Fundamental Forecast for USOIL: Short-term Negative
WTI Crude Oil Fundamental Talking Points:
- The ONE Thing: The rebound in crude appears hollow as OPEC is expected to add to the global oil supply. The increase in supplies, which could come online quickly are already pressuring prices and adding to the coming supply, US oil inventories jumped by the most in a decade on higher US output.
- Per BHI, U.S. Oil Rig Count rises by 1 to 862, US total count at 1,062
- OPEC oil output remains in hot contention as Venezuela pleads for OPEC to fight sanctions as their rig count falls on unpaid drillers pulling projects
- The technical analysis picture of crude oil has a focus on the 61.8% at $65.60 that also aligns with the Ichimoku cloud. A breakdown from here, which the fundamentals are beginning to favor could see a broad breakdown toward $60/58 per bbl.
Crude oil may have a difficult time resuming the trend that was so prevalent in the first half of the year as OPEC plans to fight sanctions and increase productions while US oil inventories showed the sharpest increase in US oil stockpiles since October 2008.
The combination may make the recent bounce in price in WTI near $66 short-lived and hollow as bearish pressure is seen through the oil curve, which is flattening.
December ’18 – December ’19 Spread Breaks Down on Increasing Global Production
Data source: Bloomberg
An oil curve is often a guiding light for traders who like to combine technical analysis with moves in the correlated spot markets. The curve answers the simple questions: is there a premium or discount of this homogeneous product when comparing a near-dated futures contract to a later dated contract?
A premium of the near-month contract aligns with buying pressure or the desire to buy now because supplies are likely low relative to perceived demand. As the near-month contract converges or drops below the later-dated contract, we typically see a drop in price like you see above.
Either way, the falling blue line, which is the spread between December 2018-December 2019 NYMEX WTI contract helps to show that the premium in the front-month contract is waning and with it, so is the price of spot WTI.
Oil traders are getting conflicting information about supply from OPEC as Saudi Arabia and Russia are expected to wind down their production curbs, which has helped to flatten the spread above. Additionally, the crippling Venezuelan exports have been a two-headed monster of poor economic health reducing the production of oil as well as US sanctions.
Specifically, Venezuelan Oil Minister Manuel Quevedo has requested that at the June 22 meeting that the de-facto head of OPEC, Saudi Arabia, and key ally, Russia condemn the ‘unilateral sanctions’ of the US that are said to have brought about financial and economic aggression for the national oil industry of Venezuela.
Venezuela’s plea aligns with Iran’s, who is OPEC’s number 3 producer that recently received sanctions by the US.
Once again, WTI and Brent crude has become the market everyone is discussing! Unlock our forecast here
Crude Oil Sits On Broad Support With Weakening Fundamentals
Chart Source: Pro Real Time with IG UK Price Feed. Created by Tyler Yell, CMT
The sharp pull-back is seen well with RSI(5) on the Daily chart. RSI(5) has hit the lowest point since crude began its impressive in June. Crude’s spot price has stayed above the Ichimoku cloud on a daily basis, but counter-trend moves tend to happen in three-waves, and it appears premature to call the counter-trend move lower over. A breakdown below last week’s low at $64.18 would argue that we could see a move toward $60/58 per barrel.
Technical resistance, which is important given the recent reversal is coming off of 3-year highs would be at $68.61/bbl, which is the May 30 high.
Not familiar with Ichimoku? You’re not alone, and you’re in luck. I created a free guide for you here
Next Week’s Data Points That May Affect Energy Markets:
The fundamental focal points for the energy market next week:
- Tuesday: President Donald Trump and North Korean leader Kim Jong Un meet in Singapore
- Tuesday: OPEC and the IEA release supply/demand forecasts and production data in monthly reports
- Tuesday 4:30 PM ET: API Weekly Oil Inventories Report
- Wednesday 10:30 AM ET: EIA issues weekly US Oil Inventory Report
- Wednesday 2:00 PM ET: FOMC Interest Rate Decision, Fed rate hike 100% priced into the market
- Wednesday 10:00 PM ET: China’s National Bureau of Statistics releases industrial output for May (includes oil refining)
- Friday: Energy ministers from G-20 nations, including Russia, Mexico, U.S. and Saudi Arabia, hold their annual meeting in Bariloche, Argentina
- Friday 1:00 PM ET: Baker-Hughes Rig Count
- Friday 3:30 PM ET: Release of the CFTC weekly commitments of traders report on U.S. futures, options contracts
—Written by Tyler Yell, CMT
Tyler Yell is a Chartered Market Technician. Tyler provides Technical analysis that is powered by fundamental factors on key markets as well as trading educational resources. Read more of Tyler’s Technical reports via his bio page.
Communicate with Tyler and have your shout below by posting in the comments area. Feel free to include your market views as well.
Discuss this market with Tyler in the live webinar, FX Closing Bell, Weekdays Monday-Thursday at 3 pm ET.
Talk markets on twitter @ForexYell
AUD/NZD Nets Out Market Mood Swings, Focus On RBA & RBNZ Policy
AUD/NZD Talking Points:
- The Australian and New Zealand Dollars tend to closely follow global stock indexes
- AUD/NZD can thus at times net out market mood swings, acting as “risk neutral”
- This places the focus for AUD/NZD on RBA and RBNZ monetary policy expectations
Have more questions about AUD/NZD? Join a free Q&A webinar and have your trading questions answered!
Part 1 – AUD & NZD, Sentiment-Linked Currencies
In the majors FX spectrum, two currencies often find themselves moving in tandem with global stock indexes such as the S&P 500 and Nikkei 225. These are the Australian and New Zealand Dollars. To get a rough idea of why, we have to go back to the 2008 financial crisis. Central banks in developed economies at the time cut their lending rates close to or near zero levels to help stimulate their economies as liquidity shrunk, growth slowed and inflation fell.
However, two of them did not quite cut rates as far. Those are the reserve banks of Australia and New Zealand. While the Fed’s benchmark rate hovered between a range of 0.00% – 0.25% and the Bank of England pushed theirs down to 0.50%, the RBA and RBNZ reached 3.00% and 2.50% respectively. Then, in the aftermath they eventually glided down to 1.50% and 1.75% respectively (though at times they did rise before getting to those levels).
Still, those rates were higher than what other major central banks offered. This in turn gave investors an option for higher returns in a world with depressed yields. One could borrow in a cheap/low-yielding currency and then park their capital into ones that offered a higher rate. For those seeking to capitalize on interest rate differentials, AUD and NZD were/are a prime target for carry trades.
With that in mind, during times when market mood is jubilant and traders are focused on seeking returns as stocks rally, the sentiment-linked Australian and New Zealand Dollars tend to benefit. However, this behavior can also reverse. As an example, below is a chart showing how AUD/USD performed in February 2018 when the S&P 500 and Nikkei 225 fell as much as 11% and 13% respectively.
Chart Created in TradingView
Below is the identical reaction from NZD/USD:
Chart Created in TradingView
During this period of extraordinary market volatility, AUD/USD declined as much as 4.6% while NZD/USD fell about 3.2%. Both succumbed to selling pressure as the focus for traders shifted from seeking returns to preserving capital. But what happens when you start comparing both AUD and NZD against each other during times of broad market malaise?
Part 2 – AUD/NZD, Brexit Vote Reaction
Given that these sentiment-linked currencies tend to closely follow stocks, one may hypothesize that the impact of market mood on AUD/NZD could cancel each other out. This may result in the pair being close to little changed when equities tumble. Such was the case when looking at how AUD/NZD reacted in June 2016 when the UK voted to leave the European Union.
Chart Created in TradingView
The Brexit vote carried large amounts of uncertainty for the future of the UK and EU given that no country had ever left the nation bloc before. Markets were unnerved as the S&P 500 and Nikkei 225 declined about 5% and 9% respectively in the aftermath. AUD/USD (-4%) and NZD/USD (-3.75%) also saw aggressive losses as one would expect. But, solely looking at AUD/NZD shows that it fell only about 0.65% and the pair largely remained within its trading range.
Part 3 – The Key Fundamental Catalyst for AUD/NZD
So at times, AUD/NZD can behave as a “risk neutral” pair that acts as a shock absorber to a certain extent. This allows the pair to fundamentally focus more on RBA and RBNZ monetary policy expectations. After all, the key driver for FX is the direction of where interest rates are going.
One of the ways in which we can measure which of the two is on the verge of gaining a yield advantage over the other is looking at differences in government bond yields between the two countries. Below is a chart showing AUD/NZD and its performance between the spread of two-year Australian and New Zealand bond yields from June 2016 to the beginning of August 2018.
In addition, here is the same relationship but looking at the often more liquid 10-year yield:
When the spread between Australian and New Zealand bond yields rises, it means that rates in the former are outpacing the latter. Not surprisingly, when Australian bond yields earn higher returns than in New Zealand, AUD tends to appreciate against NZD and vice versa.
Note that the 20-day rolling correlation in both cases was positive around 80 percent of the time. In addition, sometimes AUD/NZD would find itself favoring spreads between the two-year and at other times the ten-year. However, do keep in mind that this relationship is not always perfect and at times the correlation was negative.
With that in mind, those closely watching AUD/NZD should be aware of its potential as a “risk neutral” pair that can focus more on relative interest rate differentials between the RBA and RBNZ. This can also make it more reactive to local economic event risks (central banks, GDP, CPI, jobs data, etc…). This was evident when in August 2018 the Reserve Bank of New Zealand suggested that its next rate hike would be further out. As a result, AUD/NZD volatility suddenly awoke as it rallied more than 1.54% within hours of the monetary policy announcement.
Finally, keep in mind that in the future the behavior between AUD/NZD and equities could change depending on where other central banks take their interest rates. As of August 2018, the Fed boasts the highest yield in the majors FX spectrum of up to 2.00% and that seems likely to increase in the near-term. In addition, the Bank of Canada raised benchmark lending rates to 1.50% in July 2018. This tied it with the RBA. As other central banks outpace both the RBA and RBNZ, the relationship between stocks and the Australian and New Zealand Dollars could wane compared to other higher yielding currencies.
AUD/NZD Trading Resources:
— Written by Daniel Dubrovsky, Junior Currency Analyst for DailyFX.com
To contact Daniel, use the comments section below or @ddubrovskyFX on Twitter
EURUSD Elliott Wave from February 2018 Concludes
EURUSD Elliott Wave at high probability the bottom is in
We began building our short EURUSD position in two separate occasions from April 10 at 1.2350 and April 26 at 1.2153 in anticipation of a developing bearish impulse wave. Though our first target of 1.1554 was hit on May 29, the bearish impulse wave appeared incomplete. As of May 29, we could count three of the five Elliott Wave impulse waves lower, which implied a fourth wave correction and fifth wave sell off still to come.
On August 6, we closed down half of the position (booking +791 pips) and tightened the stop loss on the remaining short EURUSD to 1.1750. We are now going to tighten the stop loss further as evidence is growing the bearish impulse wave from February 2018 has ended or is about to end with one more dip. Therefore, we are moving the stop loss on the remaining short EURUSD position to the August 6 low of 1.1530.
If EURUSD pops above 1.1530, then we will gladly book the remaining profits and head to the sidelines as EURUSD may be in the beginning stages of a multi-month rally that may drive to 1.17-1.22.
Elliott Wave Theory FAQ
What Elliott Wave is EURUSD in right now?
Our analysis points to a bearish impulse wave ending from February 2018 to August 15, 2018. This bearish impulse wave is likely wave 1 of a larger bearish impulse wave or wave A of a larger zigzag wave.
Our beginner and advanced Elliott Wave guides share with you typical waveforms and structure that include tips on how to trade with the waves.
Why do traders lose money?
Regardless of the style of analysis, many traders do lose money because they do not take the time to study the market and the effect of leverage. At DailyFX, we have studied millions of live trades and boiled our study down into a Traits of Successful Traders guide. You will find how leverage and human nature affects our trading so you can implement tactics like ones described in the trading idea above.
New to FX trading? We created this guide just for you.
—Written by Jeremy Wagner, CEWA-M
Jeremy Wagner is a Certified Elliott Wave Analyst with a Master’s designation. Jeremy provides Elliott Wave analysis on key markets as well as Elliott Wave educational resources. Read more of Jeremy’s Elliott Wave reports via his bio page.
Communicate with Jeremy and have your shout below by posting in the comments area. Feel free to include your Elliott Wave count as well.
Discuss this market with Jeremy in Monday’s US Opening Bell webinar.
Follow on twitter @JWagnerFXTrader .
Australian Dollar May Get Some Respite If Only For Lack Of News
Fundamental Australian Dollar Forecast: Neutral
AUD Talking Points
- The Australian Dollar remains in a pervasive downtrend against its US cousin
- Interest rate differentials and twitchy risk appetite will probably ensure it stays ther
- But this week could offer some pause
Find out what retail foreign exchange traders make of the Australian Dollar’s prospects right now, in real time, at the DailyFX Sentiment Page
The Australian Dollar faces multiple sources of downward pressure but the coming week’s light economic data schedule may offer it some probably temporary reprieve.
The widening interest rate differential in favor of the US Dollar does not appear to be going anywhere soon. Reserve Bank of Australia Governor Phillip Lowe testified before Parliament last week that, although the RBA still thinks the next move, when it comes, will be a rise, there’s no near-term case for any such move.
Indeed local futures markets do not now price in any change to the record-low, 1.50% Official Cash Rate until at least the start of 2020.
But the Aussie’s worries go a little deeper than simple rate comparisons. Risk aversion sparked first by global trade worries and then by thy collapse of the Turkish Lira has also weighed on the growth-linked currency. Morever, signs that the best of China’s growth for the year may now be behind us have also done it no favours. Official industrial production and capital investment data out of China missed forecasts significantly last week. They were also the first look at figures for July, and suggested that 2018’s second half may well be tougher than its first, with or without a trade settlement between Washington and Beijing.
So, given all of the above the Australian Dollar backdrop looks just about as gloomy as ever, especially as the markets also suspect that the RBA doesn’t mind its weakness at all given how often it talks about a weaker currency making growth and inflation goals easier to hit.
But the week doesn’t offer much in the way of Australian economic numbers. We will get the minutes of the last RBA monetary policy meeting. However, seeing as investors heard from the governor himself only a few days ago, scope for big moves on the minutes would seem very limited.
Make no mistake, the Australian Dollar is still biased lower against its US big brother, but it has been hit fairly hard in the last couple of weeks. The coming sessions could offer some breathing space and consolidation so it’s a neutral call.
Resources for Traders
Whether you’re new to trading or an old hand DailyFX has plenty of resources to help you. There’s our trading sentiment indicator which shows you live how IG clients are positioned right now. We also hold educational and analytical webinars and offer trading guides, with one specifically aimed at those new to foreign exchange markets. There’s also a Bitcoin guide. Be sure to make the most of them all. They were written by our seasoned trading experts and they’re all free.
— Written by David Cottle, DailyFX Research
Follow David on Twitter@DavidCottleFX or use the Comments section below to get in touch!
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