Commodity Currencies and the Japanese Yen Are Pushing Back the Buck; European Currencies are Lagging Behind
Eric Furstenberg • 3 min read
European major currencies performed poorly against the US dollar today while the Australian dollar, Canadian dollar, and the Japanese yen managed to win back some ground against the Greenback. The stronger oil price definitely played a role in today’s commodity currency strength. Whether OPEC and the involved non-OPEC members will be able to co-operate is uncertain, and there are definitely some major differences between these nations which are preventing an agreement.
The AUD/USD is currently trading in a zone of resistance which is likely to stop the pair’s recent advance in its tracks. There is a strong confluence of technical factors which suggest that the pair might have difficulty trading higher over the next few days. Let’s look at a daily chart:
AUD/USD Daily Chart
The 20-day exponential moving average is still a valid resistor to the exchange rate. The pair headed for this exponential moving average today but turned around just before reaching it. The other factors that could hold down the pair, are the 200-day moving average, and the former support zone which could act as new resistance.
There is normally a certain correlation between the Australian dollar and the Canadian dollar, and the oil price. These two commodity currencies frequently move in the same direction against the US dollar. When the oil price affects the Canadian dollar, the Australian dollar many times reacts in the same way as the Canadian dollar. Oil’s effect on the Australian dollar is just less dramatic than on the Canadian dollar because Canada is such a large producer of oil.
If we look at the AUD/USD on a larger timeframe, the picture appears to be bearish as well. Look this weekly chart:
AUD/USD Weekly Chart
If you look at the last two bearish (red) candles on this chart, you’ll notice how impulsive and aggressive they are. They strongly suggest that a further decline in the rate may be expected.
The 20-week exponential moving average could also offer some resistance to the pair, and at the moment the path of least resistance seems to be heading to the downside.
A few days ago, I wrote of the bearish / negative divergence on this pair which could be a concern to bullish market participants. Look at the following chart:
USD/CAD Daily Chart
Negative or bearish divergence means that an oscillator is moving lower while the price of the instrument is creating new highs. When this occurs, it points to the possibility that the recent bullish move could be getting exhausted, and that a reversal or a correction of some sort may be on the way.
Monday’s close below the 20-day exponential moving average is a tangible token of some weakness in the pair. If the pair fails to get back above this moving average soon, there could be scope for a deeper correction in the pair over the next week or two.
If we look at the fundamentals which concern the pair, the OPEC theme certainly carries the most weight over the short-term. The outcome of Wednesday’s meeting could send the pair racing in any direction and could override much technical analysis. It is, therefore, important to be very cautious if you’re planning to trade the Canadian dollar in the next couple of days. With major events like this OPEC meeting, the core fundamental driver is often not priced into the market smoothly and effectively. Market players often overreact in one way or the other, and choppy, irrational price action is the result. Of course, there are always decent profits to be made by experienced and disciplined traders. Volatility can be very rewarding if you know how to use it.
It is difficult to say what the effect of an oil production cut would be over the medium to long-term. There would probably be much difficulty in controlling such an effort, and also to keep all the involved parties happy. On the other side of the scale, the oil producing countries who are not involved in this deal would have a golden opportunity to increase their market share by cranking up their production.
This pair is giving back some of its recent gains. We could perhaps get some good opportunities to once again buy into this strong bull-run.
USD/JPY Daily Chart
Before initiating new long positions on this pair, it is important to see some decent buying activity first. We don’t know how far this retracement will go. The price of this pair is still considerably oversold, and it could easily come down some more in the next week or two.
Tuesday’s docket is relatively light. The first event to watch out for is a speech by the Bank of Canada’s governor Mr. Stephen Poloz at 01:00 GMT. Later in the day, the US third quarter preliminary GDP number will be released at 13:30 GMT, and the US CB consumer confidence number at 15:00 GMT. To end off the day, the FOMC member Mr. Powell will deliver a speech at 17:40 GMT.
Have a tremendous trading day!