Oil driving USD flows

On 30 January, I suggested waiting to see if we saw a rejection of the December downtrend in EUR/USD materialise and from there look to short EUR/USD.

Source: Bloomberg

Well, we have seen the pair sail through the downtrend and the oscillators suggest there could be more short-term momentum behind the move. A basic ‘fair value’ model, using swaps spreads and other variables suggests the pair could move higher as well and as such it’s worth looking at upside targets to work potential offers into.

I looked at the 38.2% retracement of the December to January sell-off at $1.1659 as a possible target, which also coincides with highs seen in 20 and 21 January. As always, it’s important to see if we get a rejection first of the key resistance and establish  that the pair is ready to continue in its longer-term downtrend.

The fact that the Greek government has pushed away from seeking a debt write-down and is seemingly keen to negotiate and ultimately compromise is clearly causing traders to cover EUR shorts. I also think oil is absolutely key for EUR/USD and, of course, pairs like USD/CAD, which has seen a strong down move in the last two days.

Oil is the heartbeat of the markets right now and looks as though it’s actually driving USD flows. Keep an eye on US light crude, which is seeing a strong move higher and is now eyeing the downtrend drawn from the August highs.

On a fundamental level, oil rigs have fallen 24% since October, which is also in fitting with the dramatic reduction in capital expenditure and this is having some bearing on price. There has been talk that the refinery strike in the US is having a positive impact. However, I think this is incorrect and believe that, if anything, it should be negative as it increases the prospect of even higher supplies.

Click to enlarge

IGA, may distribute information/research produced by its respective foreign affiliates within the IG Group of companies pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the research is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, IGA accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact IGA at 6390 5118 for matters arising from, or in connection with the information distributed.

This information/research prepared by IGA or IGA Group is intended for general circulation. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. You should take into account your specific investment objectives, financial situation or particular needs before making a commitment to trade, including seeking advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. In addition to the disclaimer above, the information does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. Any views and opinions expressed may be changed without an update.

See important Research Disclaimer.