Currencies & Commodities Roundup
By Darshan Viswanath, Jeet Shah, Ryan Teo Zhi Kai, Gopal Modi, Maria Dupré, Max Trapnell, Oliver Armitage, Anshuman Bhatnagar
Starting 2021 at a low of 102.750, the USD/JPY pair picked up the pace and is currently trading within a clearly defined upside channel, making higher highs and higher lows (as seen from the 4H chart above). After approaching the 105.660 highs on 5th February, the pair retraced early this week and spent most of the week consolidating within the 104.500 to 104.800 range.
Upon closer inspection in the 1H timeframe, it was observed that the pair experienced strong support at the 104.530 level through the week, with prices dipping below that level just once, which was immediately followed up by a bullish engulfing candle to the weekly resistance at 104.580 (intermediate level). Toward the end of the week, the pair successfully broke this resistance level and is currently trading at 104.944. Both short-term (1H) and long-term (4H) timeframes point to a long/bullish bias for the pair.
The perfect moment to go long on this pair would be when it retraces back to the resistance level of 104.580 and subsequently rejects the level (such that it turns into the short-term intermediate support). Should this happen, we believe that the upside potential for this pair (in the green shade) is close to 4x that of the downside potential, as the pair could approach the 105.660 highs in the short-run, which could serve as the 1st take-profit level. Beyond that, should the pair remain in the uptrend, it could reach the 106.090 high (October 7th, 2020).
With the DXY (USD currency index) dipping drastic since early February, it may seem counterintuitive to long this pair, as it would mean the strengthening of the USD relative to the Yen. What are some fundamental factors that could support the technical analysis to go long?
US Stimulus Package
The delay in the successful roll-out of the US stimulus package has undeniably put a damper on the USD against most major currencies. However, it is assumed that regardless of the specifics of the package, it will boost consumer spending, which was dismal in Q4 2020. The eventual implementation of the stimulus package may provide renewed optimism on the US economy and the USD.
Rapidly Improving Covid-19 Situation in the US
Daily Covid-19 cases in America have halved since mid-January, with the country reporting slightly over 100k cases currently. America’s vaccination campaign has also improved gradually, with the country hitting 1.6 million doses per day. With the last major lockdown in California lifted, there are rife expectations for a rapid acceleration in US recovery, which would aid the USD in an upward move.
Poor Macroeconomic Outlook from Japan
Pessimistic economic data has been emerging out of Japan since the start of the year. In January, Consumer Confidence fell to a half-year low of 29.6. Looking to the future, a Reuters poll found that Japan’s economy might suffer a much bigger contraction of 5.0% (doubling expectations of 2.4%) in the January-March quarter of 2021. This will be due to the extended state of emergency imposed to contain the coronavirus pandemic, which dealt a significant blow to corporate and household spending.
The economic downturn in Japan shall weaken the Yen. Furthermore, the Bank of Japan has a yield curve control strategy that keeps a ceiling on Japanese bond yields. With the expected recovery in bond yields in other countries, the Yen may struggle to keep pace with other major currencies.
For the week beginning 08/02, EUR/USD started the week at the 1.2048 mark and trended upwards until Wednesday, reaching a high of 1.2140, plateauing thereafter at around 1.2123 until Friday.
Factors weighing in on the USD’s appeal, which experienced its first weekly loss in over three weeks, include discouraging economic data releases over the past two weeks. Indeed the Initial Weekly Jobless Claims were higher than expected (793,000 instead of the forecasted 757,000), adding to the weaker non-farm payrolls number from last week; altogether, the economic data signals weaknesses in the key US job market are rising. Further, Fed Chairman Jerome Powell’s dovish comments that the central bank would “remain patient with its accommodative monetary policy stance” means interest rates would remain low to stimulate the economy; hence, the depreciation of the USD against EUR.
Nevertheless, investors are hesitant to sell USD too much. The US Covid-19 outlook is gradually improving as vaccines are rolled out and fiscal stimulus is planned.
Beyond US-centric drivers, EUR has become more appealing in its own right due to improvements in EU’s coronavirus situation on the back of a drop in active cases to around 155,000 (lowest since late October) and fresh supplies of vaccine delivered by AstraZeneca, after weeks of stalling. Finally, next week promises to potentially breach the critical resistance of 1.2150 as key Eurozone data on the job market and growth rate is due on Tuesday; if the bloc performed better than expected towards the end of 2020, it could boost optimism that the region is handling the pandemic well.
On April 20th 2020, traders were desperate to rid themselves of oil future contracts due to expire the following day. Fearful of the costs from taking physical delivery, traders were willing to pay others to take the holdings off their hands. Since then, the market has experienced a gradual and stable return towards more normal price levels, driven by the cautious optimism at possible economic recovery following the initial shock of Covid-19.
Taking oil as an imperfect reflection of economic performance expectations, we can see three stages to the recovery: from May to mid-June, the sharp recovery was a product of rebalancing an over-bearish market, first waves of Covid-19 being suppressed, and the potential for travel to be back on the cards, bolstering demand for fuel, and thus oil. July to November consisted of sideways, if not negative, price action as second waves hit, and investors realised that Covid-19 may be an issue that will persist for more than a few months or half a year. The sentiments during this period were most accurately captured by the FT Headline on October 31st 2020: “Oil traders tear up demand forecasts as Covid lockdowns return”. December to the present day has seen a rather strong bullish trend fuelled by strong vaccination programmes in the US and the UK. Focusing on more recent price behaviours, despite the bullish trend encountering resistance at around USD54, trading sideways from mid-January to early February, the price of CFD’s on WTI on February 2nd 2021 broke above this, closing at just over USD55. Since then, the climb has been strong reaching a post-pandemic high of USD59.61 at the time of writing.
However, it seems that whilst vaccination efforts are making headway and many economies could be on the path back to normality, the underlying demand for [word missing] could remain depressed for a while longer. Many countries are falling behind on their vaccination targets and taking tough measures against international travel for fear of introducing new Covid-19 variants. However, demand for oil in developing and Asian markets have returned to pre-pandemic levels. Meanwhile Saudi Arabia has and continues to, removed an extra 1M barrels of oil from its supply beyond its OPEC obligations. JP Morgan Chase and Goldman Sachs have, in fact, advised clients that oil prices may continue to rise over the following months. It seems as though this bullish trend may continue at least for the short to medium term.
Platinum futures advanced to a six-year high mainly on investor bets of an industrial demand recovery as well as tightening supply of platinum from stricter vehicle emission rules to reduce automobiles’ pollution. Platinum for April delivery rallied by USD52.50 (4.4%) to reach USD1246.90 an ounce on the New York Mercantile Exchange – its highest level since February 2015, while platinum for immediate delivery gained 6% to USD1,252.84 an ounce.
Following palladium and rhodium’s huge gains in 2020, platinum joins the gains as well. Platinum is well heading into 2021 with a third consecutive year of supply deficit while vehicle demands are on the rise, such as China car sales being up 30% YoY at 2.5 million units. Although the platinum price boost will be driven by car recovery generally increasing demand for all platinum-group metals, the gains will mostly come from higher demand from heavy-duty Chinese vehicles. Adding to this demand, the moves towards renewable and clean energy fuels globally further aid platinum demands as the metal serves a pivotal role in the electrolysis process in the conversion of green hydrogen.
Further contributing to platinum’s rise, recent energy shutdowns and disruption in a key South African refinery, Eskom, further added over USD100 an ounce to the prices of the metal this week, likely keeping the market in deficit this year as well according to World Platinum Investment Council. Although some investors regard recent optimism over speedy economic recovery and a large potential US stimulus package of USD1.9 trillion having boosted assets, in general, to simply spread to cause platinum rises, there are also investors to find this six-year high to reflect higher fundamental value and growth of the metal in the long-term. It remains to be seen whether these bets on industrial demand growth and tougher emission rules will continue to advance platinum futures for delivery beyond April.
ETFs exposed to the metal rose this week with GraniteShares Platinum Trust PLTM jumping 4.3% while Aberdeen Standard Physical Platinum Shares ETF PPLT was up 4.1%.
Trade Idea – Long GBP/USD.
GBP/USD strengthened relatively consistently over the last two quarters of 2020, with this growth spilling over into 2021. Cable’s growth during this period has reflected, in particular, the differing responses of the UK and US governments to developments in the Covid-19 pandemic and the differing prospects of each economy returning to economic normality. While GBP/USD’s performance in the short-run may be affected by upcoming UK economic data releases, the evidence points to a further strengthening of the GBP/USD in the coming weeks.
The impact of vaccination programmes on GBP/USD.
GBP has been boosted in recent weeks as Covid-19 cases in the UK have fallen significantly faster than in both the US and EU. These developments have, in turn, stoked hopes of UK lockdown restrictions being eased in spring, thus opening up the UK economy once again. While the UK government’s reluctance to lay out a firm roadmap to the removal of restrictions may have softened market sentiment slightly, the rapid rate at which cases are falling and the recent news that the UK’s R rate has fallen to between 0.7-0.9 have ensured markets remained bullish vis-à-vis GBP/USD.
Furthermore, the UK’s Covid-19 vaccination strategy has shown itself to be rather expeditious relative to that of the US’ programme, with 20% of the UK population being already vaccinated compared to 13% in the US. This further indicates the likelihood that economic normality will return in the UK quicker than in the US, leading to a stronger macroeconomic performance relative to the US once the UK economy opens up and thus encouraging a further strengthening of GBP relative to USD. Market sentiment of a speedy return to economic normality in the UK was given a further boost following data releases from Israel which demonstrated the real-world effectiveness of the Pfizer Covid-19 vaccine. While such sentiment will also be shared in the US, the more sluggish nature of the US vaccination programme will translate into a strengthening of the GBP/USD.
The impact of recent monetary and fiscal policy on GBP/USD.
The approval of over USD900m worth of stimulus measures by the Ways and Means Committee of the US House of Representatives constituted a further step towards President Biden’s proposed USD1.9tr stimulus package coming into force. Furthermore, House Speaker Pelosi has hinted that the final bill itself will be voted upon before the beginning of March 2021, opening up the US to inflationary pressure in the near future and applying further downward pressure on the Greenback. Thus, regardless of the extent of the final stimulus package passed, one can expect a further strengthening of the GBP/USD in the near future.
Additionally, in the recent past, GBP/USD has been strengthened by weak macroeconomic data pointing towards the US economy’s ongoing struggles to generate recovery during this pandemic period. For example, the recent release of US jobless claims data showed that claims stood at 793,000 for the week beginning February 6th 2021. While this represents an improvement on previous data, these results disappointed markets, which expected closer to 760,000 claims – thus demonstrating to markets the US economy’s lack of robustness in response to the Covid-19 pandemic. The lack of dynamism in the US job market is particularly crucial to the performance of GBP/USD as Fed Chair Powell has noted the weak US labour market as a key reason the Fed intends to persist with its aggressive monetary policy – a move that will continue to suppress USD.
On the other side of the pond, markets will await the release of key UK data reports this week. Specifically, the UK’s February 2021 CPI figures are set to be announced this Wednesday, while Friday will bring the release of new UK retail sales data. While the impact of these reports on the relative strength of GBP will only be felt in the days to come, the BoE has shown itself to be committed to its current programme of low interest rates, remaining reluctant to delve into negative rates despite warning commercial lenders of this possibility.
Trading at 1.38450 represented yet another step towards cable breaking 1.40 for the first time since Q2 2018. Not only this, but the furthering strength of GBP/USD in 2021 continues the developments seen since September 2020, with cable rising from around 1.265 to its current level in that time period. Furthermore, GBP/USD has consistently traded above its 5-day moving average across the last month (barring a slight slip in early February 2021), indicating its strength.
While identifying resistance points using historical data is difficult, given the novelty of GBP/USD’s current position, it seems likely that the current outbreak from the previous resistance around 1.370 will be sustained (especially given the US economic data that has been released since that point) and challenge its next resistance levels, seemingly around 1.390 and 1.40.
Additionally, cable’s RSI indicates that markets’ bullish outlook vis-à-vis GBP/USD has not resulted in cable becoming oversold, with the RSI holding just around 60 since the new year.
In the short-term, the current market price offers a suitable point of entry into GBP/USD with a stop loss at the previous resistance level (1.370) providing insurance against a reversal of the outbreak above this level and against the uncertainty regarding upcoming UK data releases. However, given the strong chances of the GBP/USD pushing through the 1.390 and 1.40 resistances, a take-profit could be set at the latter price, ensuring a 1.1% return on current prices. However, given the likelihood of a speedier UK economic recovery (assuming the fundamentals are realised), a longer-term outlook (of several months) on this trade is perhaps best appropriate, even if this acts as a higher-risk secondary take profit option.
In conclusion, while it remains to be seen whether markets will push GBP/USD through the 1.390 and 1.40 barriers, fundamental and technical indicators suggest that one should expect a further strengthening of cable, continuing the trend of the last 6 months. However, in the short-term at least, markets will wait to adjust depending on the impending release of key UK inflation and retail sales data.
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