After a slightly mixed week last week not providing much direction, or trading opportunities, we will hopefully get some more viable trade ideas in the coming week. The one big move we did have last week came from the oil market, and we are through the lows again to start the week. Ongoing demand issues from a somewhat struggling global economy is a factor but last week we had an announcement that we were going to see a price cap on Russian exports of a price limit of $65-$70 a barrel. This then alleviated some worries that they would stop supplying oil to where it was needed, and with OPEC seemingly reluctant to do anything to stop any rise in prices, this calmed any market fears that the supply chain would be cut off. In simple terms a decrease in demand and no reduce of supply mean the price of an asset goes down. Couple this with the unrest we have seen in China over the weekend, further downside in oil looks on. Selling rallies back to the trendline on the 1hr chart seems a decent bet.
Markets this week got off on a sour footing. Stocks lower across the board, commodities lower, antipodeans lower and safe havens higher made for pretty grim reading getting to my screens this morning. The people in China have come together in protests against the government and President Xi Jinping, the likes of which have not been seen since the Tiananmen Square massacre of 1989. We have not got anywhere close to that, but the reports don’t seem peaceful by any means. This is something that doesn’t happen often in the country, and it will be interesting to see how Beijing deal with it. They have been taking to the streets against the governments COVID measures amid the first deaths since May and 4 straight days of rising cases, with fresh lockdowns across the country, which was also kickstarted after an apartment fire in Urumqi, in the west of the country. The drag these measures continue to cause on the worlds second largest economy, and in turn the global economy mean markets did not take too kindly to the fresh news over the weekend. We have since stabilised over the course of the European session and then moved back lower in the US, but markets are certainly not enjoying themselves to start the week. We have manufacturing PMI’s out of China this week which markets will look towards, and any majorly weak numbers should prove negative for markets, and the Yuan will come under pressure again.
On Tuesday we will see German CPI. However, there are many contributing factors to the price of the Euro, other than the economic data. Recession risks, geopolitics, stagflation, and the energy supply shortages continue to be a problem for the Eurozone, but the inflation print still has some relevance. With the PPI last week showing weaker than expected numbers, it would suggest this week on the consumer front we should get a weak print. Any move higher in the print may end up posing a bigger issue to Europe going forward, requiring further substantial rate hikes, and thus, further damaging the medium-term outlook for the economy. I would, however, be cautious going piling into any trades just off the back of this. There is an 80% risk of a recession in the EZ at the moment, so I would argue there is potential for a move lower in the Euro on a beat, as it will stoke further stagflation fears.
With the FED maintaining they are data dependent; this week could give us some tradeable opportunities. The USD is reacting to data in a cyclical fashion, as is expected with data. In other nations, it is a bit tricky to navigate but with the US, it is a bit more clear cut. As you can see on the chart below, the USD has been trending lower the last couple of months off the back of expectations for the FED slowing the pace of rate hikes. With the FED remaining ‘data dependent’ then any weak data this week should further fuel this move lower.
With FED Chair Powell’s speech on Wednesday, Manufacturing PMI’s on Thursday and NFP on Friday, there potentially a few opportunities to get short. I think on a risk/reward basis, any spike higher could, if you are brave, potentially be worth a sell at a better level, but realistically, 105 needs to be breached to the downside to feel confident of this move extending lower. EURUSD has had 2 attempts at 1.05 as well and failed both times, so that level is important too in monitoring the USD. The global recession risk has probably not been priced into markets either, so a clean run of negative prints across the board may prove troublesome to trade, so in my opinion, waiting for 105 to fold is the way to play it to the downside.
The 10-year yield sat just above the 3.6% level is interesting too. That would need to fold as well, to give us a move lower.
EURUSD 1.05, US10Y 3.6% and DXY 105 are the levels to watch at the back end of this week. Couple any USD move lower with higher stocks, the shorts seem on but if stocks take a hit on the back of any global recession fears, that should prove supportive for USD. Multiple markets to keep an eye on this week, but definitely some options for an opportunity on these markets this week.
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