Currencies & Commodities Roundup
By Analysts at the LSESU Trading Society: Darshan Viswanath, Jeet Shah, Ryan Teo Zhi Kai, Gopal Modi, Maria Dupre, Max Trapnell, Oliver Armitage, Anshuman Bhatnagar
The EUR/USD pair rebounded from its 3-month lows of 1.09 this week, ending the 2-week downward trajectory it had been on. Throughout the week, it built on this rebound, supported by quite a few factors.
Firstly, addressing USD. The general optimism in the economy surrounding quicker economic recovery and the boost in market sentiment after US President Joe Biden signed a $1.9 trillion stimulus bill into law; there have been major factors in undermining the safe-haven US dollar, lowering the risk appetite of people. Other factors that decreased the demand for USD were successful auctions for 10yr and 30yr US government bonds that boosted investors’ sentiment, combined with mixed consumer inflation figures released on Wednesday that relaxed any market concerns over inflation possibly being higher than expected.
On the other hand, EUR rallied supported by ECB’s willingness to stem the recent upward shift in bond yields and keeping policy rates unchanged at 0%. Furthermore, their pledge to increase the pace of bond purchases in order to maintain good and favourable financing conditions and overall, simply trying to maintain their policy targets, favoured the currency as well. ECB upped its 2021 GBP forecast as there are expectations on Europe’s recovery picking up more rapidly in the second half of the year.
However, despite these factors supporting the rally in the currency pair, EUR/USD failed to reach the 1.20 level which was perhaps due to a modest rise in US Treasury yields that brought the pair down from when it seemed to reach a 1.20 mark.
Investors are now aiming to German CPI data, US Producer Price Index, US Consumer Sentiment data, and US bond yields to anticipate currency movements in the pair. Nonetheless, for the time being, there is an expected trend for other higher yielding currencies to perform relatively better against the US dollar as higher optimism regarding global economic recovery supported by the $1.9 trillion package, and a more stable US government is expected to be prevalent in the coming months.
EUR/USD is testing the level of support and resistance at the 1.195 level and its behaviour over the coming week will determine the direction of momentum. Whilst it broke downwards through 1.195, the currency pair retraced and retested the level. A sustained breakthrough downwards of this level would be a strong bearish signal. Momentum indicators such as the RSI are relatively neutral, currently at around 40. However, the currency pair slipped below the 50 simple moving average on the 4-hour chart, indicating a bearish signal.
Sources: DailyFX; IG
If the level of support is not broken, the currency pair could rise up to just below 1.210 and this would prove an opportune shorting moment to maximise the likely following swing downwards from the resistance trend line, whilst exploiting the underlying downwards trend.
The AUD/USD currency pair experienced a steady upward trend in the past 12 months. Moreover, commodity-related currencies, such as the Australian Dollar, the New Zealand Dollar and the Canadian Dollar are expected to strengthen against peer currencies due to vaccine rollouts and the outlooks of economic recovery. Also, inflation pushing yields higher can further contribute to the strengthening of such currencies. In particular, after a short-lived decline in the end of February, commodity currencies rose again in the first days of March, with AUD hitting $0.7754. The currency slipped by 0.25% on the 2nd of March, ahead of the Reserve Bank of Australia meeting. It recovered on the 3rd of March, due to stronger-than-expected economic growth and expectations of recovery, trading at $0.7828. At the same time, the 10yr yields on Australian bonds have been rising, hitting 1.79% on the 4th of March, with the exchange rate touching 0.7788.
However, on the 5th of March, following a short wave of pessimism, riskier currencies fell and the AUD slipped $0.7705. On Monday the 7th of March, Australia started its mass vaccine rollout, following three consecutive days without any new reported infection in the whole country, which further pushed the AUD/USD up to hit its 3-year high at $0.7917. It slightly fell to 0.7684 on the 10th of March as the 10yr yield fell to 1.72%, but it recovered by the end of the week, stabilising at 0.7765. The currency pair is not expected to depreciate as long as commodity prices keep rising, making commodity currencies relatively strong against the greenback. Additionally, expectations of increase in the volume of global trade sustain the strength of AUD against USD.
For the week beginning the 8th of March, the price of WTI Futures started and ended the week by hovering around 65.57, reaching a high of 67.98 on Monday and low of 63.13 on Wednesday.
The WTI Crude Oil markets initially fell during the week but then turned around to show signs of life again. By doing so, WTI has broken strong resistance at 65 and it could trend upwards to 70 and potentially even 75 (if the previous high from October 2018 of 70 is breached). Factors contributing to bullish outlook of oil include the improvement in global economic recovery from the pandemic as evidenced by a host of encouraging factors:
(1) Fall in global 14-day COVID-19 case notification rate per 100 000 from about 202 in Week 2 of 2021 to about 110 in Week 9 of 2021, accompanied with over 354 million doses have been administered across 121 countries (global average of 9.14 million doses a day).
(2) Rising US rig count on the back of increased oil activity as extra oil rigs were found in the West Texas/New Mexico Permian basin, where operators added four rigs for a total of 226, marking the highest since the week ended 29th of April and leaving the US total at 492.
Together, (1) and (2) imply a resurgence in oil demand which was critically hurt at the beginning of the pandemic.
Nevertheless, there could be a breakdown below the bottom of the last candlestick, meaning we can then expect WTI prices to pullback. Primary factor contributing to bearish outlook of oil is driven by pressure on oil majors to move towards a path of decarbonisation, especially on US oil majors like ExxonMobil and Chevron. President Biden signed an executive order for the US to re-enter the Paris Agreement, signalling a change in US climate policy stance. Indeed, US oil majors have discussed in their strategy presentations about solutions and opportunities where they have a competitive advantage such as Carbon Capture and Storage, as well as in areas where competitive advantage isn’t as obvious such as renewables, biofuels, hydrogen and natural sinks. This is also backed by the US rig count composition since the pandemic as most companies leading the rig growth in the Permian basin are non-majors.
Gold – having experienced three consecutive weeks of declining price action – bucked its recent trend by recording a weekly price gain of 1.3%, settling just below $1,726 at the end of the week. However, near-term prospects for the yellow metal are uncertain with markets holding in anticipation of the Federal Reserve’s upcoming FOMC meeting.
Gold futures prices have naturally come under pressure in recent months as vaccination programmes across the globe continue to offer hope of an end to the Covid-19 pandemic and a subsequent post-pandemic economic recovery. However, the key driver of gold’s most recent price decline has been the continuing climb of US Treasury bond yields – demonstrated by US 10-Year Treasury bond yields hitting pre-pandemic highs last week following US February payrolls nearly doubling the consensus market estimate. Rising yields have reduced the appeal of gold to investors which – when combined with the imminent signing into law of Biden’s stimulus package and the increasingly bullish targets of the Biden administration’s vaccination programme – contributed to gold futures prices sliding to a 10-month low on Monday. These bearish market effects were felt again late-Thursday and early-Friday, following the signing of the American Recovery Plan Act and recovering bond yields (which fell off mid-week).
However, despite rising bond yields having a depressing effect on gold prices, several factors offer some support to gold futures going forward. Firstly, markets seemed to provide strong support to the yellow metal at around the $1,700 mark, indicating that technical buying offers some support against a continuation of gold’s falling price action. Secondly, gold markets are being supported by the prospect of the Federal Reserve quickening their decision to raise interest rates to combat the recent bond yield increases. While Fed Chair Jerome Powell has promised to stay strong on his decision to allow inflation to rise prior to rate increases, Lael Brainard – a Governor of the Fed – admitted the Fed had been monitoring bond yields. If such monitoring led to the Fed raising rates, such an intervention would reverse the market dynamic that has been observed over the last few weeks, increasing the attractiveness of gold to investors.
However, while the near-term prospects for gold are highly reliant upon the upcoming FOMC meeting, gold’s long-term future seems to be a bearish one with the ever-increasing probability of an imminent global economic recovery suppressing risk sentiment and, by extension, gold prices.
Sources: Investing.com; TradingView
Trade Idea – By Ryan Teo
- Idea: Short EUR/USD
- Entry: 1.1990 [Previous Week High]
- Stop-Loss: 1.2100 [Monthly High on 3 March]
- TP1 (50% Equity): 1.1780 [Intermediate Support]
- TP2 (50% Equity): 1.1620 [Strong Support]
- R/R Ratio: 1:2.63 – [110 pip SL for 290 pip average TP]
How did I arrive at this pair?
You would not be doing yourself a favour if you ignored the strength of the USD now. As a safe-haven asset, the global recovery from COVID-19 should have troubled the dollar. It did not; instead, the unending rise in US government yields have caused a spike in demand for the USD since March.
With a long bias on the USD, all that was left for me to do was to find a currency with weak fundamentals for it to be shorted against the dollar. Straightaway, it meant eliminating commodity-related currencies such as the Canadian dollar, as the rising oil prices gave such currencies inherent strength. The pound, too, since it could always rely on Britain’s strong vaccination endeavour for strength.
The robustness of my idea was contingent on sound technical analysis. This meant disregarding currency pairs that were trading in range with no obvious bearish direction, such as the GBP/USD [between 1.38-1.40 all March]. The same went for pairs that seemed to have bottomed out, with no room for further weakness against the dollar.
With bits of knowledge about Europe’s poor vaccination campaign and the lacklustre ECB bond buyback scheme, which weighed heavily on the euro, I knew I struck gold when I glanced at the daily chart for the EUR/USD. This was what I saw.
1. EUR/USD was on a sustained downtrend since the 1.2350 yearly high in early 2021, and recent 1.2230 high in late-February.
2. The pair was far from bottoming out, with an intermediate support level observed close to 1.18 and a strong support level at 1.16.
3. Currently trading at 1.1950, a bearish rally to these support levels was imminent, given the lack of resistance and pronounced activity in this range.
This discovery alone made shorting the pair extremely attractive. How could I increase my certainty that the euro will remain relatively weaker to the dollar in the short-term? That was when I turned to studying news events that had obvious ramifications on both currencies.
Comparing Europe and US on 2 Fronts
On Central Bank Policies
The soaring US government bond yields need no further introduction. Already at significantly overstretched levels, the yield continues its perpetual advance and currently stands at 1.62%. Rising government bond yields make the US dollar extremely attractive, as investors will receive greater returns on bonds purchased.
On the other side of the Atlantic, the European Central Bank had decided to leave its Pandemic Emergency Purchasing Program (PEPP) unchanged at 1.85 trillion. With the euro surging each time, the ECB decided to expand its buying scheme [as it signifies artificial monetary injections to stimulate potential growth]; this decision is expected to weigh on the euro.
On Efficiency and Effectiveness of COVID-19 Vaccination Campaigns
The change from a Trump to Biden administration had injected a breath of fresh air to the US. On Friday, Biden announced that he would compel all 50 US states to ensure coronavirus vaccines were available for all adults by 1st of May. This obvious acceleration of the immunization process will put the US on track to reach a “new-normal” sooner than widely expected, with Biden aiming for this to happen by 4th of July.
This optimistic situation cannot distinguish itself better than from Continental Europe, the only region labelled by the Economist as a “place with lots of new cases, but little vaccination”. Europe has been plagued by a slow vaccine rollout, blaming AstraZeneca for failing to meet delivery targets. The problems are far greater than merely time-lags – there are alarming quality concerns as well. Several countries have banned the use of at least one batch of the AstraZeneca shot, citing concerns about serious side effects related to blood clots.
A relatively poorer vaccination campaign in Europe implies a pessimistic outlook on the economic recovery of the region compared to the US. It would be unthinkable, then, for the euro to overtake the dollar’s strength.
The Specifics of the Trade Idea
The last step would be to identify precise entry, stop-loss and take-profit levels to maximize returns on this trade idea. For this, I examined the hourly chart for the pair.
1. With little reason for the euro to gain traction, entering at the previous week high of 1.1990 sounds reasonable. It is a level that the pair could reach before its subsequent descent.
2. The stop-loss at 1.2100 (Monthly high) is strategically placed. Why? This was the point where the pair broke out of the reverse Head-and-Shoulders pattern [which was widely seen as a reliable indicator for the euro to gain ground back then]. The pair is unlikely to slip back into the range above 1.2100.
3. The 2 take-profit levels were decided based on previous support levels in 2020.
Do you know why I waited till Friday (for the market to close) before writing this article? I wanted to see if the pair would continue its’ midweek ascent above 1.20. It retraced instead, rejecting the 1.20 level. This means the bears are in control – and you could be one too.
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