activity this week:
After spending the last three days consolidating in a relatively tight range, crude oil prices gained traction on Friday and the barrel of West Texas Intermediate rose to its highest level since July 11 at $73.70. The weekly report published by Baker Hughes energy services revealed that the total number of active oil rigs in the United States declined to 863 to provide a late boost to the WTI.
“For the third quarter, the increase of five oil rigs was the smallest since drillers cut three rigs in the fourth quarter of 2017. They added 50 rigs in the first quarter and 61 rigs in the second quarter of 2018,” Reuters noted.
Earlier in the day, Saudi’s oil giant, ARAMCO, announce that it would boost its oil output by 600K barrels per day to make up for the negative impact of the U.S. sanctions on Iran’s supply. Although this news dragged the barrel of WTI below the $72 mark earlier in the day, it didn’t take for crude oil to reverse its course as investors are looking to reposition themselves in the last day of the quarter ahead of November 4, on which U.S. sanctions against Iran go into effect.
“The market is coming to grips with the fact that the Iranian sanctions are not that far away. It’s going to tighten the market,” Phil Flynn, an analyst at Price Futures Group in Chicago, told Reuters on Friday.
Technical levels to consider
The initial resistance for the WTI aligns at $74.25 (Jul. 11 high) ahead of $75.25 (2018 high) and $76 (psychological level). On the downside, supports could be seen at $72 (psychological level/daily low), $70.80 (Sep. 24 low) and $70 (20-DMA).
The EUR/USD pair dropped on Friday for the third-day in-a-row affected by the announcement of the Italian government of a 2.4% budget deficit. Also, the comments from Italian officials added to concerns. The euro managed to recover ground during the American session but it was about to end Friday on a weak note.
US data failed to boost the greenback in the market and EUR/USD moved off lows. The pair bottomed earlier today at 1.1569, the lowest since September 11 and then managed to rise back above 1.1600. The recovery was capped by 1.1625 and near the end of the week was trading at 1.1615, 135 pips below the level it had a week ago, the worst decline in almost two months.
EUR/USD rejected from above 1.1800
Earlier over the week, the euro rose above 1.1800 but like what happened last week, it was rejected and pulled back sharply. It broke a short-term uptrend line, opening the doors to more losses from a technical perspective. Now the 1.1520/30 support is back on the radar.
The retreat from 3-month highs took place on the week the Federal Reserve rose the Fed fund rate for the third time of the year and signaled another hike in December. When the euro was looking to make a clear break above 1.1800 dropped back to the average price of the last five months. Over the short-term, monetary policy expectations could continue to provide support for the US dollar but it is not clear what could happen on a longer-term perspective.
“The next big move in EUR/USD is up when the first ECB hike draws closer and we forecast 1.25 in 12M. We still expect a steeper EUR yield curve on a 12M horizon. The ECB maintains a relatively tight grip on the short end of the curve, while the 10Y segment of the curve is pushed higher by rising US yields, the end of ECB QE and the pricing of ECB rate hikes in 2019-20. Our base case is still that the ECB waits until December 2019 to hike for the first time (20bp). While our euro area inflation forecast is in line with the ECB projection this year, our profile is lower for next year making a December hike more likely than a September hike. A 10bp hike is priced in by September 2019 and 20bp by December 2019”, wrote analysts at Danske Bank.
The Mexican peso rose on Friday against the US dollar and was about to end the week and the quarter on a strong note. The currency climbed supported by a positive tone around emerging market currencies and also by higher crude oil prices.
The USD/MXN ended lower the week despite another rate hike from the Federal Reserve. What the US central bank did, was already priced in. The tone of the statement and the projections did not create tensions across emerging markets.
The peso also showed resilience despite the lack of resolution regarding the trade deal between the US and Canada. The fact that the US and Mexico already reached a deal offset major concerns. Another positive factor over the week for MXN was the rally in crude oil prices; the WTI barrel rose almost 4%.
After Fed, comes Banxico
Next Thursday is the meeting of the Bank of Mexico. There is not a unanimous consensus about what Banxico would do. The stabilization of the exchange rate and the expectations that inflation will slowdown removed pressure from the central bank to raise rates again. Some analysts expect Banxico to hike the key rate to 8.0%, following the Fed.
On Friday, it was informed that economist Johnathan Heath, would be nominated for central bank deputy governor. The report was received as a positive in markets. The election is taken by the president-elect administration. Over López Obrador six-year presidential term, he will get to nominate three deputy governors and the governor.
USD/MXN Technical levels
The pair ended the week around 18.70 that is a relevant support level. A consolidation below that level would clear the way to more losses, targeting 18.50. Between 18.40 and 18.50 there is a strong barrier that is likely to cap the downside but if broken, the outlook would favor more gains to the peso.
To the upside, if USD/MXN holds above 18.70 it could correct higher. Only a firm break above 19.05 would change the current neutral to bearish short-term bias.
USD/CHF 4-hour chart
Spot rate: 0.9818
Relative change: 0.45%
Main trend: Bullish
Resistance 1: 0.9807 August 22 low
Resistance 2: 0.9820 August 25 low
Resistance 3: 0.9868 July 31 low
Resistance 4: 0.9984 August 15 high
Support 1: 0.9788 June 7 swing low (key level)
Support 2: 0.9768 September 4 swing high
Support 3: 0.9745-47, August 28 low, 200-day simple moving average
Support 4: 0.9700 figure
Mexican President-elect Andrés Manuel López Obrador recently crossed the wires, via LiveSquawk, saying that there was still time to reach a trilateral NAFTA deal and added that they will insist to have Canada included in the new agreement.
Commenting on the weekly CFTC report, “Investors acquired new shorts and continued to shed long gold exposure ahead of the Fed’s rate decision, which was expected to yield a hike,” TD Securities analysts said.
“The prospects of higher US policy rates, which were reinforced by increasing 2yr yields, along with the drift lower in prices over the summer, have left net positioning near historic lows. Recent signs of waning US strength should help specs to look beyond Wednesday’s FOMC communique and find the courage to cover and lift prices.”
“Meanwhile, decreasing trade-related EM angst following a less severe US trade action against China, prompted specs to aggressively cover short exposure in platinum and add length in palladium as sentiment improved.”