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Oil Prices Factoring Into Currency Plays As the Commodity Soars Above $100

Oil Prices Factoring Into Currency Plays As the Commodity Soars Above $100

2011-02-24 12:10:00
Joel Kruger, Technical Strategist
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Despite a session of some pretty critical price action, there wasn’t a whole lot going on in terms of new fundamental developments. The Euro was under pressure in late Asia and early Europe, before finding some very solid bids just ahead of 1.3700 and rebounding sharply all the way back above some reported option barriers at 1.3800. Meanwhile, the safe-haven majors were very well bid, with USD/CHF breaking to fresh record lows below 0.9250, and USD/JPY breaking back below 82.00 to threaten a potential retest of some key shorter-term range lows down by 81.00.

Relative Performance Versus USD Thursday (As of 12:10GMT)

  1. JPY +0.83%
  2. CHF +0.68%
  3. CAD +0.46%
  4. AUD +0.31%
  5. NZD +0.16%
  6. EUR +0.07%
  7. GBP -0.37%

The sharp recovery rally in the Euro above 1.3800 was said to have come from a risk aversion oil rally (Libya tensions) above $100, with the surging price of the commodity adding to downside pressures in the USD. Also benefiting from the oil spike was the correlated Canadian Dollar, which reversed recent weakness as USD/CAD dropped sharply back down towards the 0.9800 figure.

We have however been seeing a relative underperformance in the commodity currencies despite a surge in commodity prices led by the massive oil move, with risk aversion themes on geopolitical threats and lower global equity prices detracting from the lure of the higher yielding antipodeans. Also seen weighing on these currencies overnight has been a much weaker than expected Aussie Capex showing, and ongoing concerns over the costs associated with the rebuilding of Christchurch following the devastating earthquake this week.

Data released in Europe failed to materially influence price action, with Eurozone confidence readings coming in on the whole a tad firmer than expected, while UK CBI distributive trades was much weaker than expected. The Pound had been the one non-USD major outlier in Thursday trade, with the single currency already underperforming ahead of the softer UK data.

Looking ahead, US durable goods (2.8% expected) takes the spotlight at 13:30GMT, while the Chicago Fed national activity index (.09 expected), initial jobless claims (405k expected) and continuing claims (3880k expected) are also out at the same time. US new home sales (305k expected), and the house price index (-0.1% expected) are then out at 15:00GMT, with oil and gas inventory data capping things off at 15:30GMT. On the official circuit, Fed Bullard is slated to speak in Kentucky at 13:30GMT. US equity futures continue to track lower, while oil tracks above $100, and gold trades flat.

TECHNICAL OUTLOOK

Morning_Slices_body_eur.png, Oil Prices Factoring Into Currency Plays As the Commodity Soars Above $100

EUR/USD:The latest sharp upside reversal certainly threatens short-term bearish prospects, with the market now looking to establish back above 1.3745-65 (previous right shoulder/78.6% fib retrace off of 1.3860-1.3425). Next key resistance comes in by 1.3860 and a break and close above this level will completely negate bearish outlook and open the door for a more significant rally over the coming sessions towards 1.4000. However, inability to establish above 1.3745-65, will once again put the focus back on the downside and expose a retest of 1.3425 further down. In the interim, we remain sidelined and will wait for a clearer signal.

Morning_Slices_body_jpy2.png, Oil Prices Factoring Into Currency Plays As the Commodity Soars Above $100

USD/JPY: Although the market has come under some intense pressure in recent trade back below 82.00, overall price action remains largely consolidative and we would expect to see the market once again well supported in the 81.00’s. For now, 81.00 remains the key level to watch below, and only a close below this figure would negate the current range-bound price action and give reason for concern. As such, we like the idea of buying on dips into the 81.00’s in favor of a bullish reversal and close back above 82.00.

Morning_Slices_body_gbp2.png, Oil Prices Factoring Into Currency Plays As the Commodity Soars Above $100

GBP/USD: The market largely remains locked in some consolidation after continuously stalling out by and ahead of key resistance at 1.6300. From here, it is difficult to establish a clear directional bias and we will need to see a sustained break above 1.6300 or back below 1.6100 for additional clarity.

Morning_Slices_body_swiss1.png, Oil Prices Factoring Into Currency Plays As the Commodity Soars Above $100

USD/CHF: The latest break to fresh record lows below 0.9250 is certainly concerning and threatens our longer-term recovery outlook. Still, we do not see setbacks extending much further and continue to favor the formation of some form of a material base over the coming weeks in favor of an eventual break back above parity. From here, big figures become key support as we are in unchartered territory, while a break back above 0.9400 would be required to relieve immediate downside pressures.

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Written by Joel Kruger, Technical Currency Strategist

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