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EUR/USD Rockets to 2017 Highs, Oil Price Corrective Rally Risk Grows

EUR/USD Rockets to 2017 Highs, Oil Price Corrective Rally Risk Grows

2017-06-28 21:30:00
Tyler Yell, CMT, Currency Strategist

Highlights:

  • EUR surges as Draghi downplays deflation taking EUR/USD above 1.13
  • CAD extends gains as Poloz and Patterson encourage view that hikes are on the table
  • Short covering rally in Oil is key risk for bears as Brent shorts at highest level on record
  • Sentiment Highlight: EUR/USD trend appears undeterred as retail Bull’s exit the trade

EUR/USD is looking set to close out its strongest quarter since 2011. Wednesday’s high of 1.1379 has pushed the 2017 range to 10.15% off the January 3 low of 1.0341 and for the quarter, EUR/USD is higher by 7.57%. One key measure that can help you to see how strong the shift has been in to EUR bullishness is 3-month risk reversals or ‘riskies’ that help you see premiums being paid to calls or puts over a specific tenor. On Wednesday, the 3m 25-delta risk reversal for EUR/USD reached their highest level since 2009 in favor of calls showing a preference for investors to pay a premium to protect against (or capture) outsized EUR gains over the coming quarter. Draghi’s speech in Sintra, Portugal at the ECB conference has provided a hawkish tone that was echoed by the likes of Bank of Canada’s Stephen Poloz, and BoE’s Mark Carney. While EUR strength is favored, traders should keep an eye on core inflation numbers coming this week that could help support or dismantle investors bullish EUR expectations. The chart below helps to communicate that bond investors see a possible paradigm shift developing in German Bunds.

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As if not wanting to be outdone, comments from the Bank of Canada’s Stephen Poloz on Lynn Patterson helped boost the Canadian Dollar to the highest level against the ever-weak USD since February. Both BoC members shared that the Bank of Canada is done with rate cuts and the time has come to consider rate hikes. The market seems to agree as the odds of a rate hike in 2H 2017 rose aggressively this week to 67% from 39% earlier this week according to Bloomberg. The psychologically important 1.30 level will remain in focus, but a rebound in crude oil could help take USD/CAD well below 1.3000 in H2 with extended downside targets at 1.2892.

Though crude oil has a lot of fundamental resistance, a look at the positioning data could indicate that we may see a snap higher on a price recovery. When looking at Brent institutional speculative positioning, ICE Futures Europe data shows short positions are at the highest levels since records began in 2011. The fundamentals remain doubtful for a shift from bearish to bullish in the market as Libya is set to ship the most oil in three years and shale E&P is expected to keep their production humming along a further rise in prices could test the Bears patience. Short-covering rallies are a palpable risk when a trend is fought in unison, and a rebound in price takes hold that causes everyone running to the door at once. Given the 2017 trend of lowerhighs, a sharp retracement may find resistance near $48-50/bbl.

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Closing Bell’s Top Chart: June 28, 2017, DE Front end Bulls giving up could further propel the EUR

EUR/USD Rockets to 2017 Highs, Oil Price Corrective Rally Risk Grows

Chart Created by Tyler Yell, CMT

Tomorrow's Main Event:EUR German Consumer Price Index (YoY) (JUN P)– Exp: 1.4%

IG Client Sentiment Highlight:Euro Forecast to Continue Higher versus US Dollar

The sentiment highlight section is designed to help you see how DailyFX utilizes the insights derived from IG Client Sentiment, and how client positioning can lead to trade ideas. If you have any questions on this indicator, you are welcome to reach out to the author of this article with questions at tyell@dailyfx.com.

EUR/USD Rockets to 2017 Highs, Oil Price Corrective Rally Risk Grows

EURUSD: Retail trader data shows 19.8% of traders are net-long with the ratio of traders short to long at 4.04 to 1. In fact, traders have remained net-short since Apr 18 when EURUSD traded near 1.0589; the price has moved 7.5% higher since then. The number of traders net-long is 3.7% higher than yesterday and 42.9% lower from last week, while the number of traders net-short is 1.4% higher than yesterday and 14.6% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests EURUSD prices may continue to rise. Positioning is less net-short than yesterday but more net-short from last week. The combination of current sentiment and recent changes gives us a further mixed EURUSD trading bias.(Emphasis mine)

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Written by Tyler Yell, CMT, Currency Analyst & Trading Instructor for DailyFX.com

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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