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Copper, Oil and Yen: Pressure Points for the Global Economy

Copper, Oil and Yen: Pressure Points for the Global Economy

James Stanley, Strategist

Talking Points:

- This week has brought a considerable amount of data to markets, but the big release remains for tomorrow at 8:30 AM ET with the release of Non-Farm Payrolls for the month of May.

- The out-sized up-trend in the US Dollar in the month of May is continuing to rest near support as traders attempt to factor in the probabilities of actually getting a hike when the Fed next meets in two weeks.

- If you’re looking for trading ideas, check out our Trading Guides. And if you want something more short-term in nature, check out our SSI indicator.

ECB Holds as Expected

Expectations for this morning’s European Central Bank meeting were extremely low, as it was likely that the bank would still be in an evaluation period after the outsized stimulus triggered just three months ago. Combine this with the relief that the bank is likely feeling after the month of May in which the EUR/USD posted a 2.73% loss against the US Dollar, and this was just even more reason for the ECB to take a passive approach this morning.

This lack of any new announcements or policies (or even the lack of expectation for anything new) helped to contribute to a relatively low-volatility environment in EUR/USD over the past two weeks, which has essentially seen the pair trade in a ~150 pip range over that time period. There is an interesting technical observation in the pair, as EUR/USD rallied right back to the 1.1212 level of resistance. This is a big level as it’s the 61.8% Fibonacci retracement of the lifetime move in the pair, and perhaps more importantly has shown numerous price action implications over the past 16 months.

Copper, Oil and Yen: Pressure Points for the Global Economy

Charts prepared by James Stanley

USD/JPY Look for Resistance at Old Support

One pair that is on the move is USD/JPY. We discussed this in yesterday’s Market Talk after Shinzo Abe delayed the scheduled tax hike while also promising that a ‘comprehensive, bold economic stimulus package’ was coming this fall.

And oddly, even with that announcement that a stimulus package would be on the way, Japanese markets are putting in signs of risk aversion with the Yen strengthening and the Nikkei continuing to fall. We had looked at the prospect of the Yen as the safe-haven vehicle of choice last September, and since then USD/JPY has moved down by 9.5% while dropping by over 1,100 pips.

The month of May brought a great deal of relief to that down-trend as US Dollar strength took over on the back of increasing rate expectations out of the United States. But two days into June, it looks as though the down-trend in USD/JPY may be on its way back. We’ve been watching a Fibonacci level at 109.10 in the pair, and this zone of support was the area that we were using to base down-trend resumption strategies two weeks ago. This price had offered a brief amount of support yesterday, but since selling pressure has taken price action back below. At this point, with price action continuing to settle around near-term lows, traders would likely want to wait for a cleaner entry; as in, let price move up to resistance, look for a price action reversal before looking to jump on the short-side of the trade. We discuss price action reversals and price action triggers in the article, The Price Action Trigger.

Copper, Oil and Yen: Pressure Points for the Global Economy

Created with Marketscope/Trading Station II; prepared by James Stanley

Commodities May Be Showing a Signal…

Last November, we looked at the Copper market as a leading indicator of global growth. With its numerous industrial uses, particularly with electrical wiring, Copper will have a tendency to act as a type of leading indicator with global growth because, as economies grow they build; and as they build they need electricity which is where copper wiring comes in to play. So as global growth is increasing, Copper prices will generally show that strength as demand for the commodity increases as builders acquire resources to actually build.

Copper prices have been trending lower for more than four years, and last November Copper prices hit a new six-year low as worries about China and Emerging Markets continued to heat up. Six weeks later as the New Year opened; a massive amount of risk aversion took over with one of the primary contributing factors being the painful trends being seen in commodities.

The past month has brought back the down-trend in Copper, with fresh near-term lows being printed just two weeks ago.

Copper, Oil and Yen: Pressure Points for the Global Economy

Charts prepared by James Stanley

Another commodity that has enormous macro-economic implications at the moment is Oil. The dramatic drop in Oil prices last year leading into 2016 was a threatening theme; because the American economy had huge exposure to Oil prices after large increases in production, and many banks were extended as there were significant amounts of debt outlaid to these producers.

So, the threat here wasn’t just to Oil producers; it was/is also to the banks that have capital exposure to these types of outfits. We discuss this, along with potential contagion effects in the article, USOil and the Velocity of Contraction: The Looming Boom of Energy Debt.

But 2016 has been very positive for Oil so far, as we’ve seen Oil prices increase by 29% this year (and nearly 100% from the low set on February 11th), and this has helped to move the global economy back from the brink of full-scale risk aversion. Much of the early portion of this gain was on the back of the expectation for major cuts to production, with eyes on an Oil minister’s meeting in Doha in April. When that meeting produced no results, no agreements and no cap to production, it looked like we may have been nearing a return of the violent moves lower, but support came in around hopes that, eventually, a deal would be struck. We wrote at the time to be careful of looking for that down-trend just yet, as price action structure was still bullish in nature.

But another OPEC meeting this morning failed to produce any cuts to production. With Oil prices having just hit the psychological $50 level, incentive to actually cut production is probably lower than it’s been all year long. We looked at the technical setup in Oil last week as prices hit the $50-level; and the same setup applies. The first level of support has been broken, and for traders looking to get short Oil, watch for support breaks at 46.66, and again at 42.66 to indicate down-trend continuation potential.

Copper, Oil and Yen: Pressure Points for the Global Economy

Charts prepared by James Stanley

--- Written by James Stanley, Analyst for DailyFX.com

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