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Video / 10 March 2017 at 8:19 GMT

From the Floor: Oil bumping against support, remains vulnerable

#SaxoStrats
  • Sharply knocked crude oil bouncing off support levels 
  • Big key area for WTI is $48.70/barrel, while Brent is looking at $50/b
  • Crude oil likely to pause but remain pressured by long liquidation: Hansen
  • Many oil longs are under water and could trigger more selling: Hansen
  • Brent at $50/b could be 'line in the sand' for Opec: Hansen
  • Euro much higher across the board on shift in rate outlook: Hardy 
  • ECB's Draghi was forced to admit the economic outlook has improved: Hardy
  • Higher rates and commodity weakness hurting commodity FX and EM FX
  • USDJPY broke elusive 115.00 and could head towards Dec-Jan high at 118 next
  • Bond yields on the move, with US 10-year breaking 2.6% barrier
  • US February employment report (nonfarm payrolls) due at 1330 GMT
  • Average hourly earnings the important component to watch in US jobs report
SaxoStrats banner
 
By John Acher

Sharply sold-off crude oil is bumping against support levels and remains vulnerable to further long liquidation if those levels fail to hold.

“We saw an extension to the selloff in crude oil yesterday,” says Saxo Bank’s head of commodities strategy Ole Hansen.

Meanwhile, the euro strengthened across the board on Thursday on a shift in the rate outlook as European Central Bank president Mario Draghi was forced to admit that the economic prospects have improved, even while keeping policy neutral.

Draghi’s task after Thursday’s ECB governing council meeting had been to neutralise the rate outlook and dampen the euro, but none of that really materialised, and the ECB’s statement largely recycled the bank’s previous statement.

“There were no changes to anything, no major revisions to forecasts either,” says Saxo Bank fixed-income trader Michael Boye, noting that the 2017-18 forecasts were bumped up slightly, but the 2019 outlook was unchanged. “So it is clear that the ECB is in no rush to tighten policy right now.”

Vulnerable oil

After Wednesday's rout, WTI crude oil prices bounced twice off support at the $48.70/barrel level on Thursday, and that key level remains in focus on Friday, says Saxo's Hansen.

WTI bounce off critical support at $48.70/b; resistance at $51 and $51.7
WTI crude oil priceSource: Bloomberg and Saxo Bank

Three major lines converge in the area around $48.70/barrel: the trendline coming from the lows last year, the 50% retracement of the rally since November and also the 200-day moving average.

“So it’s a really big, big level on a weekly basis. If it goes below that tonight, we could see further weakness into next week,” Hansen says.

The market was seen pausing a bit ahead of that big number, Hansen says, “but when it slides, it slides fairly quickly.” (See also Hansen's fresh comment on oil here.)

“There are still a lot of longs out there that remain under water. […] For many, if we see it go below the 200-day moving average, that could trigger some additional long liquidation,” he says. 

The open interest in the oil market has risen in the past few days, which indicates that aggressive new selling is coming into the market and helping to level the playing field somewhat, with the wager between longs and shorts starting to come down, but the long position remains considerably extended.

Another key level to look out for is $50/b for Brent crude. “I think that is the line in the sand for Opec and obviously verbal intervention and potential extension of production cuts being announced if we get down to that level,” Hansen says.

Gold and silver remain under pressure from rising bond yields and the strong dollar, he says. 

Euro jumps as Draghi against the wall

The euro rose vigorously after the ECB’s governing council meeting on Thursday brought little new.

“The euro much higher across the board on the shift in the rate outlook, despite all the attempts at keeping the potential for downside policy-making, that rates could be lower, and so forth,” says Saxo Bank's head of FX strategy John J Hardy. (See also Hardy's new FX Update here and see Hardy's video comment on Draghi's failure to talk down the euro here.)

“This was seen as the meeting at which the ECB effectively neutralised the outlook, and Draghi was more or less forced in the Q&A to admit that the outlook has improved,” Hardy says. “So this saw quite a significant adjustment in European rates, and that has been very supportive of the euro across the board.” 

The euro’s strength is seen especially, for instance, in EURJPY which is pushing towards the upper boundary of the Ichimoku cloud and could push further if yields extend further, Hardy adds. 

EURJPY at interesting levels
EURJPY
Source: Saxo Bank

USDJPY broke the elusive 115.00 level on Friday and could head towards December-January high at 118 next, says Saxo Bank's Hong Wei Lee in Singapore.

Higher yields in Europe and the US combined with sudden commodity weakness have put pressure on emerging-market FX and commodity FX, Hardy says.


The lowdown on the nonfarm

Expectations for the US February employment report (due at 1330 GMT) are quite high after the blowout ADP jobs report earlier this week. Today's US jobs report is especially important because it is the last piece of key macroeconomic data before the Federal Reserve's March 14-15 policy meeting.

The noise about higher rates has only added one rate hike to the forward curve all the way out to December 2018.

“This is nothing,” Hardy says. “And because the rates outlook has picked up elsewhere, this has muted a lot of the potential for further dollar strength. 

“This needs to accelerate for us to see any notable further dollar strength, and that will be the key,” Hardy says.

The key component to watch in the Labor Department’s February employment report is the average hourly earnings. (See here for a preview on the Friday nonfarm payrolls.)

January brought a disappointing drop to 2.5% year-on-year average hourly earnings growth after December growth hit a high for the cycle. The consensus market expectation is for hourly earnings growth of 2.8% for February, Hardy says.

“It really needs to hit that 2.8%, otherwise it is going to be seen as dollar-bearish almost no matter what payrolls are, and I think 3% would be required to get a really strong dollar response off this,” Hardy says.

Yields on the move

Rate hike expectations have knocked bonds and lifted yields.

“Global yields are on the move,” says Saxo's Boye. “The 10-year Treasury has finally broken out of the range that we have been talking about throughout the year, to trade at 2.60%.”

The nonfarm payrolls could change that, but a clear break through 2.60% could put the next target for the 10-year US yield at 3%, Boye says. 

Yields in Europe are moving higher as well, despite the ECB’s dovishness.

The 10-year Bund yield is at 44 basis points now, but could challenge the year high at 50 bps next, Boye says.

10-year Bund yield pushing 0.44%
10-year Bund yieldSource: Bloomberg


“We still think the ECB has to move at some point, of course, and probably earlier than many people think. But, without any firm indication yet that they are going to move any time soon, there is probably a limit as to far how European yields could go from here, at least in the short term,” Boye says.

Some softness is being seen in emerging-market USD-denominated bonds due to the rise in US yields, “but in the bigger picture, it’s not earth-shattering yet.”

“What we have seen for the past couple of years really is that every one of these setbacks [in EM bonds} has turned out to be an opportunity to get in on what we think is still a very strong trade fundamentally,” Boye says. 

“Keep in mind that you’re not buying the current Fed rates or the current yield curve, you’re buying the expectations, and clearly there are very aggressive expectations built into the prices at this time," he says.

Lines in the sand
 Somewhere out there is the line in the sand for Opec, and it could 
be a $50 barrel of Brent. Image: Shutterstock

Editor’s note: From the Floor takes advantage of TradingFloor.com's unique real-time access to Saxo Bank’s various trading desks around the globe to put our community in touch with the developments that matter to their portfolios.

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