Last week we had a dip in the prices of oil futures as the concerns around a recession killing off demand rose on the back of the aggressive rate hikes from central banks like the Fed and SNB. The Commitment of Traders report shows that the commercials bought into that dip and that the producers remain net long since November 2021. When we see the Commercials adding to their position by 10,000 contracts it is a sign that they believe there is still more upside in the markets. They are usually net short as a hedge against the physical that they own and hold as a way of locking in a price.
Today’s price action in Brent is at least $4 higher from yesterday’s low but what I am keen to see pan out today is whether the price action can break through and close above the low from the 16th of June at $113.72 per barrel. Looking left at the daily highs and lows, there are no other untested levels, so no resting orders left behind on the dip down. If we beak above todays current high and close near or above the daily 9-period EMA, I will take the lead from the COT report and be looking for a retest of the recent swing highs. There is also a chance that with the buying interest from the commercials in the latest dip feeding through it could lock in the $115 per barrel and price action could be sideways until we get the next major news from the likes of OPEC+. The ActivTrader sentiment indicator shows that the retail traders on the platform are positioned long with 57% of them expecting to see a test of $120 or above.
During the overnight session we learned more about the Reserve Bank of Australia’s thoughts on the Australian economy. In the RBA’s latest monetary policy meeting minutes, the committee acknowledged the recent increase in volatility in global commodity prices and agreed to take further steps to normalise monetary conditions in Australia over the months ahead. RBA Governor Lowe said that Australians should prepare for further interest rate hikes as the current level of rates is very low for an economy with a tight jobs market and high inflation. The RBA now expect the Australian CPI to top out around 7% in Q4 2022. But in 2023 inflation expectation dramatically drop back down to the 2%-3% range?
“The size and timing of future interest rate increases will continue to be guided by the incoming data and the Board’s assessment of the outlook for inflation and the labour market, including the risks to the outlook,” the bank stated. But while the cash rate is below 1% the monetary policy is still stimulatory. Further increases are required and at a rate of 25bps hikes at the next meetings the cash rate would be at or above 2.1% by year-end.
The Australian dollar is relatively stronger at the London open but there is still quite a way to go before we see a change in market structure. When Governor Lowe said that the markets current pricing of the rate hike trajectory is not particularly likely the AUDUSD dropped before the London open saw the Aussie bid again.
The heatmap shows that the commodity pairs are seeing positive flows whereas the yen and Swiss franc are looking weaker this morning. The US dollar is also weaker and when the US comes back to the trading desk after their 3-day weekend the US Existing Home Sales data will likely come in weaker than the previous reading and possibly add to the bearish US dollar. Unfortunately for any USD trader today, there are a few Fed speeches from Barkin and Mester which could add some volatility or kill the dollars momentum. Always best to wait until they finish speaking before placing a trade.
The USDCAD is dropping hard from the recent high as energy prices tick higher and the market prepares for the Canadian retail sales data that is due today at 13:30 (BST). If the USDCAD were to push through the 1.2860 level, I would expect a quick retracement back to the daily 200-period EMA around 1.2750.