FX And Oil Week Ahead: Best Trade Of The Year And The Ongoing USD Tragedy

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

Summary

Fed surprises markets with a Dovish forward guidance.

USD/CAD trade has achieved it's first long term price objective.

USD should stabilize into next week and begin climbing again.

Summary:

The big news this week was the FOMC meeting, and the surprise was undoubtedly how dovish the Fed was in its accompanying statement and forward guidance with the median forecasts by FOMC members reducing the expected number of rate hikes this year from four to two. The sell-off in the USD can also attributed to the lack of clarity on the conditions the Fed would need to begin raising rates further, which led to the unwinding of some shorter term long USD positions.

Whilst it is easy to be swayed at this juncture and lose faith in the USD, we think that it is more important now than ever to keep the core fundamentals in mind and not be shaken if you are holding a long USD position especially against the EUR where an obvious monetary policy divergence will weigh on that pair for the foreseeable future.

Next week brings a light economic calendar and a shortened trading week with the Good Friday holiday. The key data point will probably be the US Durable Goods numbers on Thursday. Given the light calendar, we think that next week is unlikely to bring forth any significant FX moves, though the USD gaining back some of the ground it lost this past week is likely into the long weekend.

Trading and Technical Strategy for the week ahead:

EUR/USD (FXE)

The FOMC meeting needless to say caught us by surprise in terms of how dovish the Fed was, and their lack of clarity on what they needed to see in order to hike rates further was a disappointment. This has once again taken us back over the 1.1200 level on the EUR/USD which undoubtedly is causing some pain to short EUR/USD positions established prior to the ECB and FOMC meetings. Nonetheless, we believe that the diverging monetary policies between the ECB and Fed coupled with the current economic fundamental differences will result in a lower EUR/USD in the coming weeks.

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

"The market never reached the levels we were hoping for last week to go short the EUR into the ECB meeting. Hopefully, no one left the orders past the ECB meeting given how aggressive the short covering was. Given the current bearish EUR fundamentals, short positions can be established at current levels (around 1.1160) as well as at 1.1250. The stop loss for this medium to longer term short trade is 1.1385. We will be looking for the pair to break back below the 1.1000 level in the not too distant future."

As mentioned in our strategy piece last week, we took a short position in the EUR/USD at 1.1250 and will be looking to hold this for the medium term with a revisit below the 1.1000 level expected in the sessions to come. Our stop loss continues to be at 1.1385 for this trade. Should the trade be stopped out, we will consider the 1.1440 level as the next level to establish a short position.

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

Our short-term strategy this week would be to fade any rally toward 1.1320 with a downside price objective of 1.1140. Our stop loss for any shorts taken will be at 1.1350.

USD/JPY (FXY)

The USD/JPY decided to give up on trying for the upside and broke down below the key 112.45 support level. At this time, the USD/JPY has a target of 110.19 given the current technical pattern in play. We continue to believe that the 110 level will be key to hold and that the BOJ is likely to intervene at least verbally if the pair gets close to this level.

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

We will be looking to take a long position in the pair closer to the 110.25 level on the next selloff in the pair, with an expectation that the BOJ will either intervene at least verbally to support the pair over the 110 level. Any long positions we take will have a stop loss at 109.50.

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

Short-term traders can look to sell the USD/JPY around current levels with a target of 110.50 to the downside. The stop loss on this short trade would be the 112 level.

AUD/USD (FXA)

AUD/USD short positions were not spared from the surprise FOMC statement with the pair going straight through the 0.7600 figure post the meeting. At this juncture, we continue to remain short the pair from the 0.7500 and 0.7560 level and will be looking to fade this rally further at the 0.7740 level. We believe that this current move up in the pair and the surprise rate cut by the RBNZ will push the RBA into action sooner rather than later.

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

Short positions can be established at current AUD/USD levels as well as at the 0.7740 level to play the downside expected in the pair. The target for the downside move would be an eventual testing and break of the 0.7200 level. We are currently positioned short on the pair on our trading portfolio and will be sending daily updates on this trade to our premium subscribers.

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

Short term traders can fade rallies toward 0.7670 short with a stop loss at the 0.7690 level. The price objective for this short term strategy would be the 0.7560 level.

USD/CAD (FXC)

The USD/CAD hit our long term downside target at 1.2980, and continues to remain at the support for now. Unfortunately, we misread the expected outcome of the FOMC meeting and failed to re-establish our short position when the USD/CAD hit the 1.3400 level. Given that our best trade for the year has hit our first long term price objective, we will be watching for a significant bounce in the pair to materialize in the not so distant future. As and when this sizable bounce occurs, we will be looking for a favourable short setup to go for the second price objective which is the 1.2000 level which we mentioned in our original article. Our second trade that was meant to play the rise in crude prices was the USD/NOK, which has not quite played out in full yet and as such may offer an opportunity for those looking to use currencies to play the current move up in oil prices.

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

We think a substantial retracement and move up should be at hand to around the 1.3500/1.3600 levels before downside over the medium to long term resumes for the pair. Given the current technical conditions in the pair, we will be standing aside until this bounce materializes.

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

Short-term traders can play from the long side buying USD/CAD at 1.2980 and lower, with a stop loss at 1.2900. The price target on this trade would be the 1.3220 level.

WTI OIL (USO)

*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 seems to have decided to move up a lot faster than expected with the commodity now well over the $40 level and heading towards the $46 price target. Thereafter, we do expect a substantial correction in the price of WTI crude before further upside in the commodity.

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

"We continue to be optimistic for higher prices in the not too distant future, though current overbought conditions do not make for an ideal long setup here. We think levels closer to $35 would be more attractive, with a stop loss placed below $33.50 to play for an upside move over $40, which could be seen in the not too distant future."

Our expectations for the move over $40 last week came to past faster than we expected with WTI crude just missing our $35.30 buy order before the move up. As most of the medium term upside move seems to have played out at this point, we will not be pursuing any opportunities for the medium to longer term until WTI crude hits the $46 or $33.45 level.

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

Our short term strategy would be to buy WTI crude on dips to $38.30 to play for an upside move toward the $42 level with a stop at $37.05. Given the current momentum in WTI price to the upside we prefer to play on the long side unless $33.45 is taken out.

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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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.

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