Oil Traders fly like moths to a flame 26May17


Oil traders flutter like moths to the flame

Michael O’Neill

FX Trade Strategist / http://www.Loonieviews.net

Canada

·

  • Month-end rebalancing flows, nonfarm payrolls to ensure FX volatility
  • Monday will be a write-off due to holidays in the UK and the US

· Upside surprise to US GDP and Durable Goods boosts US dollar

It’s not quite a chart of oil traders’ recent activity… but it’s close. Photo: Shutterstock

By Michael O’Neill

“Like a moth to the flame” is a phrase used to describe someone who was likely to be tempted by something that would lead to their downfall, and it aptly describes oil traders in May.

The rumour that Russia and Opec were discussing extending oil production cuts for an additional nine months beyond the previously agreed June 30 expiry date was the flame, first spotted on May 5.

Oil traders were the moths.

When Opec first announced the agreement to trim oil production by 1.3 million barrels/day on November 30, 2016, oil prices soared. Brent spiked, rising from $46.30/barrel prior to the news to $57.98/b on January 3, 2017, and WTI moved in a similar fashion. The moths circled the flame as prices were fairly stable and well above $50/b until March 8

A combination of issues including questions about the Federal Reserve and US rate hikes, president Trump and his ability to delivery on election promises, and steadily increasing US crude inventories led to a massive unwind of long oil positions. Brent dropped from $56.11/b on March 8 to $50.25/b two weeks later. The moths flew into the flame.

Geopolitical issues including a US air strike in Syria, supply disruptions from Canada, and speculation that US demand was rising and US inventories were shrinking. That rally saw Brent prices peak at $56.56 on April 12. Prices collapsed under the weight of rising US crude and gasoline inventories, reports of increased shale production and concerns that the global supply/demand imbalance wouldn’t be corrected for many months. Once again, Lymantria disparwas roasted.

Twice burned, third time shy? Not for oil traders.

When Brent oil prices were plumbing the depths of $47.20/b, a rumour began circulating that Russia and Saudi Arabia were concocting a plan to extend the Opec production cut agreement for an additional nine months. That flame attracted another swarm of moths. Brent prices rallied to $54.39 fueled by rumours that not only would production cuts be extended, the cuts would be deeper.

On May 25, Opec delivered the production cut extension. Suddenly, that news was bad news. Traders were concerned that the extension wouldn’t do anything to combat tepid demand and rising production. The flame became a blow-torch and the moths were incinerated… again.

Evidently, there appears to be far more moths than flames which suggests this latest bout of oil price weakness will pass.

Brent and WTI oil (four-hour):

Source: Saxo Bank

The week ahead

It is going to be a very busy week. Month-end portfolio rebalancing flows on Wednesday and US nonfarm payrolls on Friday will be the major points of focus. It is also going to be a short week for UK and US traders who have Monday off.

Monday will be very quiet around the globe, unless there is some drama at the conclusion of the G7 meeting in Italy.

Tuesday, the Asian session may be quiet due to a lack of regional data and a holiday in China. UK and US traders return to work and will deal with fall-out, if any, from Eurozone data and US Case-Shiller and PCE reports.

Wednesday is a very heavy day for data around the globe. Asia starts with the Reserve Bank of New Zealand Financial Stability report followed by Australia GDP and then manufacturing PMI data from China. Eurozone CPI and Unemployment are the marquee reports in Europe with Germany adding unemployment and Retail Sales to the mix. The UK has consumer credit and Mortgage data. Canada GDP is on tap and the US releases Chicago PMI and Home Sales data. Month-end portfolio rebalancing flows will be the icing on the cake, making this a very entertaining day for traders.

Thursday, Australia retail Sales and China Manufacturing PMI will compete for attention in Asia. There is a host of Eurozone PMI data on tap. In the US ADP Employment data and ISM manufacturing PMI are due.

Friday, the US employment report is due and traders will be looking for a big number to confirm a June rate hike while upping the odds for a September hike as well.

The week that was

There was a risk that fresh political theatre from Washington would add some drama to FX trading this week. There wasn’t any. That’s because “drama queen” president Trump was overseas imparting his brand of wisdom to Nato and the G7.

Monday, GBPUSD gapped lower at the open in Asia after a UK election poll. It showed the Conservative Party’s lead shrinking. USDJPY rallied from 110.87 to 111.58 on mild profit-taking and concerns ahead of the Trump budget that was being released on Tuesday.

German chancellor Merkel gave EURUSD a big boost when she said that a “too weak” euro was responsible for Germany’s trade surplus. Euro traders dined on that comment for the rest of the week. EURUSD touched 1.1266 by mid-morning in New York and then spent the rest of the session in a narrow 1.1228-43 range.

USDJPY closed in New York very close to where it had closed on Friday while sterling was a tad lower.

The commodity currencies traded higher throughout the day. Oil prices firmed with traders eagerly awaiting Thursday’s Opec meeting.

Tuesday, a UK terrorist attack put a damper on trading in Asia and Europe. EURUSD stayed firm and touched 1.1267 when New York walked in. A dose of mixed economic data and Trump’s budget proposal for $3.6 trillion in spending cuts gave the US dollar a bid

A rise in commodity lifted AUDUSD and kiwi went along for the ride

Oil price slipped after Trump suggested selling half of the US Strategic Oil Reserve.

Wednesday, the G10 currencies hugged narrow trading bands ahead of the release of the FOMC minutes in the New York afternoon. Moody’s unsettled Asia markets, briefly, when they downgraded China Sovereign debt from Aa3 negative to A1 Stable, much to China’s chagrin.

Oil prices stayed firm supported by a decline in US crude inventories. The Bank of Canada left interest rates unchanged but the policy statement was not as dovish as expected. USDCAD dropped.

The US dollar went into the Federal Open Market Committee minutes with a bid tone. That proved to be a mistake. The FOMC minutes were seen to be dovish and the US dollar declined. Wall Street was pleased with the FOMC and the major indices posted new record highs.

Thursday, Asia traders sold US dollars on the FOMC minutes but lacked conviction and quickly bought them back.

USDJPY started in Asia at the overnight low of 111.51 and crawled higher, opening in New York at 111.89. It finished the day at 111.78.

NZDUSD opened at 0.7052 and then retested that high after New Zealand’s budget. The government forecast a larger than expected surplus in 2017.

EURUSD peaked at 1.1249 early in the European session and drifted steadily lower, touching 1.1200 after the US data.

Sterling had an extra choppy session, climbing to 1.3013 in Europe and then dropping to 1.2941. Weaker than expected GDP data got the blame. (Q1 GDP Actual 2.0% vs forecast 2.1%, year over year)

The Opec meeting dominated the New York session. Oil prices rallied to $51.97 in Europe on anticipation of not just a production cut extension, but deeper production cuts. They only got the extension. WTI plunged, shedding nearly 5 percent by the end of the day.

Friday, the Japanese yen was in demand in a nod to risk aversion following the oil price swoon and a dip in Asia equity indices. Sterling got whacked on another UK election poll showing Prime Minister May lead narrowing to a mere 5 points ahead of the June 8 election. The US dollar was poised to head into the long weekend on a firmer footing against EURUSD after better than expected GDP and Durable Goods data.

Rush hour: Will next week’s US jobs report for May justify a June rate hike? Photo: Shutterstock

— Edited by Michael McKenna

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“Euro Traders sing “We’ve Only Just Begun” 19May17


EURUSD traders sing ‘We’ve only just begun’

Michael O’Neill

FX Trade Strategist / www.Loonieviews.net

Canada

·

· Political theatre will be next week’s hot ticket and that’s not good for the dollar

· Wednesday’s FOMC minutes are sure to disappoint those looking for fresh insight

· The May 25 Opec meeting will drive oil prices and USDCAD by default

· Rumoured ECB plan to end negative interest rates may be behind EURUSD upside

· Recent USDCAD upside could get boost from Trump’s Nafta renegotiation

"We’ve Only Just Begun" is a saccharine, gag-inducing love song released by The Carpenters in 1970 and played at millions of weddings ever since. It’s also what EURUSD bulls are singing today.

EURUSD found its nadir in the waning days of December and early January of this year. Since then, two uptrends stalled, retreated and resumed. A third uptrend has begun and this one has legs.

The EURUSD correction turned into a trend change after round one of the French elections. The downtrend line from the 2014 peak of 1.3990-1.4000 area was broken on April 27 when EURUSD gapped higher, from 1.0775 to 1.0950. The gap has not been filled and in the meantime EURUSD punched above another downtrend line from May 2016 when it traded above 1.1035.

The 38.2% Fibonacci retracement target is 1.1740, suggesting EURUSD has plenty of upside.

In my opinion, a large part of the move can be attributed to the talk that the European Central Bank has reached the point where – whether they admit it or not – they are actively working on a stimulus reduction strategy and an end to negative interest rates.

ECB President Mario Draghi denied any talk about tapering at the April ECB meeting. He also said that there aren’t any plans to raise interest rates ahead of the end of the QE programme. The QE programme is supposed to end in December 2018 but many believe it will be extended.

However, Bundesbank President Jens Weidmann and other German officials are a tad less enamoured with QE and get a lot of the blame for the market’s focus on the ECB version of tapering.

Forex traders are reactionary and the mere thought that tapering could become a reality sometime in 2017 spurred EURUSD buying.

EURUSD has also been supported by investment flows. The Dax has risen in concert with

EURUSD gains and with the increasing dysfunction of the White House.

Chart: Daily EURUSD and DAX

Source: Saxo Bank

Loonie, oil and Nafta

USDCAD has finally jumped on the bearish dollar bandwagon. And it is all because of oil. WTI dropped 18.5% in April as stubbornly high US crude inventories and rising shale production saw bullish bets on rising demand and shrinking supply scrapped.

This week’s news that Opec appears ready and willing to not just extend the production cut agreement until the March 2018, but also make bigger production cuts has boosted WTI 14% in May.

USDCAD traders finally took notice. USDCAD smashed support in the 1.3640-60 area and is currently probing major support in the 1.3560 area. If that level breaks, USDCAD could revisit the 1.3250-1.3350 area where there is major support from:

a) long term uptrend line at 1.3250 b) the 200-day moving average at 1.3288 c) the 100-day moving average at 1.3340.

However, US President Donald Trump is no longer interested in “tweaking” the Nafta agreement like he told Canada’s Prime Minister Justin Trudeau. He has set the table for a full-blown Nafta renegotiation, or Nafta ll. There should be plenty of USDCAD buyers at lower levels the closer we get to that date which will limit USDCAD losses.

Chart: Daily USDCAD

Source: Saxo Bank

The week that will be

If you are hoping for a reprieve from the drama of the US political stink show next week, you won’t get it.

Monday, Asia markets will be vulnerable to any weekend press reports around Trump, the White House and Comey. Japan releases Merchandise Trade, and Leading indicators. After that, there isn’t much of anything. Canada is closed for Victoria Day.

Tuesday, Asia trading will start off slow. Activity will really pick up in Europe due to a deluge of data including German GDP, Markit Manufacturing PMI and the IFO survey. Elsewhere, Eurozone Manufacturing PMI and the UK Inflation report hearings. Markit PMI data and New Home Sales reports are due in New York.

Wednesday could be wild. New Zealand kicks things off with the Trade Report and then it gets dull until New York opens. US Politics will be center stage as former FBI Director James Comey is expected to testify before the House Oversight Committee.

The Federal Open Market Committee minutes from the May 3 meeting get released, but they could be disappointing. The Bank of Canada interest rate and policy statement is also on tap.

Thursday, Asia gets to deal with the fallout from the FOMC minutes and US politics. Kiwi traders will be focused on the domestic budget release. Europe will be quiet as large swathes of the Eurozone are closed for Ascension Day. Sterling may be extra volatile due to GDP data being released in a day with reduced liquidity. The US session will likely be subdued with traders sidelined awaiting Friday’s major data.

Friday, Japan inflation will be the focus in Asia while European traders will be waiting for the US data. US GDP, PCE, Durable Goods, and Michigan Consumer Sentiment could mean a big finish to the week.

The week that was

The lack of top tier US data this week suggested that FX trading would be choppy and rangebound. It was choppy; rangebound, not so much.

Monday started with the dollar hungover from the previous Friday’s less-than-stellar US Retail Sales and inflation reports. Another North Korea nuclear test was met with a shrug. Chinese economic data were mixed and a non-factor. The US dollar lost ground in Asia and Europe but recouped those losses in New York. EURUSD finished the day with a bit of a bid while USDJPY was offered.

Oil prices rallied on news that Russia and Saudi Arabia were considering extending production cuts until March 2018.

Tuesday, the Trump circus came to town. Again. This time there was an uproar over his alleged leaking of classified information to Russia. EURUSD rallied, cracking 1.1000 and then weak US data exacerbated the move. GBPUSD rode the CPI rollercoaster, rising into the data and diving after it was released. AUDUSD shrugged off minor disappointment from the RBA minutes and together with NZDUSD, bopped then weaved and finished the day in New York where they started.

Wednesday, the Trump circus came back for an encore and what an encore it was. Allegation’s that the president interfered in an FBI investigation, which may have played a role in the sacking of FBI Director Comey, roiled financial markets. Global equity indices tumbled,

EURUSD shattered the 1.1100 barrier and the floor fell out of USDJPY which dropped to 110.50. The Canadian and Australian dollars under performed and both currency pairs lost a little ground by the end of the day in New York.

Thursday, USDJPY hit 110.32 by the New York open and then rallied to 111.30 by the end of the day. EURUSD peaked at 1.1170 in Asia and dropped back to 1.1090 at the New York close. US economic data was firm and Cleveland Fed President Loretta Mester was at her hawkish best, giving some support to the greenback.

UK Retail Sales in April were a healthy 4.0% (forecast 2.0%) and GBPUSD soared from 1.2938 to 1.3045 on the news. GBPUSD plunged 0.0100 points in the New York afternoon. It may have been a delayed reaction to an ECB official’s comments about the viability of a Euro clearing center in a non-EU country.

Dollar buyers emerged after a video surfaced which reportedly has the former FBI director denying that he was pressured into ending his Russia investigation.

Friday, US dollar sellers returned in Europe and EURUSD hit 1.1187 supported by Eurozone data. USDJPY trade in a tight range. Sterling recouped all of Thursday’s "flash-crash" losses. The WTI oil price rally stalled just above $50.00/barrel which also halted the USDCAD decline at 1.3555.

The seemingly never-ending carousel of scandals swirling around the US president – and his increasingly capricious responses to them – are likely to continue to influence the markets next week. Photo: Shutterstock

— Edited by Jack Davies

FX focus shifts outside US in the week ahead 12May17


· US economic data cupboard is bare next week

· Oil rally may come to an end if $48.05-20/b caps the upside

· G7 finance minister sound bites could disrupt Monday’s Asia open

Oil prices have pushed back from the week’s lows, but gains may be limited. Photo: Shutterstock

By Michael O’Neill

The US dollar closed out the week with solid gains against the G10 currency bloc. Strong data, an increased risk of more than three US rate increases in 2017, a slew of strong economic reports, and the Trump/Comey sideshow were among the factors fuelling the move.

Oil rebounds

Oil prices have bounced back from last week’s low with WTI gaining 9.6% since touching $43.80/barrel on May 5.

Last week’s WTI selloff was precipitated by stubbornly high US crude inventories and sluggish gasoline demand while US shale oil production increased.

WTI rallied after the strong US employment report and “verbal intervention” as Saudi Arabia reassured markets that Russia will extend Opec production cuts beyond the end of June.

The rally was capped at $46.90 until the Energy Information Administration reported that US crude inventories declined by 5.25 million barrels, exceeding the forecast. WTI added to its gains and hit $48.15/b on May 11.

That could be it for now, however, as the Opec Monthly Oil Report, released May 11, raised the forecast for non-Opec supply by 370,000 barrels/day to 950,000 b/d, due to increased production in the US. The group’s forecast for world oil demand was left unchanged at 1,270,000 b/d.

Non-Opec production:

Source: Opec

WTI prices are at a crossroads. Prices are close to the May 11 top of $48.05/b, which is also the downtrend line from the April peak. A decisive break above $48.05/b will confirm a short-term bottom is in place and lead to a test of $52.00/b. A move below $46.50/b will extend losses to $44.00/b again.

Loonie falls flat

When WTI rallied on May 5, USDCAD behaved normally and dropped, falling from 1.3790 to 1.3645. It made another attempt to crack support at 1.3650 on May 10. That move ended when Moody’s announced six Canadian bank downgrades. USDCAD climbed to 1.3770 before consolidating within a 1.3680-1.3710 range.

The Moody’s downgrade of the Canadian banks followed last week’s news that alternative lender Home Capital needed a bailout. USDCAD bulls felt empowered.

However, Home Capital’s woes had nothing to do with the quality of its mortgage portfolio, but merely regulatory issues. Moody’s could be accused of “crying wolf” as the concerns raised in last week’s bank downgrade were very similar to the ones they raised five years ago.

The intraday and short term USDCAD technicals are bullish with a break of resistance at 1.3740 leading to 1.3850. A break of 1.3640 will meet added support at 1.3610 and 1.3570.

USDCAD weekly:

Source: Saxo Bank

The week ahead

This week the focus shifts to key European economic releases while a lack of top-tier US economic reports may lead to further choppy but rangebound trading for the FX majors.

Monday’s Asian start will be far quieter than the previous week, although sound bites from the G7 finance ministers’ weekend meeting, could have an impact.

New Zealand retail sales may warm the cockles of kiwi traders. The Reserve Bank of New Zealand is fresh off a dovish statement so the report should not have much impact. Later, Australia home loan data will compete with China retail sales, and industrial production for attention. There is not much of anything on tap for the rest of the day

Tuesday, AUDUSD traders will study the minutes from the Reserve Bank of Australia meeting of May 2. AUDUSD could get a bid if the minutes are as upbeat (as the policy statement appeared to be). UK PPI, and CPI data will be front and center in Europe especially after the May 11 reaction to the Bank of England policy statement.

Source: Saxo Bank

Eurozone GDP and trade will be studied to see if the data supports European Central Bank president Draghi’s dovish stance. US housing data shouldn’t be much of a factor for traders

Wednesday, kiwi traders will deal with the results of the GlobalDairyTrade auction and PPI while AUDUSD traders look at consumer confidence data. Europe will be busy with UK employment data and Eurozone CPI. The US data cupboard is bare.

Thursday, Japan leads with GDP and Australia follows with the employment report. The UK answers the bell with Retail Sales data and the US reports are all second-tier.

Friday will be quiet in Asia due to a lack of data and Europe won’t be much livelier, for the same reason. In Canada, CPI and retail sales data are on tap.

The week that was

A couple of central bank meetings were expected to keep things interesting this week… they did.

Monday started with Asia reacting to round two of the French elections; Emmanuel Macron soundly trounced Marine Le Pen and we were off to the races.

EURUSD gapped higher at the open in Asia and then began a slow decline that lasted all week. Japan returned from a five-day break and bought USDJPY to 113.07. It then started to slide until mid-morning in Europe, where it found a bottom at 112.40. The US dollar closed higher in New York against the G10 currencies.

Tuesday, USDJPY extended Monday’s gains thanks to the improved risk tone. It rose from 113.14 to 114.30 by the New York afternoon but ended the day at 113.85 on another North Korea nuclear threat.

Weaker-than-expected Australia retail sales capped a small AUDUSD rise while NZDUSD inched lower ahead of Thursday’s RBNZ meeting. Sterling was whippy inside a 1.2914-58 range while keeping an upward bias. Federal Reserve hawks squawking about rate hikes helped to underpin the greenback. A big decline in US crude inventories at the end of the day took WTI prices off the lows.

Wednesday, USDJPY dropped further on the North Korea nuclear story but found a floor at 113.63. It bounced between that level and 114.35 until New York closed.

President Trump’s firing of FBI director Comey distracted FX traders through the US session making for a quiet trading day.

Fortunately, the EIA crude stocks data surprised with a larger than expected drawdown. Oil prices soared sending USDCAD from an overnight peak of 1.3738 to 1.3648 at the close.

Thursday the bottom fell out of kiwi at the Asia open. The RBNZ left rates unchanged and seemed to be more dovish than expected. NZDUSD gapped down from 0.6938 to 0.6817. AUDUSD traded lower in sympathy with the kiwi move.

USDCAD soared and then bounced within a wide 1.3675-1.3770 range. Strong US data and Moody’s were behind the move.

In Europe, sterling tanked after the Bank of England policy statement. The BoE said its forecast were based on a “smooth Brexit” negotiation. Traders didn’t buy that assumption.

A round of better-than-expected US data made for a very choppy US session. EURUSD tried and failed to extend losses below 1.0840. USDJPY sank on profit-taking and on some concern about the Trump/Comey circus. The day ended with traders waiting for key US Retail Sales and Inflation data on Friday.

"There’s more where that came from." Photo: Shutterstock

— Edited by Michael McKenna

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