FX And Oil Week Ahead: Trading A Potential Brexit

| About: The United (USO)

Summary

Markets now pricing in only one rate hike this year following the FOMC meeting.

Commodities have had a volatile week.

Lower risk alternatives to trading the UK referendum vote.

This past week's highlight was undoubtedly the FOMC meeting, and the attached speech that followed the meeting. The key highlight of the meeting, continues to be the revised dot plot by various members of the FOMC committee. Whilst the June 23 UK referendum was undoubtedly on the minds of committee members, they are quite obviously affected by the latest non farm payroll headline number. It would undoubtedly take a strong number for June payrolls to alleviate their fears at this time, so the release of this number come the first week of July will be especially important. Having said that, the current trend in the jobless claims numbers is certainly not something that is pointing to an especially bright number for June at this time.

Our expectations as published last week for the various instruments have largely been met, with gold and WTI oil experiencing some crazy volatility into the second half the week. This week, we will be attempting to spot opportunities to hopefully trade the UK referendum vote without excessive risks, given the extreme volatility of the Sterling pound (GBP) at this time. It is also important to note that this referendum holds significant long term implications for the rest of the EU and EZ, so it's outcome will certainly have European politicians and central bankers on edge.

Trading and Technical Strategy for the week ahead:

Instrument Fundamentals Intraday bias Hourly oscillators Short term bias (1-3 days) 4 hourly timeframe Medium term trend (1wk-3mths) Daily timeframe Long term trend (>3mths) Weekly Timeframe
EUR/USD Bearish Bullish Bias being challenged Bullish Bullish Bullish
AUD/USD Bearish but improving Bullish Bullish Bearish Bullish
NZD/USD Bearish but improving Bearish Bullish Bearish Bullish
GOLD Bullish Bullish Bullish Bearish Bullish
WTI OIL Bearish but improving Bullish Bullish Bias being challenged Bearish Bias being challenged Bearish
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EUR/USD (FXE)

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Key Levels
Support: 1.1240/ 1.1160/ 1.1110/ 1.1095/ 1.1040/ 1.0970
Resistance: 1.1280/ 1.1320/ 1.1360/ 1.1420/ 1.1470/ 1.1560/ 1.1615/ *1.1775
*Level to consider buying at for support & selling at for resistance for intra-day trades
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The EUR/USD in our opinion continues to offer a lower risk alternative to play the UK referendum vote. We think that in the scenario of a 'Bremain' vote, EUR/GBP selling would weigh on the EUR/USD and likely push it lower. Whilst a 'Brexit' vote will undoubtedly push the pair significantly lower with the prospects that this could be the start of the fracturing of the European Union.

Trading strategy:

"We will be looking for a pullback in the EUR back above 1.1300 to consider a short position for the pair with a stop loss at the 1.1420 level to hedge against an unexpected 'Brexit' win on June 23.Our target to the downside would be 1.1110 first followed by lower levels thereafter if the 1.1110 support breaks."

The EUR/USD did move back to the 1.1300 level as expected early in the week to setup for a nice short opportunity which came very close to the 1.1110 objective. This week, we think that the EUR can be sold at current levels up to 1.1300 to hedge against a 'Brexit' risk with a stop at 1.1420. As mentioned above, we think that the EUR should sell-off post the referendum regardless of outcome. This in our view is a lower risk trade relative to trading the GBP/USD or EUR/GBP directly.

NZD/USD

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Key Levels
Support: 0.7050/ 0.6975/ 0.6875/ 0.6840/ 0.6810/ 0.6780/ 0.6745
Resistance: *0.7100/ 0.7180/ 0.7230/ 0.7280
*Level to consider buying at for support & selling at for resistance for intra-day trades
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The NZD/USD continues to struggle at current levels on risk-off sentiment and a high TWI reading which makes going long the currency at current levels something many traders would likely feel uncomfortable with. We think the pair offers a good hedge at current prices against a 'Brexit' vote and would be a lower risk alternative to hedging this risk.

We also continue to remain bearish on the NZD longer term, with a belief that the RBNZ will resume rate cuts following the referendum vote, regardless of outcome in response to the high TWI reading at this time. Any bullish move to the upside at this time, in our view is a squeeze to shake out over-leveraged shorts in the market, and we do not think that NZD strength is sustainable past July. As such, whilst we are accounting for short term upside in the pair at this time due to the technical squeeze, we prefer to trade only from the short side for the pair.

Trading strategy:

"We would short the NZD on a likely retracement to the upside from current levels early next week to play for the 0.6960 level. Thereafter, we would look for short term long positions in the pair, given that there is no RBNZ meeting till August. All eyes will be on the NZ GDP release on Thursday, 16 June for the market to decide the next big move in the pair thereafter."

Our expected path from last week played out as expected with the pair falling to 0.6963 at the start of the week before rallying back to current levels above 0.7050.

We think that going short again around current levels to play for another downside move to 0.6910 with a stop at 0.7150 provides a good hedge against a 'Brexit' vote going into the June 23 referendum vote.

AUD/USD (FXA)

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Key Levels
Support: 0.7330/ 0.7260/ 0.7210/ 0.7100 /0.7042
Resistance: 0.7440/ 0.7500/ 0.7530/ 0.7640/ 0.7700/ 0.7760
*Level to consider buying at for support & selling at for resistance for intra-day trades
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The AUD/USD continues to struggle with other carry trade currencies on fears of a 'Brexit' vote. We continue to think that the pair should at minimum see 0.7550 before more selling in the pair. The key level for the pair at this moment is the 0.7140 level, below which momentum will likely take the pair back below the 0.7000 level.

Trading strategy:

"At the current juncture, risk reward tilts to the upside for the pair and shorter term traders can use the current pull back to go long the pair at current levels with a stop loss at the 0.7140 level. The target to the upside will be the 0.7550 level followed by the 0.7700 level."

Our expectations last week for the pair, would have left most traders with a small profit at this time, though we prefer for this week to square any long AUD positions and sit on the sidelines for this pair given the UK referendum risks.

GOLD (NYSEARCA:GLD) Click to enlarge

Key Levels
Support: 1285/ 1246/ 1241.50/ 1212/ 1200/ 1150/1110
Resistance: 1305/ 1330/ 1400
*Level to consider buying at for support & selling at for resistance for intra-day trades
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GOLD rallied to our 1297 level and higher as expected last week before a strong consolidation pulled the metal back to the $1280 level very quickly to work off overbought conditions. We think gold should ideally move to $1260 to the downside to end the current consolidation before another bullish rally which should ideally take out $1334 next. This expectation would be invalidated if $1316 is taken out to the upside first, which would indicate the rally past $1334 is likely in play already.

Trading strategy:

"Short term traders can look for a pullback once the metal hits the 1280 resistance to around 1260/65 with a stop loss at the 1248 level and a minimum target of the 1297 level to the upside. Thereafter, we would be looking for an opportunity to go long again for medium term upside in the metal."

Unfortunately, gold did not pullback last week as expected for us to buy into before the rally to $1297 and higher. For this week, we continue to look for long positions at $1260 with a stop loss at $1241 to play a rally past $1334. We will cancel this order and buy at higher levels if $1316 is taken to the upside first. Gold in our opinion also provides a good hedging alternative against 'Brexit' risks in our view.

WTI OIL (USO)

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Key Levels
Support: 47.15/ 46 /45.60/44.60/43.10/ 42.80/ 41.90/ 40.00
Resistance: 48.30/ 49/ 49.80/ 50.20/ 51/ 52/ 52.50
*Level to consider buying at for support & selling at for resistance for intra-day trades
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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 July 2016 contract.

WTI oil prices continued falling on risk off sentiment during the week with no pullback before rallying sharply toward the end of the week from the $45.80 level we had posted to our subscribers. Given the current bearish momentum in WTI crude, we expect prices to move further down from around the $48.70 level to the expected $41.80/$42 bottoming level before a longer term rally in WTI resumes.

Trading strategy:

"Given the short term oversold conditions in WTI oil, we expect a pullback for WTI oil in the early session next week to around $50.30 where short positions can be established to play a downside break of $48 which should then eventually lead to a downside test of $43 and $41 to work off overbought conditions, before resuming its current medium to longer term upside move."

Unfortunately, no pullback was seen for WTI at the start of last week for us to go short, and the price went straight to our $45.80 projection target. We think that this week, shorts can be established around $48.70 with a stop loss at $49.80 to play the next expected downside move to $41.80.

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Risk Disclosure

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