Choosing the Best Forex and CFD Broker

Instead, they have to trade through a financial services organization, known as a forex or CFD broker. These businesses act as ‘intermediaries’ or ‘middlemen”, perfectly explaining their function and importance in the trading process.

New traders have literally hundreds of brokers to choose from when opening a forex or CFD account. This diversity makes it harder to find a perfect fit for an individual’s skill level, educational needs, and initial trading stake. To assist in your investigation, we’ve organized a checklist to print out and keep at your desk, identifying key factors to review when choosing a forex or CFD broker.

KEY POINTS

  • A robust trading platform is needed to trade our modern electronic markets.
  • Good brokers offer resources and value-added services that support the client’s objectives.
  • Choose a broker who is regulated and disciplined by a local regulatory body.
  • Match the broker choice with your skill, experience, and capitalization level.
  • Look for hidden costs before opening a brokerage account.

Investor Protection & Regulations

Look at regulation and domicile when selecting a forex or CFD broker, examining the firm’s home page for compliance with competent regulatory agencies (see ‘How Do Brokers Make Money’). A regulated broker has met operating standards imposed by the regulatory body in the country or zone of domicile (headquarters).

Standard regulatory requirements include adequate capitalization, segregation of accounts in order to protect client funds, and annual filings that can be easily accessed by applicants. Additionally, regulation provides reimbursement up to a statutory amount if the firm becomes insolvent and ensures the broker upholds rigorous standards as a financial service provider.

Major countries/zones with financial regulatory agencies, backed up with strict enforcement:

Tradable Products

Examine the list of tradable currency pairs before choosing a forex or CFD broker.  At a minimum, the brokerage should offer all major currency pairs (EUR/USD, USD/JPY, GBP/USD, USD/CHF) and cross-currency pairs, as well as so-called commodity currency pairs (USD/CAD, AUD/USD, NZD/USD). Traders who take exposure solely in these instruments won’t need a long list of minor pairs from faraway places that aren’t of interest.

However, a robust list reflects a broker’s willingness to go the extra mile in providing customers with the opportunity to trade lesser-known pairs when a shock event or other market mover hits that part of the world. For example, the USD/MXN pair attracted huge buying and selling interest when the United States renegotiated NAFTA with Mexico and Canada. Just keep in mind that minor and exotic pairs usually incur much wider spreads and higher commissions.

Look at the margin and leverage offered for each currency group. European regulations have capped margin on forex and forex CFDs since 2018, with a 30:1 limit on major currency pairs and 20: 1 limit on non-major currency pairs. Make sure to read the fine print because EU-regulated brokers are also required to prominently disclose the percentage of clients who lose money and provide negative balance protection to ensure the account never drops below 0.

Account Opening

Opening a ‘live’ account at most brokerages will require personal information about your current income, savings, marital status, trading experience, and risk tolerance. You’ll also have to provide minimum opening account capital, which varies from broker to broker.

On the other hand, a free demo account just requires a name and email address, giving potential customers an opportunity to ‘kick the tires’ before committing real money.  In many venues, you can go through an instant ID verification process and access the live platform in just a few minutes. In the United States, applicants also have to provide a social security number for tax purposes.

Forex and CFD brokers may also offer tiered account options that cater to different risk, capitalization, and experience levels:

  • Micro Account: One lot is equivalent to 1,000 units of the traded instrument.
  • Mini Account: One lot is equivalent to 10,000 units of the traded instrument.
  • Standard Account:  One lot is equivalent to 100,000 units of the traded instrument.

A low minimum initial investment is required to open a Micro or Mini account. The Standard account requires a higher initial investment, although the minimum varies from broker to broker. Given these tiers, it’s best to select a trading account that is commensurate with your investment capital.

Deposits & Withdrawal Options

The new account can be funded through personal check, debit card, ACH, wire transfer, or an online service like Paypal or Skrill. Some brokers will allow credit card funding but that’s no longer typical. Many brokers also let clients choose their base currency, which will be the country of origin in most cases. Funding completed through personal or bank checks may delay account access until those funds clear.

Withdrawal options vary from broker to broker and can be hard to find at web sites. This is often intentional, with the broker seeking to hide fees and standard delays in access to withdrawn funds. Processing times can vary from 24 hours to several weeks, so read the fine print closely to avoid frustration. Withdrawals are also subject to minimum amounts that vary from broker to broker and, in most cases, must go through the originating funding source, due to money laundering considerations.

Web/Desktop Platforms

The trading platform is the client’s gateway to the forex market so the applicant must ensure the interface performs all of the functions needed to trade profitably, and is reliable, with few complaints of outages on public forums. Many brokers provide a choice of platforms but the majority of newcomers should stick with the default, at least at the beginning. Also look for desktop and web versions that offer equal functionality.

Most platforms are provided through third party solution providers like MetaQuotes Software, the forex industry’s standard-bearer. Some brokers also build ‘in-house’ proprietary platforms, in an attempt to differentiate themselves from industry rivals. A proprietary platform often provides a host of features not found on a standard platform, added in reaction to input from the broker’s client base.

Look for these standard features on all trading platforms:

  • Comprehensive charting package
  • Customizable watch lists
  • Wide range of technical indicators
  • One-click trading
  • Sophisticated order entry
  • Risk management tools
  • Portfolio management

These features play a crucial role in ensuring the new trader enjoys a seamless and productive trading experience. Even so, it’s a matter of personal choice because most platforms offer the same bells and whistles. The broker’s free demo account provides a perfect way for applicants to find the best fit for their experience and capitalization level. Walk away and don’t look back if the broker doesn’t provide a demo account.

When looking for a forex or CFD broker, you’ll quickly discover the huge popularity of MetaQuotes Software’s MetaTrader, which is now offered at more than 80% of all brokers in the United States, Europe, and Australia. This mature platform is a perfect choice for new forex traders due to easy customization, robust charting, and an API that supports hundreds of add-ons. The platform is also available by desktop, on the web, and through mobile devices, allowing easy synchronization while on the go.

Mobile Trading Platforms

All forex and CFD brokers should provide slimmed-down mobile trading platforms so you don’t have to stare at a computer screen all day. These should automatically synchronize with desktop and web versions but don’t expect all the features of bigger platforms.  Major platforms, including Metatrader, now offer mobile and tablet versions for Android and iOS. Note that some brokers will ‘self-brand’ popular mobile platforms so you might need to read the fine print to find the app’s origin.

Trading Features

Brokers try to distinguish themselves from industry rivals by offering additional, value-added services that include free market analysis, real-time news feeds, live streams, and trading signals. Most of these services are provided free of charge but brokers may require minimum account size for access.

Applicants should make a checklist of advanced features when shopping for a broker. In addition to standard add-ons, look for tools that include market scanners, VPNs, and notification alerts. Also check for discounts or free trading for high volume customers. Many traders look for advanced charting or alternate platforms that go beyond the capabilities of standard offerings. Some brokers even offer third-party integration so real-time data can be used in an ‘off-the-shelf’ platform, like Elliott Wave software.

Day traders and scalpers also benefit from specialized value-added services. Given time frames for these strategies, look for a diverse selection of instruments to scout for short-term trading opportunities. These can include a signal service, tools like an economic calendar, market news filtering, and real-time earnings releases.

Commissions & Spreads

Unlike the majority of financial markets, forex and CFD brokers usually profit through spreads rather than commissions, explaining why many of these folks advertise their services as ‘commission-free’. Brokers make money by taking the spread for each buy and sell transaction passing through their hands. The spread marks the difference between the buying price and the selling price. For example, if the bid/ask for the EUR/USD currency pair is priced at 1.0875/1.0878, the spread is 1.0878 – 1.0875 = 3 pips.

As a forex trader, you will come across three types of cost structures. The type you receive will depend on the broker’s business model:

  • Fixed spread:  the spread doesn’t change as price fluctuates so you know the cost before you trade.
  • Floating spread: the spread is variable, stretching and contracting in reaction to market volatility.
  • Commission: calculated as a percentage of the spread. You should know this cost before you trade.

Traders looking for predictability with transaction costs prefer fixed spreads. Conversely, traders looking to save money through the entry and exit timing prefer floating spreads. Ultimately, specific trading needs and transaction history will determine the right choice.

Bonus & Promotions

Brokers may offer account bonuses that include a month or more of no-commission or no-cost trades, loyalty rebates, and even iPhones. Bonuses and promotions for frequent traders have become quite common as well, with customers receiving volume discounts or a basket of free trades after passing a monthly transaction threshold. Some brokers have also introduced generous rewards programs that pay customers who achieve financial commitment ‘levels’.

Customer Support

Newcomers forget to ‘factor-in’ customer support when choosing a broker because they don’t understand this group’s role in the ultimate trading experience. It’s not a question of ‘if’ you’ll need their assistance but ‘when’ because a time comes, sooner or later, when prompt customer service is needed to avoid financial losses. When it happens, you need timely access to knowledgeable individuals who don’t hate their jobs. As a result, you should confirm the broker provides reliable customer support, verified by reviews and in public forums.

Look for multiple ways to contact customer support because some brokers still rely on antiquated ticketing systems and don’t offer real-time chat or a toll-free number. All reputable brokers provide clients with several means of contact, including e-mail, live chat, support ticket, and toll-free telephone. Bottom line: don’t put yourself in the uncomfortable position of worrying what your broker is going to do with your problem … or your money.

Research

The best forex and CFD brokers offer plenty of research resources at no extra charge, letting new traders do ‘deep dives’ on the currencies they want to buy or sell, with an eye on macro conditions or developing issues that may affect price action. These resources should include daily reports from forex experts, long-term technical analysis, dates to watch, and live webinars featuring presentations on major forex pairs and emerging opportunities.

Trader Education

The depth of educational resources at a forex or CFD broker reveals the level of their commitment or lack of commitment to new traders. Look for an on-site trading ‘academy’ or ‘university’, with dozens of useful up-to-date articles and video programming to accelerate your learning and build lifetime skills. On the flip side, walk away if your search through a broker’s website comes up empty, or the few available resources are out of date or neglected.

The Trading Experience: from Novice to Professional

New forex traders need these broker resources to start out in the trading game:

  • Comprehensive education:  a suite of educational materials to assist new traders in skill mastery. These can include webinars, live streams, videos, courses, guides, and articles.
  • Demo accounts:  Reputable brokers offer free demo accounts. They are especially useful when starting out or test-driving a broker’s platform before opening a live account.
  • User-friendly platform: As a new trader, you don’t need complicated software with lots of bells and whistles. For now, find a popular, easy-to-navigate platform with lots of customization features.

As you progress, your trading needs will differ significantly from those of a new trader.

Experienced forex traders need a broker who provides these value-added services:

  • Comprehensive trading tools:  a variety of tools including commission calculator, economic calendar, and advanced charting with tons of indicators and one-click trading.
  • High leverage: experienced traders seek leverage to multiply their capital. Just keep in mind that leverage increases risk and reward equally.
  • Low spreads: spreads can undermine long-term profitability. Look for higher-tier account types that lock in lower spreads and offer volume discounts.

Questions to Ask the Broker

  • Is (broker) regulated?
  • Where is (broker)based?
  • How does (broker) make money?
  • How do I deposit into the (broker) account?
  • What is the minimum deposit for (broker)?
  • How do I withdraw money from (broker)?
  • What is the maximum leverage at (broker)?
  • How do I open an account with (broker)?
  • Does (broker) use MetaTrader or a proprietary platform?

Summary

Finding the best forex or CFD broker is hard work but the effort pays off, greatly improving your long-term prospects as a trader. This beginner’s guide provides a good first step in that selection process. However, everyone is different and your best choice may require a delicate balance between transaction costs, perks, platforms, and all the other resources needed to trade the forex market.

To simplify your search, FX Empire conducts regular in-depth reviews of all major forex and CFD brokers, vetting each broker on our recommended list to ensure they meet high industry standards. We strongly believe these financial institutions will provide the services needed to survive and prosper in our modern electronic markets.

Crude Length Cut to Eight-Month Low; Dollar Buying Resumes

This summary highlights futures positions and changes made by hedge funds across commodities, forex and financials up until last Tuesday, March 15. A week where risk appetite stage a small comeback with stock markets rising despite a continued flow of troubling news from Ukraine, and US Treasuries staging a sharp reversal with yields on the 10-year notes surging 30 basis point as the market priced in an imminent but long awaited US rate hike. In commodities, the Bloomberg Spot Index gave back the bulk of the 11% gain from the previous week with selling seen across most sectors.

Saxo Bank publishes weekly Commitment of Traders reports (COT) covering leveraged fund positions in commodities, bonds and stock index futures. For IMM currency futures and the VIX, we use the broader measure called non-commercial.

Commodities

The Bloomberg Commodity Spot index slumped by 8.3%, thereby giving back most of the gains seen during the first week of the Russian invasion. Russia-focused commodities like crude oil, palladium and wheat took the biggest hit in percentage terms. Overall the total net long held by managed money accounts across 24 major commodity futures was reduced by 5% to an eight-week low at 2.06 million lots, the biggest reductions seen in crude oil, natural gas, gold, silver, copper and coffee.

During 2021 the 30-day volatility on the BCOM Spot index traded within a 9% to 19.5% but since the war started on February 24, it has surged higher, reaching 31% last week, thereby forcing many hedge funds targeting a certain level of volatility to cut their exposure.

The jump has been led by spikes in energy, industrial metals and grains, all of which have seen volatility more than double. As long the volatility remains stable, trend and momentum following hedge funds will normally buy into strength and sell into weakness. The mentioned volatility surge helps to explain the current behavior where positions have been cut to pre-war levels.

Energy

Another week of extreme volatility in crude oil, this time a 22% move to the downside, drove a second weekly reduction in the combine WTI and Brent net long by 23k lots to a four-month low at 411k lots and just above the 400k lots reached in early December when crude oil briefly traded below $70/b in response to the omicron virus variant. Brent, the global benchmark saw its net long drop to a 16-month low at 153k lots.

As mentioned, when volatility spikes and traders are faced with rising margin calls on their open futures positions, the first reaction is to make an across the board reduction. This is currently very noticeable in the five oil and fuel contracts which have seen open interest fall from 7.1 million lots on March 12 to a current seven-year low at 4.7 million lots.

Monday am market comment

Crude oil (OILUKMAY22 & OILUSAPR22) rose to a one-week high in Asia as the war in Ukraine keeps global supplies very tight with traders, mostly through self-sanctioning, avoiding Russian crude, currently being offered close to 30-dollar below Brent with a limited number of buyers queuing up to secure cheap cargoes.

In addition, Middle East tensions also rose after Houthi rebels attacked sites across Saudia Arabia over the weekend. With supply tightening, the market will be looking for signs of demand destruction, mostly through the cost of diesel and gasoline as well as the impact of temporary covid related lockdowns in China.

Metals

Gold’s recent surge towards the 2020 record high and subsequent abrupt rejection helped drive a 5.5% correction and with that a relative small 16% reduction in the net long to 147.5k lots, the first weekly reduction in six weeks. Small in the sense that gold almost gave back all of its post invasion gains.

With most of the reduction being driven by long liquidation and a very limited amount of fresh shorts, this highlights a change that was primarily driven by leveraged traders forced to reduce bullish bets. Other big changes were a 41% reduction in the platinum long and a 31% reduction in the copper long to 29k lots and just below the average sized positions leveraged funds have held during the past year.

Monday am market comment

Gold (XAUUSD) & silver (XAGUSD) trade steady as investors continue to weigh monetary policy tightening in the US against the inflationary impact of the Russia-Ukraine war. Long liquidation from leveraged funds who had loaded up on gold futures in recent weeks may have run its course, while longer-term focused investors have been continuing buyers of gold ETFs since the war began.

During this time, total holdings have jumped by 134 tons to a one-year high at 3,246 tons, with more than half of the increase seen during golds recent 175-dollar correction. Gold as being bought as a hedge against elevated inflation and a central bank policy mistake with slowing growth potentially preventing the FOMC from carrying out its planned number of rate hikes before being forced to revert to a period of renewed stimulus. Key support at $1890/oz with a break above $1957 needed to signal fresh upside potential

Agriculture

Coffee long liquidation accelerated as it extended to a fourth week with the net long falling 26% to an eight month low at 29k lots. In sugar, a 4.8k lots small reductions followed the massive 79.5k lots jump the previous week.

Grains were the only sector seeing net buying and after four weeks of continued buying the total long across the six contracts tracked in this has reached a ten-year high at 803k lots. The bulk being held in the soybean complex (363k) and corn (373k) with the recently surge in wheat to record highs only a attracting a 67k lots position in the Kansas and Chicago wheat contracts.

Forex

Continued market turmoil and expectations for an imminent rate hike from the US Federal Reserve helped drive the first increase in bullish dollar bets since early January. The aggregate dollar long against ten IMM currency futures and the Dollar Index jumped by 53% to $10.7 billion.

On an individual level we find several major changes with biggest being a 68% reduction in the euro long to just 18.8k lots, the 40k lots reduction was the biggest one-week of net selling since June 2018. Specs also sold JPY (6.5k), GBP 16.5k) and not least MXN where 63.6k lots of selling, the biggest one-week reduction in two years flipped the position back to a net short. Countering these changes were buying of CAD (10k) as well as the antipodean currencies of NZD (16k) and not least the AUD where the 33.3k lots of buying, the biggest in seven-years helped reduce the net short by 43% to 44.9k lots.

What is the Commitments of Traders report?

The COT reports are issued by the U.S. Commodity Futures Trading Commission (CFTC) and the ICE Exchange Europe for Brent crude oil and gas oil. They are released every Friday after the U.S. close with data from the week ending the previous Tuesday. They break down the open interest in futures markets into different groups of users depending on the asset class.

Commodities: Producer/Merchant/Processor/User, Swap dealers, Managed Money and other

Financials: Dealer/Intermediary; Asset Manager/Institutional; Leveraged Funds and other

Forex: A broad breakdown between commercial and non-commercial (speculators)

The reasons why we focus primarily on the behavior of the highlighted groups are:

  • They are likely to have tight stops and no underlying exposure that is being hedged
  • This makes them most reactive to changes in fundamental or technical price developments
  • It provides views about major trends but also helps to decipher when a reversal is looming

Ole Hansen, Head of Commodity Strategy at Saxo Bank.

Start trading now

This article is provided by Saxo Capital Markets (Australia) Pty. Ltd, part of Saxo Bank Group through RSS feeds on FX Empire

Oil Longs in Major Retreat as Volatility Jumps

This summary highlights futures positions and changes made by hedge funds across commodities, forex and financials up until last Tuesday, March 8. A week where the war in Ukraine, and increased sanctions against Russia dictated most of the market swings. The prospect for lower growth and even higher inflation helped send the MSCI World stock index down by 4.5%, bond yields rose while the dollar hit multiple month highs against several major currencies.

Saxo Bank publishes weekly Commitment of Traders reports (COT) covering leveraged fund positions in commodities, bonds and stock index futures. For IMM currency futures and the VIX, we use the broader measure called non-commercial.

Commodities

The Bloomberg Commodity Spot index jumped a massive 11.2% during the reporting week, with gains being led by industrial metals, and not least energy where crude oil surged higher by 20% before suffering a major correction the day after the reporting week ended. Overall it was another week where surging volatility across most commodities saw money managers cut both long and short position, the net result being a small 2% reduction in the overall long across 24 major commodities to 2.17 million lots. Increasingly difficult market conditions helped trigger a 180k lots reduction across oil, fuel products and natural gas while net length was added to most other sectors led by grains and softs.

During 2021 the 30-day volatility on the BCOM Spot index traded within a 10.5% range between 9% and 19.5% but since the war started on February 24, it has surged higher, thereby forcing many hedge funds targeting a certain level of volatility to cut their exposure. Led by the energy and industrial metal sectors it jumped 3% to 22% during the reporting week before finishing at 28.5% on Friday.

As long the volatility remains stable, trend and momentum following hedge funds will normally buy into strength and sell into weakness. The mentioned volatility surge partly helps to explain the current dislocation in energy between reduced positioning and surging prices.

Energy

Despite rallying by around 20%, speculators cut their combined length in WTI and Brent crude oil by 100.3k lots to a three-month low at 435k lots, the largest one-week reduction since last July. Brent which jumped 22% during the week saw the biggest impact with the 38% to 158k lots being the biggest reduction made by money managers in a single week since ICE started publishing the data in 2011.

The slump took the net in Brent close to the December low at 154k lots low point when oil briefly traded below $70/b in response to the rapidly spreading omicron virus variant. The move was driven mostly by a pullback in outright longs of 63.5k lots, but also by the biggest addition in short bets (+33.6k lots) since 2016.

Long liquidation across all three fuel futures added to the story of speculators booking some profit after a one-week gains up to 42% had taken all three to record highs.

Metals

Gold surged to near the 2020 record high during the reporting and the fear of missing out of further gains saw funds raise their exposure in gold, silver and platinum through a combination of fresh buying and short positions being scaled back. As the table highlights, all three metals saw their net long jump to levels not seen in many months. Gold buyers added to 5% to 176k, a 20-month high, silver 15% to 49k, a two-year high and platinum by 72% to a one-year high at 26k.

Continued gold buying during the past five weeks had lifted the net long by 113k lots or 180% and after failing to hit a fresh record high above $2075 the temptation to book profit helped trigger the subsequent sharp correction which only paused on Friday when support was found at $1960, the 31.8% retracement of the February to March 290 dollar rally.

In HG Copper the return to a fresh record above $5/lb last Monday helped support a 36% increase in the net long to 42k lots, some 49k below the December 2020 peak and an additional 34k lots below the 2017 record at 125k lots. Highlighting a market where money managers remain unconvinced about copper’s short to medium term potentials, not least given continued uncertainty about the strenght of the Chinese economy.

Agriculture

Speculators finally managed to turn their CBOT wheat position around after 27k lots of net buying flipped the net to a long of just 20k lots. However, the hesitancy towards buying wheat at record levels and following a one-week surge of 30% was clear to see in the behavior, with the bulk of the net change being due to short covering and not fresh longs. KCB wheat meanwhile saw a small reduction of 2% after speculators cut short and long positions. Corn was also bought while the soybean complex was mixed.

Following weeks of sugar selling, buyers suddenly returned to lift the net long by 135% to 140k lots. During the week, the price jumped by 6% with surging fuel prices raising the prospect of more demand for plant-based fuels such as sugar towards ethanol production. Net selling of coffee extended to a third week with a weakening demand outlook, as shipments to Russia are cancelled, helping to offset continued worries about weather related declines in the Brazil output this season.

Forex

Russia’s unprovoked attack on a sovereign nation entered a second week, thereby supporting continued broad dollar strength. The Bloomberg Dollar Index reached a 20-month high reflecting haven demand and the market beginning to price in a relative faster pace of US rate hikes.

Speculators using IMM futures contracts to express their views on forex ended up, despite the mentioned strength, reducing bullish dollar bets for an eight consecutive week. Albeit at a slowing pace than recent weeks, the combined dollar long against ten IMM futures contracts was nevertheless reduced by 3% to $7.3 billion, the lowest since last August.

Looking beneath the bonnet we the find the relative small net change hiding increased selling of EUR, GBP and CAD being more than offset by short covering in CHF and JPY. The minor currencies saw demand for MXN and BRL while particularly challenging trading conditions saw continued reductions in both Ruble long and short positions.

What is the Commitments of Traders report?

The COT reports are issued by the U.S. Commodity Futures Trading Commission (CFTC) and the ICE Exchange Europe for Brent crude oil and gas oil. They are released every Friday after the U.S. close with data from the week ending the previous Tuesday. They break down the open interest in futures markets into different groups of users depending on the asset class.

Commodities: Producer/Merchant/Processor/User, Swap dealers, Managed Money and other

Financials: Dealer/Intermediary; Asset Manager/Institutional; Leveraged Funds and other

Forex: A broad breakdown between commercial and non-commercial (speculators)

The reasons why we focus primarily on the behavior of the highlighted groups are:

  • They are likely to have tight stops and no underlying exposure that is being hedged
  • This makes them most reactive to changes in fundamental or technical price developments
  • It provides views about major trends but also helps to decipher when a reversal is looming

Ole Hansen, Head of Commodity Strategy at Saxo Bank.

Start trading now

This article is provided by Saxo Capital Markets (Australia) Pty. Ltd, part of Saxo Bank Group through RSS feeds on FX Empire

Russia-centric Commodities in Focus Last Week

This summary highlights futures positions and changes made by hedge funds across commodities, forex and financials up until last Tuesday, February 22. Once again a reporting week that ended a few days before a major risk event took place, this time Russia’s attack on Ukraine last Thursday which triggered major moves across most asset classes. During the week in question risk appetite was already being challenged with the MSCI World Index as well as the S&P 500 Index losing more than 3% while US treasury yields reversed lower with the 10-year tenor falling 10 basis points to 1.94%

Saxo Bank publishes weekly Commitment of Traders reports (COT) covering leveraged fund positions in commodities, bonds and stock index futures. For IMM currency futures and the VIX, we use the broader measure called non-commercial.

The dollar traded unchanged, with speculators continuing to reduce their net longs, before rallying in the days that followed while commodities saw strong gains led by grains, energy and precious metals.

Commodities

The Bloomberg Commodity Spot index rose 3.3% in the week to last Tuesday, thereby reaching a fresh record high. Gains were led by commodities and sectors most at risk of being impacted by supply disruptions from Russia and Ukraine. These were crude oil, gas, palladium and grains while gold and silver received a safe haven bid amid lower bond yields and stock market turmoil.

Speculators reacted to these developments by adding length to gold and silver as well as grains, while net selling of crude oil surprisingly extended into a fifth week. Overall the total exposure across 24 major commodity futures rose 4% to 2.2 million lots representing an $8.4 billion increased in the nominal exposure to $171 billion.

Energy

Large money manager accounts cut, perhaps somewhat surprisingly, their combined lenght in crude oil for a fifth week by 5.6k lots to 509k lots. A $1.7/b widening of the WTI/Brent spread to $4.8/b during the week, now at at $6.9/b, helped drive a diversion between the two with the Brent crude oil long rising by 13.4k lots while the WTI long was cut by 19k lots. Fuel products and natural gas all saw their net longs being reduced.

Metals

The gold long jumped 28% to 161k lots as the price returned to $1900, and following three weeks of buying the net long was lifted by 98k lot to the highest since November. Such an aggressive position adjustments within a relative short period of time always tend to create a certain amount of volatility with corrections often ending up being deeper than otherwise warrented, something that was on clear display last Thursday – after this reporting week – when the price after reaching a one-year high suddenly dropped close to 100 dollars.

Silver also saw a sizable amount of buying lifting the net long by 48% to a four-week high at 26k lots. In platinum, the net long received a 157% boost while palladium, despite rallying by more than 5% saw no interest in adding length with the net remaining neutral. A quiet week in copper meanwhile driving a 9% reduction in the net long to 33.4k lots.

Agriculture

The grains sector saw broad buying interest with the net long in across the six futures contracts rising 65k lots to a ten-month high at 717k. Buying was concentrated in corn, and not least wheat where the 8.5% price jump only helped trigger a halving of the net short to 18k lots, hence the panic buying last Thursday when the price in Paris reached a record high while Chicago wheat reached levels not seen since 2008.

The soybean long meanwhile reached a 14-month high at 180k lots, still some 58k lots below the October 2020 high. All four soft commodity contracts saw witnessed long liquidation led by cocoa while the sugar long continued to deflate dropping 8% to 53.8k lots, lowest since since June 2020. Coffee and cotton both seeing a relative small 4% reduction.

 

Forex

Before surging higher last Thursday, following Russia’s attack on a sovereign nation, speculators had cut bets on a rising dollar to a six-month low. After six weeks of non-stop selling the dollar long against ten IMM currency futures and the Dollar index dropped to $8.5 billion last Tuesday with the main driver being a 25% increase in the euro long to 59.3k lots or $8.4 billion equivalent. Additional short covering in JPY and AUD also helped more than offset selling of CHF, GBP, CAD and NZD.

Among the minor currencies the Russian Ruble long rose 21% to 19.5k lots or $0.6 bn equivalent, a 14-week high, just days before starting a collapse which so far has seen drop by close to 30%. Length was also added to BRL which reached a five-year high at 24.4k lots and MXN which at 16.8k lots reached a 14-month high.

What is the Commitments of Traders report?

The COT reports are issued by the U.S. Commodity Futures Trading Commission (CFTC) and the ICE Exchange Europe for Brent crude oil and gas oil. They are released every Friday after the U.S. close with data from the week ending the previous Tuesday. They break down the open interest in futures markets into different groups of users depending on the asset class.

Commodities: Producer/Merchant/Processor/User, Swap dealers, Managed Money and other

Financials: Dealer/Intermediary; Asset Manager/Institutional; Leveraged Funds and other

Forex: A broad breakdown between commercial and non-commercial (speculators)

The reasons why we focus primarily on the behavior of the highlighted groups are:

  • They are likely to have tight stops and no underlying exposure that is being hedged
  • This makes them most reactive to changes in fundamental or technical price developments
  • It provides views about major trends but also helps to decipher when a reversal is looming

Ole Hansen, Head of Commodity Strategy at Saxo Bank.

Start trading now

This article is provided by Saxo Capital Markets (Australia) Pty. Ltd, part of Saxo Bank Group through RSS feeds on FX Empire

Crude Oil Sees Fastest Buying Pace in Two Years

This summary highlights futures positions and changes made by hedge funds across commodities, forex and financials up until last Tuesday, January 18. A reporting week that ended with a deepening selloff in stocks as bond yields continued to climb on speculation the Federal Reserve will have to boost interest sooner and by more than previously expected. Treasuries fell along the curve, pushing yields up to levels last seen before the pandemic shook the markets nearly two years ago. The dollar held steady while commodities continue to attract demand with tightness in energy, industrial metals and some soft commodities shielding the asset class from being caught up in the risk aversity seen elsewhere.

Saxo Bank publishes weekly Commitment of Traders reports (COT) covering leveraged fund positions in commodities, bonds and stock index futures. For IMM currency futures and the VIX, we use the broader measure called non-commercial.

Commodities

The Bloomberg Commodity Index rose 1.3% during the week, with strong gains in energy and softs, and to a lesser extent metals offsetting another week of losses across the grains sector. These developments helped drive 51k lots of net buying across 24 major commodity futures from large speculators, bringing the total net long to a two-month high at two lots. Buying was concentrated in WTI crude oil, gas oil, natural gas and cocoa with net selling mostly impacting the grains sector.

Energy

Speculators continued their rapid accumulation of length in crude oil futures and during the past four weeks, the net buying of WTI and Brent reached 155k lots, a rapid four-week accumulation of this magnitude was last seen in January 2020, just before the pandemic temporary sucked the life out of the market. The combined net long reached a ten-week high at 559k lots or 559 million barrels with WTI buying of 23.7 lots offsetting a small 2k lot reduction in Brent. Even though it was small, the reduction in Brent may signal fading belief in its short term ability to break above $90, a level that was almost reached during the week.

Metals

The gold net long was reduced for a third week, albeit at a slower pace. The 4% reduction to 84.5k was primarily driven by fresh short-selling from funds fading the rally towards $1830, a recent resistance level now turned support. Silver’s emerging relative strength which during the week saw the gold-silver ratio drop by 3.4% helped drive a 33% increase in the net long to 23.8k lots, a seven-week high. Copper’s one percent weakness did not deter traders, as they increased their net long to near a three month high at 28.2k lots. In platinum, the net short was reduced by 62% to just 1.3k lots.

Agriculture

Speculators reduced length in soybeans and corn while wheat was mixed with buying of Chicago and selling of Kansas. In softs, cocoa and coffee saw strong buying interest. Despite rallying by 3% the net long in sugar kept falling to reach a 19-month low., thereby making it a potential strong recovery candidate with surging fuel prices raising the prospect for increased bio-fuel production. Cotton’s 4.4% jump only attracted a small amount of additional buying from funds seeking to get involved in the commodity with the highest roll yield, currently around 20% on a one-year basis.

Forex

In forex, speculators responded to the latest stock market weakness by aggressively selling dollars. Against ten IMM currency futures and the Dollar Index the net dollar long was reduced by 30% to a four month low at $16.5 billion, and the most aggressive week of dollar selling since June 2020. All of the major IMM futures contracts with the exception of CHF got bought, led by EUR where 18.6 lots of buying tripled the net long to 24.6k lots. The Sterling short was removed following 29k lots of buying while the CAD position flipped to a net long of 7.5k lots after speculators bought a total of 14.9k lots.

What is the Commitments of Traders report?

The COT reports are issued by the U.S. Commodity Futures Trading Commission (CFTC) and the ICE Exchange Europe for Brent crude oil and gas oil. They are released every Friday after the U.S. close with data from the week ending the previous Tuesday. They break down the open interest in futures markets into different groups of users depending on the asset class.

Commodities: Producer/Merchant/Processor/User, Swap dealers, Managed Money and other

Financials: Dealer/Intermediary; Asset Manager/Institutional; Leveraged Funds and other

Forex: A broad breakdown between commercial and non-commercial (speculators)

The reasons why we focus primarily on the behavior of the highlighted groups are:

  • They are likely to have tight stops and no underlying exposure that is being hedged
  • This makes them most reactive to changes in fundamental or technical price developments
  • It provides views about major trends but also helps to decipher when a reversal is looming

Ole Hansen, Head of Commodity Strategy at Saxo Bank.

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This article is provided by Saxo Capital Markets (Australia) Pty. Ltd, part of Saxo Bank Group through RSS feeds on FX Empire

Specs in Wind Down Mode as Multiple Uncertainties Reign

A week that encapsulated a market in wind down mode and preoccupied with the risk of hawkish FOMC meeting on December 15 and the rising threat of another virus-driven market disruption.

Saxo Bank publishes weekly Commitment of Traders reports (COT) covering leveraged fund positions in commodities, bonds and stock index futures. For IMM currency futures and the VIX, we use the broader measure called non-commercial.

The weekly COT update is taking break and will return January 4.

This summary highlights futures positions and changes made by hedge funds across commodities, forex and financials up until last Tuesday, December 14. A week that encapsulated a market preoccupied with the risk of hawkish FOMC meeting on December 15 and the rising threat of another virus-driven market disruption. Responding to these developments stock markets weakened, the dollar rose and bond yields drifted lower. Commodities traded lower as well with broad weakness seen across all sectors.

Commodities 

Ahead of last Wednesday’s FOMC meeting, and raised concerns the Federal Reserve would deliver a hawkish tilt, money managers opted to cut further their exposure across the five metals contracts. The selling was led by gold and silver while the net-short in palladium rose to a record high at 3,209 lots. Additional selling in HG copper reduced the net long to just 12k lots, an 18-month low.

In energy, the combined WTI and Brent crude oil long continued to be reduced, and following two months of almost continued selling the net length has seen a 38% reduction to 400k lots, a 13-month low. The latest change primarily driven by a 14.7k lots reduction in the WTI long driven by equal measures of long liquidation and fresh short selling.

The agriculture sector speculative length received a 41k lots boost to 948k lots with net buying of corn, sugar and cocoa more than offsetting selling in soybean oil and Chicago wheat, the latter seeing a return to a net short for the sixth time this year.

Forex

In forex, the focus among speculators was for a second week primarily geared towards reducing exposure, both long and short, thereby potentially reducing the signal value. Overall, the combined dollar long against ten IMM currency futures and the Dollar index was reduced for a second week, but this time only by 2% to $22.7 billion. Flows were mixed with selling of EUR, GBP and NZD being more than offset by demand for CHF, JPY and MXN.

What is the Commitments of Traders report?

The COT reports are issued by the U.S. Commodity Futures Trading Commission (CFTC) and the ICE Exchange Europe for Brent crude oil and gas oil. They are released every Friday after the U.S. close with data from the week ending the previous Tuesday. They break down the open interest in futures markets into different groups of users depending on the asset class.

Commodities: Producer/Merchant/Processor/User, Swap dealers, Managed Money and other

Financials: Dealer/Intermediary; Asset Manager/Institutional; Leveraged Funds and other

Forex: A broad breakdown between commercial and non-commercial (speculators)

The reasons why we focus primarily on the behavior of the highlighted groups are:

  • They are likely to have tight stops and no underlying exposure that is being hedged
  • This makes them most reactive to changes in fundamental or technical price developments
  • It provides views about major trends but also helps to decipher when a reversal is looming

Ole Hansen, Head of Commodity Strategy at Saxo Bank.

Start trading now

This article is provided by Saxo Capital Markets (Australia) Pty. Ltd, part of Saxo Bank Group through RSS feeds on FX Empire

Yearend Risk Reduction Despite Underlying Strength

 The COT reports published weekly by the US CFTC highlight futures positions and changes made by hedge funds across commodities, forex and financials during the latest reporting week to last Tuesday, December 7. A week that saw stocks trading higher on optimism the omicron variant wouldn’t derail global growth. Treasury yields and the dollar rose while the commodity sector received a fresh bid following its worst slump in more than a year. With yearend and the low liquidity season upon us, speculators went against the direction of the markets and instead opted to reduce exposure in both commodities and the dollar.

Saxo Bank publishes weekly Commitment of Traders reports (COT) covering leveraged fund positions in commodities, bonds and stock index futures. For IMM currency futures and the VIX, we use the broader measure called non-commercial.

This summary highlights futures positions and changes made by hedge funds across commodities, forex and financials up until last Tuesday, December 7. A week that saw the biggest one-day rally in US stocks since March on optimism the omicron variant wouldn’t derail global growth. Treasury yields and the dollar rose while the commodity sector received a fresh bid following its worst slump in more than a year.

However, looking across all the asset classes covered in this update, we find position squaring becoming a major theme. December is normally a time of year when traders reduce exposure as liquidity starts to dry up as trading books are being reduced ahead of the holidays and yearend. With this in mind the net changes may not give much insights with regards to the short-term direction of the market. Examples being the reductions in dollar longs and commodities, both occurring in a week where both rose.

Commodities

Net selling of commodities continued for a second week, but at 117k lots the reduction slowed compared with the previous week where the 364k lots reduction was the biggest one-week reduction since the first round of Covid-19 panic hit the market in February last year. Despite strong gains with 20 out of 24 futures contracts trading higher, the general theme as mentioned was one of risk reduction with gross longs seeing a 124k lots reduction while the gross short was reduced by 8k lots.

Only a handful of contracts saw net buying led by corn (17.2k lots), soybeans (4.5k) and WTI (2.4k) while selling was led by natural gas (-37k), sugar (-22.8k), Brent (-13k) and gold (-11.6k).

Energy

The most interesting of the changes last week was the 13.1k lots reduction in the Brent crude oil long to a fresh 13-month low at 154k lots. The contract has now seen nonstop selling for the past nine weeks, and despite rallying by 9% last week, the recovery from the omicron washout and break above the 200-day moving average was not enough to persuade speculators to change their defensive stance. A behavior which is in stark contrast to the overall market belief in higher prices into 2022.

Commodity related updates from our daily Market Quick Take available here

Crude Oil

Crude oil (OILUKFEB22 & OILUSJAN22) trades near a three-week high as the market continues to view current omicron worries as short term concerns and mounting speculation that China, the world’s biggest buyer of crude oil, will start adding fiscal stimulus in early 2022 in order to stabilise the economy. Both Brent and WTI are challenging their 21-day moving averages with a break above potentially adding more technical momentum. Speculators meanwhile reduced Brent crude oil longs in the week to December 9 for a ninth, and nine weeks of non-stop reductions have seen the net long drop to a 13-month low. A behavior which is in stark contrast to the overall market belief in higher prices into 2022. Focus turning to monthly oil market reports from OPEC today and IEA tomorrow.

Gold

Gold (XAUUSD) remains stuck below its 200-day moving average at $1794 with focus this week on Wednesday’s FOMC meeting, and how they will respond to inflation rising at the fastest pace since the 1980’s. The market is currently pricing in three rate hikes next year with the first one due around June. Countering the negative price impact of a potential more aggressive US central bank, the rapid spreading of the omicron virus is also receiving some attention given its potential negative growth impact.

Industrial metals

Industrial metals have started the week on a firmer footing with iron ore jumping 6% on raised expectations that China will move to increase stimulus next year to support the economy. Following the end of a three-day annual Central Economic Work Conference, the party signaled a clear change in focus away from growth towards ensuring stability. They also vowed to front load policies to halt the recent slide.

Natural Gas

Surging EU gas prices ahead of the European Council meeting on December 16. Apart from having to deal with Covid-19 and the Russian threat on its eastern borders, the council is also set to decide whether investments in gas and nuclear energy should be labelled climate friendly. The design of the EU green investment classification system is closely watched by investors worldwide and could potentially attract billions of euros in private finance to help the green transition, especially given the need to reduce the usage of coal, the biggest polluter.

Forex

In forex, the speculative flow was skewed towards dollar sales, primarily driven by short covering in EUR, JPY and CAD. Just one week after hitting an 18-month high on omicron worries and heightened Fed tightening focus, the overall dollar long against ten IMM currency futures and the Dollar index was reduced by 16% to $23.3 billion.

As can be seen in the table below, the overall focus was primarily on reducing exposure which helps to explain that the dollar length was reduced in a week where the greenback rose. The 4.6 billion dollar reduction was primarily driven by a 5.1 billion dollar equivalent broad reduction in gross short positions led by JPY ($1.9 bn) and EUR. Other major changes was the MXN net short which reached a four-year high at 64k lots or the equivalent of $1.5 billion.

What is the Commitments of Traders report?

The COT reports are issued by the U.S. Commodity Futures Trading Commission (CFTC) and the ICE Exchange Europe for Brent crude oil and gas oil. They are released every Friday after the U.S. close with data from the week ending the previous Tuesday. They break down the open interest in futures markets into different groups of users depending on the asset class.

Commodities: Producer/Merchant/Processor/User, Swap dealers, Managed Money and other
Financials: Dealer/Intermediary; Asset Manager/Institutional; Leveraged Funds and other
Forex: A broad breakdown between commercial and non-commercial (speculators)

The reasons why we focus primarily on the behavior of the highlighted groups are:

  • They are likely to have tight stops and no underlying exposure that is being hedged
  • This makes them most reactive to changes in fundamental or technical price developments
  • It provides views about major trends but also helps to decipher when a reversal is looming

Ole Hansen, Head of Commodity Strategy at Saxo Bank.

Start trading now

This article is provided by Saxo Capital Markets (Australia) Pty. Ltd, part of Saxo Bank Group through RSS feeds on FX Empire

2022 Global Economic Outlook: Covid-19, Structural Inflation, Monetary Tightening Challenge Global Outlook

Explainer video: Scope Ratings introduces its 2022 Global Sovereign Outlook

Download Scope’s 2022 Sovereign Outlook (report).

Entering 2022, new variants of Covid-19, elevated inflation, and withdrawal of fiscal and monetary support present risk for the robustness of recovery. GDP is seen, nevertheless, continuing to grow above trend over 2022 of 3.5% in the US, 4.4% in the euro area, 3.6% in Japan and 4.6% for the UK, even if, in most cases, normalising to a degree from elevated early-recovery growth of 2021. China is seen growing nearer trend of 5%.

Amid an uneven recovery, we see momentary slowdown over Q4 2021 and Q1 2022 across many economies, if not in some cases temporary output contraction, as countries of Europe reintroduce generally lighter restrictions on basis of renewed rise in Covid-19 cases, including those associated with a new Omicron variant. But we see economic rebound regathering traction by the spring of 2022.

As expected, full economic normalisation has remained vulnerable to renewed introduction of restrictions as transmissible virus variants challenge public-health systems, though we see severity of virus risk for economic recovery continuing to moderate with time as governments adopt more targeted responses, virus becomes more transmissible but less lethal, and businesses and people adapt ways of doing business. Nevertheless, risk to the 2022 outlook appears skewed on the downside.

More persistent inflation, even as it begins to moderate, supports increasing monetary policy divergence

Inflationary pressure is likely to remain more persistent than central bank projections, running above pre-crisis averages even after price changes begin to moderate by next year. This is likely to compel a continued divergence of monetary policy within the globe’s core economies, with associated risk of crystallisation of latent debt and financial-bubble risk as central banks pull back.

This is especially true as regards the UK and the US, where inflation might continue testing 2% mandates, although much less the case for Japan of course, with the euro area somewhere in between with inflation potentially remaining under 2% over the long run.

By end-2022, policy rates of leading central banks are expected to similarly diverge: remaining on hold with respect to the ECB and the Bank of Japan but with rate hikes next year from the Bank of England and Federal Reserve. The ECB is seen halting the Pandemic Emergency Purchase Programme (PEPP) next year but adapting PEPP and/or other asset-purchases facilities to retain room for manoeuvre and smoothen transition in markets.

Higher inflation holds both positive and negative implications for sovereign credit ratings

Higher and more persistent inflation holds both positive and negative credit implications as far as sovereign ratings are concerned. Somewhat higher trend inflation supports higher nominal economic growth, helping reduce public debt ratios via seigniorage, and curtails historical deflation risk of the euro area and Japan. However, rising interest rates push up debt-servicing costs especially for governments carrying heavy debt loads and running budget deficits. Emerging economies, with weakening currencies and subject to capital outflows, are particularly at risk.

Substantive accommodation from central banks has cushioned sovereign credit ratings over this crisis, so any scenario of much more persistent inflation limiting room for monetary-policy manoeuvre is a risk affecting credit outlooks. Bounds in central bank capacity to impede market sell-off due to high inflation compromising monetary space may expose latent risk associated with debt accrued in past years.

Monetary innovation during this crisis has supported credit outlooks

As many central banks tighten monetary policy amid policy divergence, peer central banks that might otherwise prefer looser financial conditions may see themselves compelled to likewise remove some accommodation, otherwise risking currency depreciation. At the same time, with governments dealing with record levels of debt and central banks owning large segments of this debt, “fiscal dominance” may coerce moderation in speed of policy normalisation.

Monetary innovation over this crisis such as flexibility made available in ECB asset purchases supports resilience of sovereign borrowers longer run, assuming such innovations were available for re-deployment in future crises.

Emerging market vulnerabilities entering 2022, while ESG risks becoming increasingly substantive

Emerging market vulnerabilities are a theme entering 2022, amid G4 central bank tapering, geopolitical risk, and a slowdown of China’s economy. Debate heats up furthermore during 2022 around adaptation of fiscal frameworks for a post-crisis age, with potentially far-reaching implications as far as sovereign risk. Environmental, social and governance (ESG) risks are becoming increasingly significant – presenting opportunities and challenges for ratings.

Sovereign borrowers with a Stable Outlook make up presently over 90% of Scope Ratings’ publicly rated sovereign issuers, indicating comparatively lesser likelihood of ratings changes next year as compared with during 2021, although economic risks could present upside and downside ratings risk. Only one country is currently on Negative Outlook: Turkey (rated a sub-investment-grade B).

For a look at all of today’s economic events, check out our economic calendar.

Giacomo Barisone is Managing Director of Sovereign and Public Sector ratings at Scope Ratings GmbH.

 

Specs Exit Commodities on Omicron and Fed Worries

Futures positions and changes made by hedge funds across commodities, forex and financials up until last Tuesday, November 30. A week that encapsulated the markets very nervous reaction to the Omicron virus news as well as Jerome Powell’s increased focus on combatting inflation. While global stocks and US long end yields dropped, a 7% correction in the Bloomberg commodity index helped trigger the biggest and most widespread hedge fund exodus since February 2020.

Saxo Bank publishes weekly Commitment of Traders reports (COT) covering leveraged fund positions in commodities, bonds and stock index futures. For IMM currency futures and the VIX, we use the broader measure called non-commercial.

This summary highlights futures positions and changes made by hedge funds across commodities, forex and financials up until last Tuesday, November 30. The reporting week encapsulated the markets very nervous reaction to the Omicron virus news as well as Jerome Powell confirming inflation is no longer being transitory. His comments to the Senate banking committee raised expectations for faster tapering with the first full 0.25% rate hike now priced in for July next year.

The US yield curve flattened considerably with virus related safe-haven demand driving down the yield on 10-year US treasury notes by 22 basis point. Global stocks slumped with the VIX jumping 8%. Hardest hit, however was the commodity sector after the Bloomberg commodity index slumped by 7%, thereby triggering the biggest and most widespread hedge fund exodus since February 2020.

Commodities

Hedge funds responded to heightened growth and demand concerns related to the omicron virus, and the potential faster pace of US tapering, by cutting their net long across 24 major commodity futures by 17% to a 15-month low at 1.8 million lots. This the biggest one-week reduction since the first round of Covid-19 panic in February last year was triggered by net selling of all but three livestock contracts.

Energy

Hardest hit was the energy sector where renewed demand concerns sent the prices of WTI and Brent down by more than 15%. In response to this, hedge funds accelerated their pace of futures selling with the combined net long slumping by 90k lots to a one-year low at 425k lots. The loss of momentum following the late October peak has driven an eight-week exodus out of oil contracts, culminating last week, and during this time the net length has seen a 35% or 224k lots reduction. Potentially setting the market up for a strong speculative driven recovery once the technical and fundamental outlook turns more friendly.

Latest: Crude oil (OILUKFEB22 & OILUSJAN21) trades higher following its longest stretch of weekly declines since 2018. Today’s rise apart from a general positive risk sentiment in Asia has been supported by Saudi Arabia’s decision to hike their official selling prices (OSP) to Asia and US next month. Thereby signaling confidence demand will be strong enough to absorb last week’s OPEC+ production increase at a time when mobility is challenged by the omicron virus. For now, both WTI and Brent continue to find resistance at their 200-day moving averages, currently at $69.50 and$72.88 respectively. 

Metals

Gold was net sold for a second week as speculators continued to reduce exposure following the failed breakout attempt above $1830. With Fed chair Powell signaling a change in focus from job creation to fighting inflation, sentiment took another knock, thereby driving a 13.7k lots reduction to a four-week low at 105k lots. Industrial metals also suffered with the net long in HG copper slumping by one-third to a three-month low at 13.4k lots. Copper’s rangebound trading behavior since July has sapped hedge funds involvement with the current net length a far cry from the 92k record peak seen this time last year.

LatestGold (XAUUSD) received a small bid on Friday following mixed US data, but overall, it continues to lack the momentum needed to challenge an area of resistance just above $1790 where both the 50- and 200-day moving averages meet. Focus on Friday’s US CPI data with the gold market struggling to respond to rising inflation as it could speed up rate hike expectations thereby putting upward pressure on real yields which are inverse correlated to gold’s performance.  A full 25 basis point rate hike has now been priced in for July and the short-term direction will likely be determined by the ebb and flow of future rate hike expectations.

Agriculture

The whole sector with the exception of livestock took a major hit, just one week after funds had increased bullish bets on grains and softs by the most in 15 months. Both sectors suffered setbacks of more than 5% with recent highflyers like wheat and cotton taking big hits. As mentioned, selling was broad and led by corn, soybeans, sugar and cocoa, with the latter together with palladium being the only two contracts where speculators hold an outright short position.

This week the grain market will be focusing on weather developments in Australia and its potential impact on the wheat harvest, as well as the monthly World Agriculture Supply & Demand report (WASDE) from the USDA.

Forex

In forex, speculators reacted to renewed virus concerns by increasing bullish dollar bets against ten IMM currency futures and the Dollar Index to an 18-month high at $27.9 billion. Speculators were buyers of JPY (18.4k lots or $2 billion equivalent) but sellers of everything else, including euros (6.8k) and the two commodity currencies of AUD (16.9k) and CAD (10.9k). These changes resulting in the aggregate dollar long rising by $2.3 billion.

In terms of extended positioning, a euro short at 23k lots was last seen in March 2020, the GBP short at 39k lots was a two-year high while the 60k lots MXN short was the highest since March 2017.

What is the Commitments of Traders report?

The COT reports are issued by the U.S. Commodity Futures Trading Commission (CFTC) and the ICE Exchange Europe for Brent crude oil and gas oil. They are released every Friday after the U.S. close with data from the week ending the previous Tuesday. They break down the open interest in futures markets into different groups of users depending on the asset class.

Commodities: Producer/Merchant/Processor/User, Swap dealers, Managed Money and other

Financials: Dealer/Intermediary; Asset Manager/Institutional; Leveraged Funds and other

Forex: A broad breakdown between commercial and non-commercial (speculators)

The reasons why we focus primarily on the behavior of the highlighted groups are:

  • They are likely to have tight stops and no underlying exposure that is being hedged
  • This makes them most reactive to changes in fundamental or technical price developments
  • It provides views about major trends but also helps to decipher when a reversal is looming

Europe Opens With the Risk ON Mode

Futures start the new week on the front foot, with the SP500 being above crucial support on the 4555 points.

DAX is trying to draw a right shoulder of the iH&S formation.

USDJPY is defending the crucial support on the 112.8.

AUDNZD is escaping from the wedge to the upside, giving hope for another bullish wave.

GBPUSD is bouncing off the 38,2% Fibo and the lower line of the flag, in theory, that’s a good place for a proper buy signal.

EURPLN continues to drop after the false breakout above the 4.64.

The Mexican peso turned around the weakness it experienced at the end of last week and starts the new week with gains.

For a look at all of today’s economic events, check out our economic calendar.

Crucial Supports Under Pressure

Many instruments approach the end of this week on crucial support and/or resistances. I guess the next week will be full of some juicy movements on many assets.

Gold is still suffering, trying to defend mid-term dynamic support.

Silver is trying to defend the most important horizontal level this year, 22.2 USD/z.

SP500 goes down aiming for the long-term up trendline.

DAX with eyes on the 14200 points – as on Silver, the most important support this year.

USDCHF continues the drop after the false breakout from the symmetric triangle pattern.

EURUSD tries to catch some breath and aims slightly higher.

EURPLN reverses after the intervention from the Polish Central Bank and creates a false breakout pattern.

Mexican Peso with a possible inverse head and shoulders pattern on both pairs: with USD and EUR.

For a look at all of today’s economic events, check out our economic calendar.

Traders Were Hoping for a Stronger Bounce I Guess…

So far, the recovery from Friday’s carnage is, let’s say, pretty mild. The same mild as apparently, the symptoms from the new coronavirus strain are. That information was about to drive today’s reversal but as you can see, traders are not encouraged to buy the dip at this point.

Gold is defending the mid-term up trendline.

SP500 bounced during the Asian session but the European one does not start well.

DAX is giving back almost all gains from the Asian session.

USDJPY continues the downswing after the breakout of the mid-term up trendline.

EURJPY drops after breaking crucial horizontal support.

AUDNZD continues a very technical movement by creating a wedge finishing the correction on the 38,2% Fibonacci.

USDCHF is trading lower after the false breakout from the symmetric triangle.

The Mexican Peso continues the weakening to USD and EUR despite quite a good opening after the weekend.

For a look at all of today’s economic events, check out our economic calendar.

Risk Off Is Back. Indices and EM Currencies Drop. Safe Havens Surge

Shocking night and morning for the vast majority of stock bulls. Indices are collapsing and the new strain of the virus is apparently to blame.

In this situation, safe-haven assets like gold for example are gaining traction. Gold is aiming higher after breaking the neckline of a small inverse head and shoulders pattern.

Yen is also gaining, USDJPY is currently performing an attack on the mid-term up trendline.

EURJPY is testing crucial long-term horizontal support on the psychological level of 128.

USDCHF is dropping after the false breakout from the symmetric triangle pattern.

EURUSD is trying a small bullish reversal to test the major horizontal resistance.

USDMXN advances higher after the breakout of an important horizontal resistance.

EURMXN continues the rise after the price escapes from a beautiful wedge pattern. A price action classic!

For a look at all of today’s economic events, check out our economic calendar.

Gold and Silver Drop. The Same Happens With EM Currencies

Gold is in a correction mode aiming to test the 1836 USD/oz as a crucial support.

Silver also dropped but here the price is still inside the flag formation.

The DAX bounced off an important horizontal support. Covid fears in Europe have accelerated.

The EURNZD is defending an important horizontal support with a head and shoulders pattern. The buy signal is still not here, we need to see the breakout of the neckline first.

The EURUSD is struggling to defend the 61.8% Fibonacci, especially after the price failed to stay above the psychological barrier of 1.14.

The EURPLN went vertical after the price broke from the ascending triangle to the upside.

The USDMXN could do the same as the EURPLN, the price is testing the upper line of the triangle as we speak.

The EURMXN is defending a crucial support inside of the giant wedge pattern. Soon we should see a decisive movement here.

For a look at all of today’s economic events, check out our economic calendar.

Commodity Currencies Explained (Part I)

Let’s start by defining what could be called a commodity currency (or commodity pair).

Generally, a commodity currency represents a currency from a country or geographical zone that produces specific commodities which will account for most of its exports.

Some examples of currencies which could be considered as commodity currencies are presented in the following table:

Currencies Top Material Exports
Argentine peso (ARS) Soybean meal ($8.81B), corn ($6.19B), delivery trucks ($3.83B), soybeans ($3.47B), soybean oil ($3.38B), bran ($292M), other vegetable residues and waste ($232M), and ground nut oil ($131M)
Australian dollar (AUD) Iron ore ($67.5B), coal briquettes ($51.5B), petroleum gas ($34.1B), gold ($25.4B), aluminium oxide ($5.6B), sheep and goat meat ($3.07B), and wool ($2.26B)
Brazilian real (BRL) Soybeans ($26.1B), crude petroleum ($24.3B), iron ore ($23B), corn ($7.39B), sulfate chemical wood pulp ($7.35B), poultry meat ($6.55B), frozen bovine meat ($5.67B) and raw sugar ($5.33B)
Canadian dollar (CAD) Crude petroleum ($67.8B), cars ($40.9B), gold ($14.6B), refined Petroleum ($12.3B), vehicle parts ($10.8B), sawn wood ($6.35B), raw aluminium ($5.45B), potassic fertilizers ($5.27B), rapeseed ($3.23B), and rapeseed oil ($2.6B)
Indian rupee (INR) Refined petroleum ($39.2B), diamonds ($22.5B), packaged medicaments ($15.8B), jewellery ($14.1B), cars ($7.15B), Rice ($6.9B), Crustaceans ($4.67B), and Non-Retail Pure Cotton Yarn ($2.86B)
Indonesian rupiah (IDR) Coal briquettes ($20.3B), palm oil ($15.3B), petroleum gas ($8.32B), cars ($4.52B), gold ($4.01B), lignite ($2.91B), stearic acid ($2.76B), uncoated paper ($2.37B), and coconut oil ($1.9B)
Malaysian ringgit (MYR) Integrated circuits ($63B), refined petroleum ($17.8B), petroleum gas ($11.5B), semiconductor devices ($9.65B), palm oil ($8.91B), rubber apparel ($4.37B), other vegetable oils ($1B), copper powder ($873M), asphalt mixtures ($417M), and platinum clad metals ($127M)
Mexican peso (MXN) Cars ($53.1B), computers ($32.4B), vehicle parts ($31.2B), delivery trucks ($26.9B), crude petroleum ($26.6B), tractors ($10.7B), beer ($5.07B), tropical fruits ($3.6B), and railway freight cars ($3.57B)
New Zealand dollar (NZD) Concentrated milk ($5.73B), sheep and goat meat ($2.62B), rough wood ($2.31B), butter ($2.29B), frozen bovine meat ($2.09B), casein ($613M), and honey ($237M)
Nigerian naira (NGN) Crude Petroleum ($46B), petroleum gas ($7.78B), scrap vessels ($2.26B), flexible metal tubing ($2.1B), and cocoa beans ($715M)
Peruvian nuevo sol (PEN) Copper ore ($12.2B), gold ($6.76B), refined petroleum ($2.21B), zinc ore ($1.65B), and refined copper ($1.62B), animal meal and pellets ($1.54B), lead ore ($1.01B), fish oil ($434M), and buckwheat ($139M)
Russian ruble (RUB) Crude petroleum ($123B), refined petroleum ($66.2B), petroleum gas ($26.3B), coal briquettes ($17.6B), wheat ($8.14B), semi-finished iron ($6.99B), coal tar oil ($4.49B), raw nickel ($4.03B), and nitrogenous fertilizers ($3.05B)
South African rand (ZAR) Gold ($16.8B), platinum ($9.62B), cars ($7.61B), iron ore ($6.73B), and coal briquettes ($5.05B), manganese ore ($3.16B), chromium ore ($1.92B), titanium ore ($583M), and niobium, tantalum, vanadium, and zirconium ore ($480M)
Swiss franc (CHF) Gold ($59B), packaged medicaments ($46.2B), blood, antisera, vaccines, toxins, and cultures ($32.9B), base metal watches ($13.6B), jewellery ($10.9B), precious metal watches ($7.32B), and hydrazine or hydroxylamine derivatives ($501M)
US dollar (USD) Refined petroleum ($84.9B), crude petroleum ($61.9B), cars ($56.9B), integrated circuits ($41.4B), vehicle parts ($41.2B), medical instruments ($29.5B), gas turbines ($28.1B), aircraft parts ($16.3B), and orthopedic appliances ($12.1B)
Vietnamese dong (VND) Broadcasting equipment ($42.3B), telephones ($18.2B), integrated circuits ($15.5B), textile footwear ($10.6B), and leather footwear ($6.43B), coconuts, Brazil nuts, and cashews ($3.16B), fuel wood ($2.05B), cement ($1.39B), metal-clad products ($1.37B), and cinnamon ($175M)
West African CFA franc (XOF) Gold ($11.66B), cocoa beans ($3.84B), refined petroleum ($2.64B), rubber ($1.08B), raw cotton ($1.04B), and crude petroleum ($941M), cocoa paste ($795M), other oily seeds ($407M), Phosphoric Acid ($346M), coconuts, Brazil nuts, and cashews ($280M), ground nuts ($192M), zinc ore ($173M), raw zinc ($155M), electricity ($141M), cocoa shells ($115M), calcium phosphates ($95.7M), radioactive chemicals ($59.6M), rough wood ($59.5M), raw copper ($49.4M), Petroleum Gas ($42.5M), non-fillet frozen fish ($356.1M), other vegetable residues ($25.4M), and aluminium ore ($3.17M)

Data: The Observatory of Economic Complexity (OEC)

(Bold: products which the country/economic area was the world’s biggest exporter in 2019)

For active trading purposes, the ones highlighted in yellow would be characterised as freely floating and more liquid currencies. Thus, they would also be more accessible and less costly (with lower fees) to trade.

For hedging purposes, the others would present some advantages to the commercialisation of their associated natural resources, even though they would rather be considered more exotic currencies.

Charts

Here is a representation of some key commodity currencies presented in the above table on a weekly timeframe against the US dollar (reference currency):

Graphical user interface, chart, applicationDescription automatically generated

Each chart was represented within 2-standard deviation Bollinger Bands based on a 20-period simple moving average (in orange), a 50-period simple moving average (blue curve), a 200-period simple moving average (the black curve) and in the pane below is a 14-period relative strength index (in blue) to which was applied a 9-period simple moving average (red curve).

All those charts are displayed over a 2-year historical period.

In the next article I’ll focus on highlighting some correlations which may exist between key natural resources and the currencies in which they are usually traded.

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Thank you.

For a look at all of today’s economic events, check out our economic calendar.

Sebastien Bischeri
Oil & Gas Trading Strategist

* * * * *

The information above represents analyses and opinions of Sebastien Bischeri, & Sunshine Profits’ associates only. As such, it may prove wrong and be subject to change without notice. At the time of writing, we base our opinions and analyses on facts and data sourced from respective essays and their authors. Although formed on top of careful research and reputably accurate sources, Sebastien Bischeri and his associates cannot guarantee the reported data’s accuracy and thoroughness. The opinions published above neither recommend nor offer any securities transaction. Mr. Bischeri is not a Registered Securities Advisor. By reading Sebastien Bischeri’s reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Sebastien Bischeri, Sunshine Profits’ employees, affiliates as well as their family members may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

 

CPI Shocker Lifted the Greenback, which now needs to Take a Breath

The dollar rallied, and new highs for the year were recorded against the euro and sterling. The dovish tapering announcement by the Fed on November 3 was completely unwound as the December 2022 Fed funds futures returned to the high-yield mark of 66 bp ahead of the weekend.

The two-year yield rose from about 39 bp at the start of the last week to almost 55 bp. The volatility of the bond market (the equivalent of the VIX for the S&P 500) surged back to the year’s high (above 78%). Ultimately, the idea that R-star, the real short-term interest rate when the US economy is at full capacity and inflation stable, has continued to trend lower will likely cap nominal rates. Equities wobbled, and the S&P 500 snapped an eight-day advance, and the NASDAQ’s 11-day rally stalled. US equities stabilized and posted modest gains in the past two sessions.

The rise in price pressures requires the Federal Reserve to be more flexible to address a range of possible outcomes. The pace of the tapering is the main constraint on policy. The FOMC statement committed the Fed to reduce the bond-buying by $15 bln in November and December. While it anticipated that the pace would continue, it reserved the right to adjust the rate.

This is likely to be the focus in the run-up to the mid-December meeting. To finish QE in March, as St. Louis Fed’s Bullard, a noted hawk, has argued, the Fed would need to double its pace of tapering to $30 bln a month starting in January. What is at stake is when the Fed’s rate hike cycle can begin, not the terminal rate, which is expected to be below 2%.

Dollar Index

The CPI saw the Dollar Index surge to convincingly surpass the (38.2%) retracement target of the decline from the March 2020 high (~103) to the January 6 low (~89.20). That retracement (~94.55) had been penetrated briefly before, but it did not stick. This time, the Dollar Index rose to new highs for the year, slightly above 95.25. The next retracement (50%) is found a little above 96.00, and the (61.8%) objective is almost 97.75. The momentum indicators suggest a high is not yet in place, but the move since the mid-week CPI shocker, above the upper Bollinger Band (~95.00) warns against chasing it. That said, initial support is likely in the 94.60-94.75 area.

Euro

The euro was driven below $1.15 after the US CPI report and failed to resurface above this previous floor, which now acts as resistance. A low near $1.1435 was recorded ahead of the weekend. Neither the MACD nor Slow Stochastic is over-extended, but, as we saw with the Dollar Index, the exchange rate is outside the Bollinger Band (slightly below $1.1465) and settled below it for the third consecutive session ahead of the weekend. There is little chart support until the $1.1290-$1.1300 area is approached. Moreover, if the euro has carved out some kind of topping pattern, the risk may extend toward $1.10.

Japanese Yen

From around mid-September through mid-October, the dollar broke out of the old JPY109-JPY111 range rate to reach JPY114.70 on October 20. It consolidated at lower levels and approached JPY112.70 on November 9. The jump in the US CPI reported the following day lifted the greenback to JPY114.00, and it reached JPY114.30 before the weekend.

We often experience the dollar-yen exchange rate as a pair often rangebound. We had anticipated a JPY113-JPY115 range and would allow about a half a yen range or so violation. The MACD has flatlined, while the Slow Stochastic has turned higher. Although the fit is not perfect, we still look at US yields for directional cues.

British Pound

Sterling had been turned lower on November 4 from $1.37 by the BOE, who caught the market leaning too far over its skis, arguably encouraged to do so by official rhetoric. Its attempt to recover was stalled near $1.36, and the US inflation jump set it to new lows for the year. The low ahead of the weekend was slightly below $1.3355.

The MACD is entering oversold territory, while the Slow Stochastic, which leveled off, seems to be slipping into over-extended territory as well. After closing for two sessions below the lower Bollinger Band, it finished the week back above it (~$1.3355). A close above $1.3400 would suggest a consolidative phase lies ahead. Last December, sterling record lows $1.3135-$1.3185, and the risk is for this area to be tested.

Canadian Dollar

Since the US CPI surprise, the Canadian dollar has been the weakest of the major currencies, falling around 0.75% against the greenback. It was the third consecutive weekly decline for the Loonie, which was preceded by a five-week advance. The US dollar posted an outside up day in the middle of last week on the back of the CPI news. It rallied from slightly below CAD1.2390 to a little above CAD1.25.

On Thursday, when US and Canadian banks were closed for holidays, the dollar rose to almost CAD1.2600 and made a marginal new high ahead of the weekend. This met the (50%) retracement of the US dollar’s decline since the CAD1.29 level was approached a couple of days before the September 22 FOMC meeting. The Slow Stochastic is over-extended, though the MACD has more scope to run. Here too, the market moved quickly, and the greenback settled the past two sessions above the Bollinger Band (~CAD1.2555). The CAD1.2480 area may offer initial support.

Australian Dollar

The Australian dollar recorded the low for the year on August 20, near $0.7100. It recovered into early September (~$0.7480) before being turned back to $0.7170 by the end of the month. The Aussie launched another advance last month that carried to around $0.7555 and the 200-day moving average. It has come under new pressure this month and fell to nearly $0.7275 ahead of the weekend, meeting the (61.8%) retracement target of the overall rally since August 20.

It closed on a firm note above $0.7300. The Slow Stochastic is over-extended and could turn up next week. The MACD is still pointing lower. After settling out the Bollinger Band on Wednesday and Thursday, the Aussie moved back into it (~$0.7300) ahead of the weekend. Initial resistance is seen in the $0.7335-$0.7355 band.

Mexican Peso

The US CPI boosted the dollar by nearly 1.6% against the peso, the most in five months. It was the only advance of the week, but it was sufficient for the greenback to close around 0.6% stronger. The high for the week (~MXN20.7225) was recorded in the hours after the central bank delivered its fourth quarter-point rate hike. Banxico showed no appetite to increase the pace, unlike other regional central banks, even though CPI is still accelerating.

Still, the greenback slightly exceeded the (61.8%) retracement target (~MXN20.70) of its decline from the November 3 high (~MXN20.98) to the November 9 low (~MXN20.2515) before retreating ahead of the weekend. Support is seen around the 20-day moving average (~MXN20.42). Among emerging market currencies, the Brazilian real (~2.3%) and the Chilean peso (1.6%) fared best. The Hungarian forint (~-2.9%) and the Turkish lira (-2.75) saw the largest losses. The JP Morgan Emerging Market Currency Index fell by about 0.40% last week, the eighth weekly decline in the past ten.

Chinese Yuan

One would not know it by reading much of the free financial press, but the Chinese yuan is the strongest currency in the world this year. Its 2.3% advance eclipses the Canadian dollar, the only major currency stronger against the US dollar on the year (~1.3%). The tensions in Europe and the pullback in oil prices saw the Russian rouble tumble almost 2.3% last week. It was knocked from its perch as the top performer, allowing the yuan to pull ahead. The dollar settled last week, slightly under CNY6.38, its lowest close since May 31, when it recorded a three-year low (~CNY6.3570).

The trend line connecting the 2014 dollar-low and 2018 low is frayed in May and June but essentially held. It is now being violated more convincingly. Sentiment toward investment in China has become in fashion again. The NASDAQ Golden Dragon Index that tracks Chinese companies that trade in the US rallied nearly 7% last week. China’s 10-year yield of 2.80% may not sound particularly exciting, but it is the only benchmark that has not sold off this year. The yield has fallen 20 bp.

This article was written by Marc Chandler, MarctoMarket.

Greenback has Legs Ahead of the Fed and Jobs

The pre-weekend and month-end activity may have exaggerated the greenback’s gains, but we suspect ahead of the FOMC meeting and the US jobs data that is the direction. Our understanding of the technical condition also favors a stronger dollar.

The jump in Australian rates may help explain why the Aussie was the strongest of the majors (~0.75%). However, the trajectory of monetary policy does not offer satisfying insight into other currencies. The underperformance of the Norwegian krone (~-1.0%), where the central bank will most likely hike rates next week, for example.

It seems almost as if the markets have concluded that most major central banks are behind the inflation curve. It expects that officials will move to correct the situation rather quickly regardless of the respective declaratory policies. This gap lends itself to policy challenges.

The Reserve Bank of Australia did not defend its bond target in the past week, though it did so on October 22. With little official guidance, the market took Australia’s two-year yield up more than 61 bp last week (to 0.715%), and more than a third was recorded ahead of the weekend. The divergence may lend itself to increased volatility, but so far, the volatility is confined mainly to the credit markets.

At the same time, the coupon curves generally flattened. There is some recognition that the rate hikes will be delivered in most major countries simultaneously as fiscal support is reduced. It is as if the great uncertainty leads many to swing between central banks slow to respond to the inflation risk and fear that they may choke off the recovery by acting against the price pressures. We suspect that the US dollar will trade higher next week as the market anticipates a hawkish Federal Reserve and a strong jobs report.

Dollar Index

The year’s high was set on October 12 near 94.55 and gently trended lower, reaching almost 93.25 on October 28. That move looks to have been completed. The pre-weekend move to around 94.30 appears to signal another run at the highs. The MACD is poised to turn higher, while the Slow Stochastic has already done so. The 94.50 area corresponds to a (38.2%) retracement of its decline since March 2020. The next retracement (50%) is a little above 96.00.

Euro

The euro rose by the most in five months on October 28 and reached almost $1.17, its best level of the month. But it most certainly was not a harbinger of a strong rally. Instead, it seemed to be related to some position squaring ahead of month-end. It surpassed the (38.2%) retracement objective of the slide that began in early September found around $1.1670 but could not quite make it to the next retracement (50%) near $1.1710.

The single currency could not hold above $1.16 ahead of the weekend, and support in the $1.1585 was easily violated. It quickly dropped to $1.1530, just ahead of the year’s low of near $1.1525. Like we saw with the Dollar Index, the MACD is set to turn lower and join the Slow Stochastic, which rolled over last week. The next downside target is slightly below $1.1500, and a convincing break could signal another two-cent move.

Japanese Yen

The dollar approached a two-and-a-half-week low against the yen near JPY113.25 as the US 10-year yield approached 1.50% on October 28, corresponding to the (38.2%) retracement of October’s rally and the 20-day moving average. The greenback quickly recovered and rose to around JPY114.10 before the weekend, though it closed slightly below.

The price action helps mark out the range we have been anticipating, JPY113.00 on the downside and JPY114.50-JPY115.00 on the upside. The MACD and the Slow Stochastic are still falling. Barring the LDP and its coalition partner Komeito losing its majority, the election is unlikely to drive the exchange rate. However, many observers suspect an exceptionally poor showing for the LDP could lead to a larger supplemental budget.

British Pound

Sterling rallied a little more than four cents from the late September low to the recent high around $1.3835, but it came to an end in a dramatic fashion. The weekly loss was modest (~0.55%), and it was fully accounted for before the weekend as sterling dropped around 0.8%, the most in October to slightly through $1.3670. The pre-weekend loss met the (38.2%) retracement objective of the month-long rally.

The next retracement objective (50%) is closer to $1.3625. The momentum indicators are just turning lower. The risk is a return to the year’s low near $1.34. The budget announcement seemed to reinforce speculation that the Bank of England will hike rates next week. Although Governor Bailey says ongoing QE will not prevent it from hiking rates, we suspect it will also adjust its bond-buying as two dissenters, including a deputy governor, wanted last month.

Canadian Dollar

The Bank of Canada ended its QE and seemed to signal an earlier rate hike in the middle of last week. The more hawkish posture knocked the greenback from the top is its range, a bit above CAD1.2430 to almost CAD1.2300, the lower end of the range. It chopped within it over the next two sessions.

It flirted with CAD1.24 but finished closer to CAD1.2385. A move above CAD1.2430, where the 20-day moving average is found, would be an early sign that the US dollar’s decline since September 20 began near CAD1.29 will correct higher. The first target would be the CAD1.2490-CAD1.2520 area, which holds the 200-day moving average and the (38.2%) retracement of the leg down. The momentum indicators have turned higher, suggesting a stronger greenback.

Australian Dollar

The Australian dollar posted an outside up day on October 28, and it rose to its best level since early July. To be sure, this was not a breakout. The Aussie stopped short of the 200-day moving average, near $0.7560, and there was no follow-through buying ahead of the weekend.

The momentum indicators are stretched but are not quite turning. A break of the $0.7480 area would be the first sign of the pullback that we anticipate. The first (38.2%) retracement objective of the month-long rally is near $0.7410, which is around where the 20-day moving average is found. Below there, the next target would be closer to $0.7360.

Mexican Peso

The dollar gained a little more than 1% against the peso before the weekend, the largest gain in the month and half of the week’s advance. News that Mexico’s economy unexpectedly contracted in Q2 (-0.2% quarter-over-quarter) contributed to the selling pressure on the peso.

The greenback’s surge carried it slightly beyond the (61.8%) retracement objective of the decline from above MXN20.90 on October 12 to about MXN20.12 on October 22 and 26. That retracement target is around MXN20.6040. Despite the intrasession penetration, the dollar finished below it.

The next area of resistance is by MXN20.80. The momentum indicators have turned higher for the dollar. Ironically, if the peso’s weakness extends and persists, partly in reaction to the weakening economy, the inflationary impulse makes a 50 bp hike when Banxico meets on November 11 more likely. The first two hikes in the cycle were for 25 bp.

Chinese Yuan

The yuan fell a minor 0.33% against the dollar last week, the first five-week loss. The greenback closed above CNY6.40 for the first time since October 18. It had looked like the dollar was settling into a range of around CNY6.38-CNY6.40. If we are right about the scope for broader dollar gains, the greenback could rise back into the CNY6.4100-CNY6.4250.

The yuan’s weakness comes as the inclusion of Chinese bonds by the FTSE Russell flagship index becomes effective. On the one hand, China’s premium over US 10-year yields has fallen from 220 bp at the end of last year to 126 bp in late October and finished the month around 144 bp. On the other hand, of the major bond markets, China is the only one where yields fell this year (~16 bp).

This article was written by Marc Chandler, MarctoMarket.

Are the Technicals Anticipating a Soft US GDP Report? Could it be a “Sell the Rumor buy the Fact?”

Indeed, the greenback fell against all the major currencies, even the Japanese yen, against which it had reached new four-year highs (~JPY114.70) before pulling back. On the other hand, the Antipodean currencies and the Norwegian krone continued to lead the move against the US dollar. The Aussie rose to new three-month highs, while the Kiwi, Nokkie, and Canadian dollar saw four-month highs.

Emerging market currencies were more mixed than the majors. At the end of the week, Russia’s larger than expected 75 bp rate hike helped lift the rouble, the best emerging market currency, last week. It reached a 15-month high ahead of the weekend. The Chinese yuan reached its best level in five months last week.

On the other hand, the Turkish lira and Brazilian real came under intense selling pressure. Turkey’s central bank showed little concern about the lira’s exchange rate when it delivered a larger-than-expected 200 bp cut in the one-week repo rate. At 16%, it stands below the headline and core inflation rates (19.58% and 16.98%, respectively in September. The lira lost 3.7% last week and fell to a record low.

The lira dropped by 25% in 2020 and is off another 22.6% this year. Political and economic turmoil in Brazil gave Turkey a run for its money. The Brazilian real fell 3.3% last week, which almost doubled its depreciation this year to 8.00%. President Bolsonaro has lost the confidence of investors and local businesses. Brazil may report that inflation stabilized (above 10%) in October, ahead of the central bank meeting, which is widely expected to lift the Selic rate 100 bp to 7.25%. It would be the third such move this year after beginning the cycle with three 75 bp increases.

Dollar Index

The high for the year was set on October 12, near 94.55. It pulled back to around 93.50 early last week before consolidating. It met the (38.2%) retracement objective of the leg up that began in early September and came in about 93.55. The next important chart area is the 93.00-93.25. The momentum indicators are still headed lower, but prices have stabilized. A close back above 94.00 would suggest that minor correction is over.

The Dollar Index settled at the end of last month slightly below 94.25. If it does not recapture this by the end of next week, it will post the first monthly loss since July. The dollar’s losses may reflect some position adjustment ahead of a soft GDP report. However, the market could be vulnerable to a “sell the rumor buy the fact” as the market quickly turns its attention to the November 3 FOMC meeting and the start of tapering.

Euro

Although the single currency held above $1.16 since testing the $1.1570 area on October 18, the upside was limited to the $1.1670 area approached on October 19. Indeed, it has been confined to Tuesday’s range (~$1.1610-$1.1670) and traded in about a third of a cent range ahead of the weekend. The momentum indicators are pointing higher. Yet, the market lacks energy even though the five-day moving average cross above the 20-day moving average for the first time since mid-September.

The US 2-year premium over Germany rose for the sixth consecutive week and around 110 bp, it is the most since March 2020. It was closer to 200 bp before the pandemic. The ECB meets next week, but important decisions are not expected until the December meeting. The EMU reports Q3 GDP, and it is expected to have grown around 2% quarter-over-quarter. Lastly, rising energy prices and a weaker euro suggest that the preliminary October CPI risk is on the upside.

Japanese Yen

After rising to a four-year high around JPY114.70, the dollar appears to have entered a consolidation phase. It pulled back to about JPY113.40 ahead of the weekend. The weak close sets up a test on the JPY113.25 support area and then JPY112.75. We note that US yields remain firm, but the dollar-yen rate has become a bit less sensitive to it (the correlation has softened). The dollar’s four-week ascent against the yen ended last week with a roughly 0.65% pullback, which tested the trendline off drawn from the lows before last month’s FOMC meeting.

We have suggested that at least initially, the JPY114.50-JPY115.00 may mark the upper end of a new range for the dollar. If that holds, the market may have to fish for the lower end of the range, and perhaps it may be encouraged by a rally in US Treasuries either ahead of or in response to the Q3 GDP estimate, for which the Atlanta Fed’s tracker sees at 0.5% annualized.

British Pound

Sterling was practically flat last week despite the seventh consecutive weekly increase in the implied yield of the December 2021 short-sterling interest rate futures contract. The implied yield rose 10 bp to about 46 bp. In early September, before the surge in rates began, it was at 0.11%. Even at the end of the week, BOE officials (chief economist Pill) were still goading the market by saying a hike in November was “fairly balanced.”

Sterling’s rally, which began the month near $1.34, stalled around $1.3835 last week (fraying the upper Bollinger Band), just in front of the 200-day moving average (~$1.3850). This area also corresponds to the (50%) retracement of the sell-off since the May high ($1.4200). Momentum indicators are getting stretched but have not begun leveling off. Support is seen in the $1.3675-$1.3700 area.

Canadian Dollar

The Canadian dollar rose for the fifth consecutive week, albeit barely, and reached levels not seen since June. The market is aggressive in pricing in a hike several months before the Bank of Canada anticipated the output gap to be closed. The implied yield of the March 2022 BA futures rose 11.5 bp, marginally exceeding the increase of the previous two weeks. At 0.795%, it is 23 bp on top of the December 2021 contract yield.

The Bank of Canada meets next week and may subtly push against speculation of an early hike. After falling slightly below CAD1.2290, the US dollar reversed higher but again encountered selling pressure near CAD1.2385. Both the MACD and Slow Stochastic appear to have leveled off in oversold territory. However, it probably requires a move above CAD1.2400-CAD1.2425 to suggest a corrective phase as opposed to consolidation.

Australian Dollar

The Aussie rose 0.6% last week, its third weekly advance. The move extended its gains to 3.3% this month. It settled last month around $0.7225. It is not just against the US dollar; speculative participants have driven the Aussie up on the crosses, including the yen and euro. The $0.7500 area corresponds to the (50%) retracement objective of the slide from early May that began by $0.7900 and bottomed in late August close to $0.7100.

The next (61.8%) retracement is found just shy of $0.7600, but before that, the 200-day moving average (~$0.7565) must be overcome. The momentum indicators are stretched, and the Slow Stochastic has already begun curling over. The Aussie finished last week below its five-day moving average for the first time this month. Initial support is seen around $0.7450, and a break signals a move to $0.7400. If that goes, there is room for another cent pullback.

Mexican Peso

The peso extended the previous week’s gains that had halted a four-week slide. Indeed, the peso’s nearly 0.75% gain last week put it near the best performers in the emerging market universe. Anticipation of more aggressive rate hikes, even before the bi-weekly CPI, reported before the weekend, accelerated more than forecast. The peso may have also benefited from a rebalancing of portfolios away from Brazil, where neither the political nor economic environment is favorable. The sell-off in bonds, stocks, and currency gives the sense that foreign investors are joining domestic investors in abandoning President Bolsonaro.

The Brazilian real managed to fall nearly as much as the Turkish lira (~3.3% vs. 3.6%). Before the weekend, the US dollar recorded a new low for the month (MXN20.1250) ahead of support seen near MXN20.10. A break sets up for a test on more important support around MXN20.00. The MACD and Slow Stochastic reflect the strong downside momentum. The latter has begun entering oversold territory. Mexico reports September trade, employment, and Q3 GDP next week. Growth is expected to have shifted lower to around 0.5% from 1.1% and 1.5% in Q1 and Q2, respectively.

China

If we begin by acknowledging that the yuan is closely managed and observe that it has risen four consecutive weeks to levels not seen since June, it seems reasonable to conclude that officials desired some yuan strength. And that strength should be kept in perspective. It is a little less than 1% this month. Still, the 0.8% gain last week was more than the cumulative gains of the previous three weeks and was the biggest advance since the last week of May when the dollar’s three-year low (~CNY6.3570). The dollar finished last week near CNY6.3835.

Some speculate that Beijing’s efforts to secure energy supplies and dampen commodity prices are consistent with a stronger currency. However, the volatility of commodities overwhelms the exchange rate volatility that PBOC officials tolerate. Also, the exchange rate is a blunt instrument, creating unintended consequences. Some demand for the yuan may have stemmed from the dollar bond issuance last week (four tranches for $4 bln). The momentum studies on the offshore yuan are stretched.

This article was written by Marc Chandler, MarctoMarket.

Greenback’s Gains Pared Mostly, but Extended Against the Yen

The yen was the weakest of the major currencies, falling almost 1.75%, its worst week since March 2020. The JP Morgan Emerging Market Currency Index initially declined to a new low for the year before recovering to snap a five-week slide and gain nearly 0.45%.

Despite the six basis point gain ahead of the weekend, perhaps helped by a stronger-than-expected September retail sales report, the 10-year note yield of 1.57% was off about four basis points on the week. The short end of the coupon curve was firmer as the curve flattened. The 2-year yield rose six basis points to 40 bp, the highest since last March. The yield has fallen only in one session so far this month.

As we have noted (here), the market is particularly aggressive in pricing in Fed tightening next year. With the average effective rate holding at eight basis points, the August 2022 Fed funds futures contract implies a yield of 23 bp, which is equivalent to a 60% chance of a hike at the late July FOMC meeting. The Federal Reserve says it will finish the tapering around the middle of next year.

Dollar Index

Since last month’s FOMC meeting, the Dollar Index rallied from slightly below 93.00 to a little above 94.55. It has since pulled back to test the midpoint of that rally (~93.77). It consolidated ahead of the weekend with an inside day. The MACD is has rolled over, and the Slow Stochastic did not confirm the high and has turned down. The next retracement objective (61.8%) is closer to 93.60, which is also about where the (38.2%) retracement of last month’s rally is found. Despite the pullback and the fraying of the 20-day moving average (~93.85), the Dollar Index has not closed below the moving average since mid-September. Given its firm close before the weeks, it seems more like consolidation right now than a trend reversal.

Euro

Last Wednesday and Thursday, the euro posted its first back-to-back gain since early September. It rose to almost $1.1625 on Thursday, stopping just shy of its 20-day moving average and the month’s high of $1.1640. The $1.1640 area also marks the (50%) retracement of the euro’s losses since the FOMC meeting concluded on September 22. Although the MACD and Slow Stochastic have turned up, the price action is not inspiring, though it managed to finish the week above $1.16, even if barely, for only the second time this month.

The euro recorded a new low for the year on October 12, near $1.1525. The $1.1490 is roughly the (38.2%) retracement of the euro’s rally since the March 20202 low around $1.0635. The US 2-year premium over Germany moved above 100 bp last week for the first time since the pandemic struck. It has risen by about 10 bp since the FOMC meeting.

Japanese Yen

The greenback gained against the yen in six of the last seven sessions. It rose from about JPY111.45 to JPY114.45 during this run and reached a new three-year high. Indeed, its four-week rally matches the longest advance since April-May 2018. Rising US yields (last week more about the short-end than long-end) is the key catalyst. More participants are talking about new opportunities for the carry trade, but momentum players appear to have also jumped aboard.

We identified the JPY114.50-JPY115.00 area as the possible top of a new range. The MACD continued to trend higher and is approaching the high for the year set in March and April. The Slow Stochastic appears to be poised to turn lower earlier next week after re-entering over-bought territory. Initial support now is seen in the JPY113.00-JPY113.25 area.

British Pound

Sterling had a good week, gaining 1% against the dollar to reach its best level in a month (~$1.3775). It is up 2% this month, helped by an aggressive backing up of short-term UK rates. Specifically, the implied yield of the December 2021 short-sterling futures contract rose 8.5 bp last week, its sixth weekly advance, during which time the rate has surged 24 bp as the market prices in a hike before the end of the year.

There are two meetings left (November 4 and December 16). The momentum indicators are trending higher, and the five-day moving average crossed above the 20-day for the first time since mid-September. The pre-weekend gains toward almost $1.3775 kissed the upper Bollinger Band. Look for sterling to run into resistance in the $1.3800-$1.3850 area, which holds the (50%) retracement of its decline from the June1 high when it last traded above $1.42, the 200-day moving average, and the trendline connecting the May and September highs. Initial support now is likely in the $1.3650-$1.3670 area.

Canadian Dollar

The US dollar fell for the fourth consecutive week against the Canadian dollar. Since last month’s FOMC meeting, the Canadian dollar has been the strongest major currency, appreciating by around 3.25% to its best level in three months. At the end of last week, the US dollar approached the measuring objective of the head and shoulders pattern we have been tracking that projects to about CAD1.2300. The greenback exceeded the (61.8%) retracement objective of its rally since the multi-year low was set on June 1 near CAD1.2000, which came a little above CAD1.2365.

After dipping below CAD1.2340 before being squeezed back to CAD1.2400. The MACD is at its lowest level in a few months but does not appear poised to turn higher. On the other hand, the Slow Stochastic has flatlined in oversold territory. Initial resistance is seen in the CAD1.2430 area. Since the Bank of Canada meeting on September 10, the June 2022 BA futures contract has sold off, and the implied yield has risen by about 28 bp. It consolidated in the second half of last week. The swaps market is pricing in about 75 bp of tightening over the next year.

Australian Dollar

The Australian dollar rallied almost 1.5% last week and finished above $0.7400 for the first time in over a month, corresponding to the (38.2%) retracement of the decline from the May high of almost $0.7900. It traded above its upper Bollinger Band every day last week and closed above it (~$0.7415) for the second consecutive session ahead of the weekend. Booming commodity prices are widely seen as a supportive factor, but they did not appear to do the Aussie much good in the June-August period.

The economic re-opening helps explain why the market can look past poor data, like the September employment report. The Aussie has fallen in only three sessions so far this month and is looking stretched. The MACD is overbought and is at its highest level in five months. The Slow Stochastic is also overbought and could turn lower next week. Initial support below $0.7400 is around $0.7375-$0.7380. On the upside, last month’s high was closer to $0.7480.

Mexican Peso

The greenback’s four-week rally against the peso ended with a bang. It fell almost 1.7% last week, the largest weekly loss since June. The dollar made a marginal new seven-month high a little above MXN20.90 on October 12, reversed lower, and fell to MXN20.32 ahead of the weekend, a new low for the month. Two factors helped the peso recover. First, the tone from most Banxico officials and the minutes seemed to play up the chances that the central bank may lift rates by more than the previous quarter-point moves. Second, risk appetites were strong, helping lift equities.

The MSCI Emerging Market Equity Index rose the second consecutive week after falling in the previous four weeks. The momentum indicators are heading lower for the dollar. With the pre-weekend decline, the greenback has given up a little more than half of the gains since the mid-September low (~MXN19.85). That retracement was found a little below MXN20.38. The next retracement (61.8%) is around MXN20.25.

Chinese Yuan

On October 14, the PBOC set the yuan’s exchange rate against the dollar lower than the models (Bloomberg survey) suggested. The gap was big enough to suggest that perhaps officials were signaling that they did not want to see continued yuan appreciation. The market seemed to shrug it off and took the yuan to a marginally new four-month high before the weekend. Some observers draw a connection between foreign flows returning to the Chinese equity market and the yuan’s strength. PBOC’s claim that the risks posed by Evergrande are “controllable” and unlikely to spread is precisely what other central banks said as the housing market bubble popped in 2007-2008.

Investors seem mistrustful and have taken other high-yielding Chinese bonds (mainly in the property development sector to around 20%). Given the slowing of the economy and the low consumer inflation, we suspect officials do not want the yuan to strengthen much from here, but to impose their will, it may have to escalate its efforts. Initial support for the dollar may be in the CNY6.4200-CNY6.4250 range, with CNY6.45 the likely nearby cap.

This article was written by Marc Chandler, MarctoMarket.

Mexico’s Central Bank Hikes Rates to 4.75% on Inflation Concerns

All 22 analysts surveyed in a Reuters poll had expected the bank, known as Banxico, to raise the rate for the third time in a row to 4.75%.

“Although the shocks that have increased inflation are expected to be transitory, due to their variety, magnitude, and the extended horizon over which they have affected it, they may pose risks to the price formation process and to inflation expectations,” Banxico said in its monetary policy statement.

In order to avoid those risks, Banxico said it deemed it necessary to hike the key rate.

Mexican consumer prices during the first half of September rose 0.42% to reach annual inflation of 5.87%, already edging above the 5.59% clocked for August, official data showed last week.

That is far above Banxico’s target rate of 3% plus or minus one percentage point.

Banxico said that annual headline and core inflation projections are expected to decrease, particularly for one year and beyond, and to converge to its 3% target by the end of the forecast horizon.

“Banxico’s decision to raise was consistent with our expectations and accompanied by yet another upward revision to inflation forecasts for the first half of 2022. But the emphasis of the statement remains on the transitory nature of price pressures and suggests Banxico does not see a lot more monetary tightening ahead,” said Charles Seville, Americas sovereigns co-head at Fitch Ratings.

Still, forecasts Banxico gave for annual headline inflation for the fourth quarter increased to 6.2%, from 5.7% previously, and projections for core inflation also rose to 5.3%, from a prior view of 5.0%.

For a look at all of today’s economic events, check out our economic calendar.

(Reporting by Anthony Esposito and Dave Graham; Editing by Chizu Nomiyama and Alistair Bell)