FX And Oil Week Ahead: Will The USD Make A Successful Comeback?

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

Summary

USD beginning to take back losses.

USD likely to be weak at the start of the week before strengthening into the later part of the week.

US Employment Numbers should beat expectations.

Summary:

The USD began to make a comeback this week after oversold conditions helped the greenback to rally. US GDP also came in better than expected though it is nothing to shout about given the continued tepid growth. Nonetheless, if the labor market and GDP growth can hold up, the Fed should be able to continue on its rate hike path.

Of note this week as well were the hawkish comments by various FOMC members which helped fuel the bounce in the USD. It remains to be seen if the next FOMC meeting will indeed lead to a rate hike and if the Fed can indeed hike two times or more before the Presidential elections, which in our view would be a period where the Fed is less likely to act.

Next week's big economic data point will be the all important Non-Farm payroll number which we think will beat the 210,000 mean forecast at this time. The start of the week should see the USD retrace some of the previous week's gains before strengthening again into and following the release of the Non-Farm Payroll data, which should then carry on into the following weeks.

Source: Bloomberg.com

Trading and Technical Strategy for the week ahead:

EUR/USD (FXE)

The EUR finally began to cede ground this week following fairly hawkish statements by various FOMC members. Nonetheless, the pair found support at the 1.1160 level which was the previous resistance turned support. Given the short term oversold conditions in the pair we expect a bounce in the early part of this coming week to around the 1.1220/40 level before the move down continues in the pair to the 1.1000 level and lower in our opinion.

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

"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."

We continue to hold our short position in the EUR/USD from 1.1250 with an expectation that lower levels will be seen in the weeks ahead for the pair. Given the potential for a bounce in the early part of the coming week, a move toward the 1.1220/40 level would provide an opportunity to go short the pair for the medium term before another decline likely takes hold of the pair. The stop loss on this medium term trade would be the 1.1385 level.

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

Short term traders can consider going long the pair at 1.1145 with a target of 1.1185 and a stop loss at 1.1120. From the short side, traders should wait for 1.1220/40 to fade the rally with a stop loss at 1.1270 and a profit target at 1.1160.

USD/JPY (FXY)

The USD/JPY proved to be fairly resilient in the previous week despite the initial technical weakness that was playing out in the pair as JPY cross buoyed the pair throughout the week. Nonetheless, we continue to view this move up as corrective and expect the next few sessions to bring downside to the pair with the 110 level likely to be support on this move to the downside as we have been expecting for some time.

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 sell-off 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 111.50 to the downside. The stop loss on this short trade would be the 113.80 level.

AUD/USD (FXA)

The AUD/USD moved lower throughout the week in tandem with other majors against the USD. However, the AUD continued to be fairly resilient finding support at the 0.7480 level where we covered our short position. We intend to re-establish the short position when the pair rebounds in the early part of next week with the 0.7560 as the first level we would consider fading this rally at if the conditions prove right. Regardless of the current momentum in the AUD, we continue to expect the AUD to move longer in the weeks ahead with a revisit of the 0.7000/7100 level likely.

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

We are looking to re-establish short positions starting from 0.7560 if the conditions for a short prove right. If momentum to the upside proves resilient, we will look at the 0.7620 level followed by the 0.7740 level to re-establish or add on short positions. The stop loss on this trade would be the 0.7780 level with a take profit target toward the 0.7100 level. Given that the stop loss could potentially be over 200pips wide, we will be reducing our position size to manage the risk.

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."

The short term strategy last week for the pair would have would have worked pretty well. For this week though, short term traders can consider buying dips toward 0.7480 with a stop loss at 0.7450, and a take profit at the 0.7530/60 level. For those looking to play on the short side, rallies toward 0.7560 can be faded with a stop loss at 0.7590 level with a take profit at the 0.7480 level.

USD/CAD (FXC)

The USD/CAD long term support at 1.2980 continues to hold and we continue to expect a move higher in the pair over the coming sessions although the pair is overbought in the short term. The likely range for the next few days will be between 1.3160 and 1.3280 until the next break out in the pair occurs.

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."

Given that the bounce in the pair has begun to materialize, we will be looking to consider a long position in the pair at the 1.3160 level with a stop loss at 1.2970. The upside target we have in mind is currently the 1.3500 level.

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

Short-term traders can play the 1.3160-1.3280 range from the long side with a stop loss at the 1.3095 level to the downside when going long the pair.

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 began its correction but the sell-down has been more tepid than expected. Given that short term oversold conditions have currently been worked off in the commodity, we could see a rally from current levels toward the $46 level if the $38.30 level holds in the coming sessions.

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

Given that the correction in WTI crude prices has not been aggressive as expected, we are now considering a medium term long position that can be established in the commodity at current levels with a stop loss at $36.30 and a take profit at the $46 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."

For short term traders that managed to establish a long position in the commodity at the $38.30 level, there is no change to our current stop loss level and take profit target of $42.

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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