20-Apr-2020

1) Crude Oil Down Over 18%
2) EUR/USD: Picture Remains Fragile
3) A Modest USD Pullback Assisted GBP/USD to Gain Some Traction on Friday

1) Crude Oil Down Over 18%

Oil has dropped to a 21-year low today. Basically, bears are out for blood. The WTI West Texas Crude Oil dropped over 18 percent today and made a low of $14.45, a price level that has surprised traders today. The steep fall in the price is because of the lack of sufficient demand and lack of storage place given the fact that the production cut has failed to address the supply glut. There is a strong possibility that WTI Crude Oil prices can drop to $10.

Since the start of the Coronavirus pandemic, oil’s demand has been crippled. There is little done from the supply side, the CAPEX cut by energy companies aren’t enough, we need organic oil production cut from the U.S.

During the 2015 oil supply glut, there has been a massive focus on the U.S. rig count number. The rig count fell to its lowest level in late June 2016. It took a fairly long time for these rig count to touch this level – just less than one year.

The same rig count measure has started to fall from its peak level now, but we are still nowhere close enough to find the same level – the level that pushed oil prices higher back in 2016. To put things in perspective, the US total rig count is down 51% from its December 2018 peak, but it is still up over 25% from its recent low. The interesting element about rig count is that it doesn’t work like a light switch, meaning they don’t go down or up instantly. It takes time for rigs to go offline due to the complexities in nature of the business, such as terms of contracts and rigs’ operation level.

The same rig count measure has started to fall from its peak level now, but we are still nowhere close enough to find the same level – the level that pushed oil prices higher back in 2016. To put things in perspective, the US total rig count is down 51% from its December 2018 peak, but it is still up over 25% from its recent low. The interesting element about rig count is that it doesn’t work like a light switch, meaning they don’t go down or up instantly. It takes time for rigs to go offline due to the complexities in nature of the business, such as terms of contracts and rigs’ operation level.

In my estimate, we believe that it is highly likely that it may take another month or two for the rig count number to reach the previous level. In terms of price, unfortunately, it means lower price levels.

In terms of technical price levels, here are some important support and resistance levels based on short-term (4 to 7 months) time frame.

If the price falls to $13 to $16 range (which it already has), the upside range could be $20 to $23.

If the price falls to $10 to $13, a likely scenario, the immediate ceiling level could be $15 to $18.

The bottom line is that there is no doubt that oil prices are way oversold at the current level, but given the circumstances, it is likely that the price may continue to fall further because the rig count hasn’t touched its bottom yet. But for an investor who holds a long term perspective, a time frame of 12 months to 24 months, the current plunge in oil price represents an opportunity.

2) EUR/USD: Picture Remains Fragile

The (trade-weighted) dollar on Friday hovered up and down around the 100 pivot. There wasn’t a clear story behind the moves. The usual risk-off/risk-on correlation hardly explained the intraday swings. Still the dollar finished near the lower bound of the intraday range (DXY 99.78) as US equities closed with solid gains. EUR/USD rebounded off an early dip (close 1.0875), but the broader picture stays fragile. USD/JPY ended at 107.54, holding the lower part of recent consolidation pattern.

Asian equities aren’t really able to build on the solid WS gains late last week. A further decline in the (WTI) oil price is a negative for global risk sentiment too. The PBOC lowered the 1-y PLR to 3.85%. The yuan (USD/CNY 7.0765 area) rebounds slightly after soft start. The TW dollar is trading little changed (99.85 area). USD/JPY gains a few ticks (107.85) despite a cautious risk sentiment. EUR/USD is trading in the 1.0865 area. The kiwi dollar outperforms. The New Zealand government announced it will ease lockdown restrictions next week (NZD/USD 0.6040).

Today’s economic calendar contains few data with potential to move global FX trading. Investors are trying to assess the pace of the restart of the economy in Europe and the US. Maybe, guidance from companies reporting Q1 earning might get some more weight in shaping global sentiment than is usually the case. Even as the link between the dollar and risk sentiment was a bit diffuse last week, we see some ‘by default’ USD strength at the start of week. US equities already recouped quite a big part of the initial corona-related losses. A pause in the equity rally might support the US currency. The same applies to the decline in the oil price. EUR/USD still struggles to hold north of the 1.0839 level (23% fibo retracement). Next key support comes in at the 1.0770 area. For now, we don’t see a trigger for a quick and forceful EUR/USD rebound.

EUR/GBP also developed a rather erratic directionless trading patter near the 0.87 level on Friday. This week, the negotiations on the future relationship between the EU and the UK restart, but there are no signs that the political stalemate will be solved anytime soon. The issue was no big factor for EUR/GBP trading of late as the UK currency was in rather good shape. Even so, we hold on to the neutral bias on the EUR/GBP cross rate and expect more range trading near the 0.87 pivot.

3) A Modest USD Pullback Assisted GBP/USD to Gain Some Traction on Friday

The GBP/USD pair on Friday staged a modest recovery from weekly lows and the uptick was supported by a mildly softer tone surrounding the US dollar. The global risk sentiment got a modest lift on the last trading day of the week after the US President Donald Trump laid down new guidelines for the reopening of the US economy. This coupled with the latest optimism over the treatment for COVID-19 virus undermined the greenback’s perceived safe-haven status against its British counterpart and remained supportive of the pair’s modest recovery.

Meanwhile, Gilead Sciences issued a note of caution on their antiviral drug Remdesivir, which coupled with persistent worries over the economic fallout from the coronavirus pandemic continue lending some support to the USD’s status as the global reserve currency. This comes ahead of the resumption of Brexit negotiations this week and kept a lid on any strong follow-through positive move. The pair witnessed some fresh selling during the Asian session on Monday and slipped back to mid-1.2400s amid a modest pickup in the USD demand.

In the absence of any major market-moving economic releases, developments surrounding the coronavirus saga might continue to play a key role in influencing the broader market risk sentiment. This might eventually drive the USD demand and produce some meaningful trading opportunities on the first day of a new trading week.

From a technical perspective, nothing seems to have changed much for the pair and the near-term bias remains tilted in favour of bearish traders. However, it will be prudent to wait for a sustained break through the 1.2400 mark before positioning for any further near-term depreciating move. A subsequent weakness below the 1.2370-65 support zone will reinforce the negative outlook and accelerate the fall towards the 1.2300 round-figure mark en-route the next major support near mid-1.2200s.

On the flip side, any attempted recovery now seems to confront some fresh supply near the key 1.2500 psychological mark and remain caped near the 1.2525-35 resistance zone. That said, some follow-through buying might prompt some short-term move and lift the pair back towards the 1.2600 round-figure mark. The momentum could further get extended and assist bulls to make a fresh attempt towards clearing the 200-DMA hurdle, currently around mid-1.2600s.