium term target once the pair reaches the 1.3100 level from current levels. The catalyst will likely be the April 17 OPEC meeting, which at this time appears to have a high risk of having no production freeze agreements in place from the meeting.

WTI OIL (USO)

Click to enlarge

*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 had a volatile week this week, with the commodity falling below the $35.80 support before rallying hard into the end of the week to close above $39. This continues to fit within the scope of the bearish head and shoulders pattern formation targeting the $30.75 level as long as the $41.76 level is not breached. Next week should be a relatively boring week for WTI given that the April 17 OPEC meeting is just around the corner. As such, we do expect a continued range bound scenario for the week.

Trading strategy:

Unfortunately, our short term long strategy whilst correct last week would have been stopped out before gains were realised due to the volatility of WTI oil. This week is a tricky week, though given the risks of a no agreement at the April 17 OPEC meeting we think short term traders can sell WTI at current levels with a stop at $41.80. However, we do note that this is an extremely high risk trade which we prefer not to put on if given a choice. You can follow us on our site regarding WTI, which we track daily to look for more favourable setups.

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

RISK DISCLOSURE:

HIGH RISK WARNING: Foreign exchange, Futures and ETF trading, carries a high level of risk that may not be suitable for all investors. Leverage creates additional risk and loss exposure. Before you decide to trade any instrument, carefully consider your investment objectives, experience level, and risk tolerance. You could lose some or all of your initial investment; do not invest money that you cannot afford to lose. Educate yourself on the risks associated with trading, and seek advice from an independent financial or tax advisor if you have any questions.

ADVISORY WARNING: THEMARKETJOURNAL provides references and links to selected blogs and other sources of economic and market information as an educational or informational service to its clients and prospects and does not endorse the opinions or recommendations of the blogs or other sources of information. Clients and prospects are advised to carefully consider the opinions and analysis offered in the blogs or other information sources in the context of the client or prospect's individual analysis and decision making. None of the blogs or other sources of information is to be considered as constituting a track record. Past performance is no guarantee of future results and THEMARKETJOURNAL specifically advises clients and prospects to carefully review all claims and representations made by advisors, bloggers, money managers and system vendors before investing any funds or opening an account with any brokerages or dealers. Any news, opinions, research, data, or other information contained within this article and our website is provided as general market commentary and does not constitute investment or trading advice.

THEMARKETJOURNAL expressly disclaims any liability for any lost principal or profits without limitation which may arise directly or indirectly from the use of or reliance on such information. As with all such advisory services, past results are never a guarantee of future results.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.