John Hardy, Head of FX Strategy at Saxo Bank, takes a look at the week ahead in FX trading.
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Highlights:
- Australian dollar primed for gains as commodities extend their rally.
- Risk-on trend could see the USDJPY return to life in the coming days.
- EURGBP may come to signal the limits of Brexit-related selling.
- NOK pulling higher versus EUR, SEK as oil prices surge.
John Hardy, Saxo Bank
We saw quite a theme shift over the last week, as the USD was mixed ahead of the key US jobs report and the focus shifted to booming metals prices and a sharp rally in the commodity currencies, particularly the AUD and NZD later in the week .
We have a couple of trading themes this week focusing on the potential extension of strong commodities prices as we look for further upside in AUD and NOK. Elsewhere, we look for the USD and GBP long trades after the strong US jobs report and on the possibility that Brexit fears have been overplayed in the short term.
AUD upside
The industrial and precious metals rally, together with a strong recovery in risk appetite over the last few weeks, has seen a gathering interest in long AUD trades and the last week saw the AUD rallying despite fairly explicit dovish guidance from the Reserve Bank of Australia (which we suspected might weigh on the currency) and a stronger-than-expected Q4 GDP release.
Technically, several AUD pairs look ready to extend their recent strength on the sudden popularity of the “hard assets” theme, even if we are skeptical of the longer-term prospects for the currency. AUDNZD longs are an alternative way to trade the metals rally, as that pair looks primed for further gains on a break of 1.1000.
Trading stance: The AUD rally may be somewhat overextended in the near term, but AUD buyers may look to pick up AUDUSD on dips with stops below 0.7250 looking for a try toward 0.7500-plus while AUDNZD longs will look for an extension of the rally above 1.10 for a try toward 1.1200-plus in the coming week or two.
USDJPY upside, conditional on breakout
The strong US jobs report may keep the US dollar relatively well-supported versus the traditional safe-haven currencies, especially the Japanese yen, but only if the focus remains on rising commodity prices and stronger risk appetite, which may finally push what has been a very resilient Japanese yen back lower.
The market is still very complacent on the risks of further Federal Reserve rate hikes at upcoming meetings, even if the March meeting is too early to expect the next one.
Trading stance: Trading has been very choppy in USDJPY, but bulls may look for new local highs above 114.55 to hold early next week for a sign that the key 115-116.00 pivot zone will be taken out and send the pair higher still in the weeks ahead.
Options positions (calls or call spreads) are an alternative way to express an upside view with expiries well into April in case the new financial year in Japan (starting April 1) sees a sudden drying-up of the hedging pressures that may have been supporting the yen recently. It will be important for bulls to get confirmation early next week .
EURGBP downside
The EURGBP rally on ongoing Brexit fears ran out of steam over the last week and the exhaustion of this move could see considerable further consolidation to the downside as the market may be over-positioned for a sterling catastrophe.
EURGBP is the preferred way to express an over-extended sterling selloff, especially in the event that the European Central Bank is able to impress at next week’s meeting as it seeks to avoid a repeat of the December catastrophe.
Trading stance: Sterling will remain risky until the Brexit referendum in June, so traders will need to be wary of the possibility of ad hoc developments like new polls at any time, but the recent reversal from new highs suggests follow-up potential to as low as 0.7500 if the pair breaks down through the 0.7700 area support.
Two-week options structures (simple puts or put spreads) are worth considering to avoid the volatility of trading spot.
NOKSEK upside breakout
The theme of strengthening commodity prices is finally seeing NOK pulling to the strong side as the week draws to a close, with EURNOK having a look below key support late in the week. The only thing needed for a bigger breakout for NOK versus the euro and a move above parity in NOKSEK is a solid extension of the oil price rally to mimic what has been unfolding in the industrial and precious metals markets and broaden the strong commodities theme.
The NOKSEK pivot zone around 0.9965/1.0000 also looks like a critical potential breakout level for that pair that could open up for considerable further upside.
Trading stance: NOKSEK bulls will need confirmation from the oil market and a close above the pivot zone around parity for a sign that the pair is primed for further gains toward 1.0250 to start.
More of John Hardy’s research can be seen at TradingFloor.com.