Welcome to the weekly segment focused on all things related to Commodities and the FX pairs that trade as their proxies. Last week we walked through the Commodity space looking a the headline instruments Gold and Crude Oil.
Let’s take a temperature check on those markets before jumping into a closer look at one of my favorite Commodity FX markets.
Crude Realities Roll On
US crude oil production has begun to turn lower and revised supply estimates suggest that non-OPEC supply will contract next year for the first time since 2008.
Adding to the impact of stronger demand growth this year, the market may see its first quarter of under supply in Q4 2016 and require prices to incentivise a re-acceleration of US supply growth in 2017. However, H1 2016 balances remain oversupplied by 1.0 mmb/d with the assumption of OPEC maintaining production at or around 31.3 mmb/d.
- From a trading perspective I will be watching for a second leg of upside correction to enter short positions against the 55.00 resistance pivot. I will be targeting a retest of the potential broken trend line resistance around 48.00 then a retest of the August lows
Fed Funds Frustrate Gold Bulls
As long as doubts persist over the timing of US monetary policy normalization, gold may enjoy short lived up swings. However, the medium term path for real rates is clear, and that this will inevitably spell sustained weakness for gold over the coming months.
- I will be monitoring the symmetry pattern suggested in the chart which would see price retesting the resistance pivot towards 1190. I will watch price action in this area for a reversal pattern to enter shorts targeting a retest of 1140 and then on towards 1100 using a stop above 1210.
AUDUSD: Down Under 0.70
AUDUSD continues to test the 0.70-handle. Once again the pair is falling foul of the double-edged sword of pressured commodity prices and weak growth data out of China.
RBA Governor Stephens recent comments strongly suggest that the Central Bank are comfortable with the current 2.00% rate policy. As the domestic currency is weighed upon by external factors, there isn’t an immediate need for further action from the RBA. Market watchers are of the view that the RBA will keep their powder dry to tackle unwanted FX appreciation down the track.
New Treasurer Scott Morrison (a beneficiary of the recent change in political leadership down under) has publicly stated that he believes that heat may be coming out of the elevated property prices recorded across popular urban locations. The new treasurer also highlighted a strong desire to control budgetary expenditure under his tenure. For now the domestic policy appears to be in a wait and see mode as the Aussie continues to take its lead from external forces for now.
Now we have an understanding of the recent fundamental developments contributing to the price action lets review technical and sentiment factors driving the price action.
From a sentiment perspective I have a couple of key go to tools to help me understand the where the flows are. I like to review the weekly data from the COT report. The recent report suggests that major market players are positioned short and added to their short exposure as of last weeks data release. My other go to tool for sentiment is Retail positioning, most brokers provide a real time read on the positioning of their accounts, the current view form most brokers is that their client basis are positioned long .
From a technical perspective the Aussie continues to trend down making lower lows and higher highs. The decline in the price action is confirmed by our Order Flow indicators which are giving bearish readings.
- Aussie is in a sustained downtrend with major players short and adding to positions, the retail crowd are getting crushed as they continue to try and fade the move.
- The decline is extended and maybe be prone to to sharp bear market rallies. I will use upside spikes to play the trend. Looking to play the short side on a pop back towards 0.73 leaning against 0.74 targeting new lows.
- If we break fresh lows without a meaningful bounce i will play the short side on a retest of the previous year to date low at 0.69 leaning against .7050 targeting the 0.65 level
Stay tuned for next weeks installment when we will take a closer look at the Loonie (USDCAD) and update our trading perspective on Gold, Crude and the Aussie.