FX And Oil Week Ahead: It's All About Energy This Week

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Includes: FXA, FXC, FXE, FXY, UDN, USDU, USO, UUP, XLE
by: The Market Master

Summary

Chinese GDP growth meets expectation but is likely to slow in H2.

Moves next week likely determined by the outcome of the Doha meeting.

USD upside limited in the interim barring a larger catalyst.

Summary:

The highlight for this past week was the Chinese GDP growth numbers that came in line with expectations at 6.7%. However, it is to be noted that the services sector slowed and that growth was largely due to the housing sector recovering after the government unleashed a slew of stimulus measures. We do not think that this will create a sustainable recovery in growth for China, and whilst the short term increase in borrowings have given a temporary boost to growth numbers, it undoubtedly adds to the medium term debt issues that China faces at this time, especially given the alarmingly high amount of Chinese corporate debt at this time.

This coming week's trading moves will likely be determined by the outcome of the OPEC meeting in Doha, with the odds continuing to be against an agreement in our view given the recent rhetoric from Saudi Arabia. Nonetheless, we do think some sort of an agreement will be reached in the second half of this year which will be bullish for WTI crude prices over the medium to longer term.

The ECB is the other key event this coming week, though nothing is expected from the meeting other than the usual rhetoric given the continued dismal Eurozone inflation rate. On the overall, we continue to expect the USD to appreciate this week though gains will be limited. Whilst we do not think that the larger USD appreciation trend is over, we also do not think that this current correction in the greenback is over.

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Trading and Technical Strategy for the week ahead:

EUR/USD (FXE)

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The EUR finally started its downside move this week. Given the current technical momentum, we think that a move toward the 1.1110/1.1090 area is very possible this coming week into the ECB meeting. However, we do think a significant catalyst will be needed to break through this technical area, which the ECB meeting on Thursday as well as some key German economic numbers may provide, though this is not our current expectation at this time.

Trading strategy:

Our short strategy for the EUR would have worked out well over the last week, with this week expected to bring the downside move to the 1.1090/1.1110 area. We will be covering at least half our short position at this area, with a trailing stop to 1.1180 to protect the other half. We think this prudent approach is important given the potential that the bullish green path to 1.1770 might be playing out, and that the ECB has probably fired all the ammunition it can fire for some time. For those looking to establish new shorts, we would look for the 1.1340 level to fade any EUR rallies, with a stop loss at 1.1395.

USD/JPY (FXY)

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The USD/JPY rebounded as expected this week reaching a high of 109.75 into the Friday session before falling back below the 109 figure, after news of an earthquake and tsunami in Japan halted the bullish momentum in the pair. We think that this current decline presents a buying opportunity to see the pair move toward the 110.50 level as projected before the next leg down in the USD/JPY is seen.

Trading strategy:

The strategy for this week is pretty straight forward. We think that a short term buying opportunity for the pair presents itself at the 108.45 level where we plan to establish a long position with a stop loss at the 107.60 level and a take profit at the 110.50 level. Over the medium to longer term though, we are now less optimistic than before given the rhetoric from the G20 discouraging currency interventions which will undoubtedly weigh on the pair over the medium term. From a technical standpoint, a break of 107.60 will signal a much larger decline toward the 100.77 level starting.

AUD/USD (FXA)

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The AUD/USD managed to invalidate the bearish head and shoulders pattern that was targeting 0.7320, though the rally in the AUD continues to look tired at this time. Key resistance for the AUD is found next at 0.7740/60 followed by the key 0.7800 level where we think the AUD will top out for at least the interim. Whilst the Chinese GDP growth numbers met expectations this week, we think that growth expectations could very well be tapered further for the world's second largest economy in the second half of this year which would continue to weigh on the AUD.

Trading strategy:

Our short strategy for last week was stopped out given the invalidation of the immediate head and shoulders pattern. For now, we are considering re-establishing short positions at the 0.7760 and 0.7800 level to play a likely interim top in the AUD. We will re-assess the AUD after the next decline to then decide whether we should hold the shorts for a longer period of time. For now, we will not be able to dictate where the stop loss for the position will be until we see an initial reversal to the downside happen from the above stated levels.

USD/CAD (FXC)

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The USD/CAD has now broken through the key 1.2980 support but continues to remain in a holding pattern as the outcome of the Doha meeting is awaited. Whilst the immediate technical trading patterns for the pair will be difficult to predict, we think that the pair should still rebound toward the 1.3300 level at a minimum which would provide a selling opportunity for the pair over the medium to longer term toward the 1.2000 level as laid out in our best ideas for the year piece.

Trading strategy:

Our short term strategy over the past week would not have worked too well given the current bullishness in the CAD due to WTI prices. Whilst the immediate bullish scenario was invalidated, we think that this scenario should still be seen in the coming sessions, with an expectation for prices to move toward the 1.3300 level at a minimum before continuing the decline as stated above. Given the short term risks in the pair we are standing aside for the time being and will be looking to re-establish medium term to long term shorts for the pair once this rebound in the USD/CAD occurs.

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 May 2016 contract.

WTI oil bulls managed to successfully invalidate the bearish head and shoulders this past week on optimism for a production freeze agreement at the OPEC meeting this Sunday. Whilst we remain short term bearish on the price of WTI despite the recent rally, we do think that the next decline toward the $33.50-$35.40 levels will set the commodity up for a nice rally past the $50 level.

Even if no agreement for a production freeze is seen at the Doha meeting, we do think that OPEC will come up with some sort of an agreement in the coming months given that their most recent report seems to imply higher crude prices given the expected increase in oil producing activities in Q4 this year which would be an illogical conclusion unless they were bullish on oil prices toward the Q3 & Q4 period. As such, we think OPEC is waiting for rig counts to fall a little further in the U.S. before finally putting in a production freeze agreement sometime in Q3. As such, we think that any fall in crude prices following the Doha meeting, especially into the mid $30s should be seen as a medium to long term buying opportunity. The risk to this expectation though, would likely be a fall in demand which is not currently modeled into their assumptions, which is always a possibility given the fragile state of the global economy.

Trading strategy:

It is going to be difficult to forecast the current short term technical movements for the next week until at least the Monday following the Doha meeting results plays out. Nonetheless, given that we see the next decline in WTI as a medium to long term buying opportunity, we will be watching the $33.50-$35.40 levels to load up on long positions in USO and XLE. The main risk to our long positions as stated above would be a drastic downward revision in the demand picture. From a technical perspective, out stops would be at the lows made in January this year.

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