The Daily Edge

All-Out Oil Price War Sparks Market Panic


The Daily Edge is authored by Ivan Delgado, 10y Forex Trader veteran & Market Insights Commentator at Global Prime. Feel free to follow Ivan on Twitter & Youtube weekly show. The purpose of this content is to provide an assessment of the conditions, taking an in-depth look of market dynamics – fundamentals and technicals – determine daily biases and assist one’s trading decisions. Global Prime is the #1 broker by reviews in Forex Peace Army.

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Quick Take

If the demand shock courtesy of COVID-19 was not enough of a stumbling block for the depressed outlook for the price of Oil, an all-out price war broke out over the weekend after Saudi Aramco cut its official selling price and announced that it plans to increase output well in excess of 10m bpd amid OPEC crumbling after a rejection by Russia to further curtail Oil production. The collateral effects have resulted in an absolutely epic hammering of Oil towards the $30.00 mark, another textbook case of what panic selling does to safe haven Yen – Yen crosses flash crash included -, while the max exodus off carry trade continues unabated, leading to also strength in the Euro as hedging and margin calls ensue. The S&P 500 was limit down after falling more than 5{c55dae091e2f4b96c42546a5edb68ce9f701c78980adb8fd55b74e573b5f59f6}. The most affected currency by the implosion of Oil prices has been, by a large margin, the Canadian Dollar and the Norwegian Krone. The US Dollar is also selling hard as chatter continues to grow that the Fed may soon have no option but to start considering opening the floodgates of money supply by reintroducing QE. Note, both the USD and CAD have also been severely affected by the bail out of carry trades. The Oceanic currency, amid this torrential dripping of negative news have been left out unloved once again, taken to the woodshed after the flash crash as liquidity remains extremely poor. A currency that keeps acting somehow as a ‘bridging’ fiat to diversify into is the Pound, the only one relatively immune to the dynamics at play (risk-off, carry trades) and more exposed to other idiosyncratic drivers such as the trade negotiations between the UK and Europe. 

The indices show the performance of a particular currency vs G8 FX. An educational video on how to interpret these indices can be found in the Global Prime’s Research section.

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Narratives In Financial Markets

* The Information is gathered after scanning top publications including the FT, WSJ, Reuters, Bloomberg, ForexLive, Twitter, Institutional Bank Research reports.

Oil’s epic bust: Crude Oil was absolutely demolished by over 30{c55dae091e2f4b96c42546a5edb68ce9f701c78980adb8fd55b74e573b5f59f6} at the Asia open to around $30.00 after news broke out that State oil giant Saudi Aramco cut its official selling price. To make it worse, it also announced that it plans to increase output well in excess of 10m bpd (barrels per day). The drastic measures taken by Saudi Arabia come on the heels of the crumbling seen by the OPEC+ cartel after Russia refused to further curtail Oil production. 

Price war declared by the Saudis: According to Bloomberg, “Saudi Arabia has privately told some market participants it could raise production much higher if needed, even going to a record of 12 million barrels a day.” The actions by Saudi Arabia in the oil market “are the equivalent of a declaration of war,” said a commodities hedge fund manager, asking not to be named due to the sensitivity of the situation.

Attempts of coup in Saudi Arabia: Not enough with the negative news-dripping out of Saudi Arabia, the Wall Street Joual reported the detentions of two royals on Friday amid an alleged coup attempt. “The publication has since reported that the sweep widened to include dozens of interior ministry officials, senior army officers and others suspected of supporting a coup attempt” the report notes. 

COVID-19 = Perfect storm: The plummeting in Oil must be contextualized at a time when due to the inteational spread of the coronavirus, we are going through a massive demand shock. Estimates suggest upwards of 5 million barrels per day end up unbued, causing an epic Oil glut, with demand expected to fall further before a U-tu occurs. 

Oil’s collateral damage: The war on oil prices is reverberating across financial markets with the Canadian Dollar or the Norwegian Krone imploding. The latter fell to its lowest since 1985 against the USD. Equity markets, judging by the S&P 500 futures are also in disarray, with the usual safe-haven assets the likes of Yen, Gold or bond yields surging. As I explained last week in this video, EURCAD is the ultimate expression of the carry trade unwind in the G8 FX space. 

EZ risk of an ongoing carry trade unwind: SocGen Economist Albert Edwards wrote: “If a carry trade unwind does cause the euro to surge uncontrollably against the dollar towards the $1.2-1.3 zone, the impact on the fragile eurozone economy could be devastating. For despite the euro’s weakness against the dollar, other countries have also been pursuing weak currency polices. As a result, the euro effective exchange rate (ie measuring the euro against a basket of currencies) is much stronger than the headline euro/$ exchange rate suggests. A surge in the euro could crush the eurozone economy. Indeed it could threaten the euro’s very existence.”

Cracks in credit markets: In credit and funding markets, it looks like some cracks are also appearing. JPMorgan strategist Nikolaos Panigirtzoglou wrote that “we see initial signs of emerging credit and funding stress” and cautions that “if these shifts in credit and funding markets are sustained over the coming weeks and months, especially in the issuance space, credit channels might start amplifying the economic fallout from the COVID-19 crisis.”

US-China trade deal in jeopardy? According to Global Times, a mouthpiece for the Chinese govement, chatter has it that the US may not be able to hold up its side of the bargain in the Phase One trade deal given the worsening coronavirus outbreak. Global Times notes that while the economy in China is retuing to normal, the US economic activity could be dampened. “The two sides might have to conduct consultations to put the lingering trade war on hold…”

China’s poor trade figures: Over the weekend, China released its January-February trade data, confirming that the exports and imports activity were both down very sharply. Imports were down 4{c55dae091e2f4b96c42546a5edb68ce9f701c78980adb8fd55b74e573b5f59f6} y/y in yuan terms, while exports saw a decrease of 17.2{c55dae091e2f4b96c42546a5edb68ce9f701c78980adb8fd55b74e573b5f59f6} in January and February.  

Draconian measures in Italy to contain COVID-19: In Italy, due to the soaring of coronavirus cases & deaths, the govement is taking draconian measures and is about to to lock down the Milan region to severely curtail movement and activity until April 3 according to a draft decree cited. This will imply that around 16 million people will be stopped from entering or exiting the most-affected areas. For more details about all the nuances, the readership can head to this Bloomberg article. Live updates available here.

US NFP comes and goes unnoticed: Last Friday’s US NFP report comes to show the secondary impact that economic news are now having as the coronavirus and now Oil are ruling the proceedings. Despite the US February nonfarm payroll came much stronger at 273K vs 175K estimate – largest since May 2018 -, the market barely budged. The unemployment rate was 3.5{c55dae091e2f4b96c42546a5edb68ce9f701c78980adb8fd55b74e573b5f59f6} vs 3.6{c55dae091e2f4b96c42546a5edb68ce9f701c78980adb8fd55b74e573b5f59f6} estimate, while the avg hourly eaings y/y remained stuck at the 3.0{c55dae091e2f4b96c42546a5edb68ce9f701c78980adb8fd55b74e573b5f59f6} mark. Note, the report did not yet account for the COVID-19 crisis that has recently hit the US, another key reason to see the little moves.  

Canadian jobs totally ignored as Oil implodes: But this obliviousness towards economic data is best represented by the behavior of the Canadian Dollar to an upbeat read in Canada’s February employment, which came at +30.3K vs +11.0K expected, with a full-time vs part-time split and wage increases also very favourable.  The unemployment rate also held up very well as did the participation rate. Despite this bright report, the unfolding virus crisis and the Oil bust render this report largely irrelevant. 

Harsh waing on COVID-19: Dr. Richard Hatchett, principal author of the National Strategy for Pandemic Influenza Implementation Plan, and currently heads the Coalition for Epidemic Preparedness Innovations, told the UK’s Channel 4: “This is the most frightening disease I’ve ever encountered in my career, and that includes Ebola, it includes MERS, it includes SARS. And it’s frightening because of the combination of infectiousness and a lethality that appears to be manyfold higher than flu.” 

8 states in the US declare State of Emergency: The coronavirus situation in the US has so far declared 8 states with a State of Emergency. These include CA, FL, KY, MD, NY, OR, UT, WA with an unfolding crisis on the testing kids as the  US FDA is still withholding approval to even test for the virus from healthcare facilities. 

Fed’s QE to the rescue? In view of Michael Wilson, Morgan Stanley chief equity strategist, markets are likely going to struggle until the Fed launches an official QE program. “I always thought the cyclical bear market that began in 2018 had unfinished business once the liquidity surge ended. COVID-19 provided the spark for its completion, which means pricing in a greater likelihood of US recession. We believe equity markets will struggle until policy-makers get back ahead of the curve with more interest rate cuts and an extension of the current balance sheet expansion and/or an official quantitative easing program – something we think is likely coming.”

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Recent Economic Indicators & Events Ahead

Source: Forexfactory

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Insights Into Forex Flows

The indices show the performance of a particular currency vs G8 FX. An educational video on how to interpret these indices can be found in the Global Prime’s Research section. The idea of this analysis is to complement one’s daily bias so that traders can make better and smarter decisions by accounting for the aggregation of flows. 

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The EUR index has broken above its previous resistance level and the 100{c55dae091e2f4b96c42546a5edb68ce9f701c78980adb8fd55b74e573b5f59f6} projection target tat had been holding up for a number of days. The implosion in Oil prices has had immediate spillover effects around all the coers of the market, causing risk assets to sell-off, the VIX to spike, and as a consequence, the safest bet remains to long the Euro as further unwind of carry trades causes the currency to be a very attractive proposition for market speculators. 

The GBP index, after the type of patte off the lows that resonates with an accumulation of longs’ campaign – compression – , the rally from that low point has been unstoppable. The Pound is seen as a ‘bridging currency’ to diversify into at times of huge uncertainty with at least half the G8 FX space (USD, CAD, AUD, NZD) imploding on the basis of ‘risk-off’ and the unwind of carry trade structures. I have serious reservations that the currency can keep up the strength given the layers of resistance above but these are very dicey times. 

The USD index, after it cracked a key level of support, it unraveled a fast and furious sell-off that in a matter of 24h has now hit its 100{c55dae091e2f4b96c42546a5edb68ce9f701c78980adb8fd55b74e573b5f59f6} projection target. The market not only keeps pricing in further Fed easing to the tune of another 50bp next week, but chatter about the Fed having to resort to more draconian measures such as a retu to QE are keeping the currency at dramatically low levels relative to where we were trading just a month ago. The mass exodus in long carry trade structures has made the USD vulnerable as of late. 

The CAD index continues to face the perfect bearish storm as the further unwind of carry trades, alongside the bold move by the BOC to cut rates by 50bp, now has an all-out Oil price war thrown into the mix. Even on Friday I said that the latest CAD sell-off before the weekend Saudi bombshell had reached oversold conditions, so this hammering makes the price out-of-whack yet remember that the market cans stay irrational longer than one can stay solvent. We’ve definitely and very quickly evolved into what looks like a macro bearish trend in the CAD, although as a huge caveat, don’t think for a minute these are attractive prices to engage in CAD shorts unless you are looking to scalp this market. As usual, wait the market to come to you for entries that may be fitting to your current strategy of engagement. 

The JPY index, with risk aversion back at full steam, has bursted through its latest resistance, one that corresponded to the origin of last year’s supply imbalance area. The frantic amount of interest to join the JPY bid has led to a very fast rise towards the 100{c55dae091e2f4b96c42546a5edb68ce9f701c78980adb8fd55b74e573b5f59f6} proj target, which is the level in the chart where I consider a market to have reached an inflection point for potential consideration of a retu back to ‘mean’ measures. The bias off the 4-hour chart remains very bullish and as a result, the safest bet is to keep betting for Yen strength. Granted, the currency looks very expensive in the near term so pullbacks will offer better deals. 

The AUD index is back under pressure by retesting its previous level of support, which as a reminder, was a 100{c55dae091e2f4b96c42546a5edb68ce9f701c78980adb8fd55b74e573b5f59f6} proj target respected with the usual striking accuracy. The index invalidated its short-term positive dynamics last Thursday as the market structure started to roll over, which has now resulted in follow-up supply dynamics. There is again re-alignment between the macro and the micro trend, hence weaker levels in coming sessions are a real possibility. 

The NZD index has been unable to gain much traction off the lows. It has been the most vulnerable currency out of the G8 FX space, even if in the last 24h, the CAD takes that title. Even on the ephemeral retu of risk appetite last week, the Kiwi failed to break above its most immediate resistance level, which speaks volumes of the low interest to accumulate longs. The unwind of carry longs has also hit the NZD as the currency was also part of the group of G8 FX currencies that offered relatively decent rates compared to funding fiats. 

The CHF index just won’t stop its appreciation with or without the SNB intervention in the market. The epic unwind of carry trade positions is also benefiting the CHF, which alongside the panic selling in equities and Oil, has taken the ‘risk off’ profile to the next level. These conditions continue to be music to the ears of CHF long speculators. The magnitude of the strength in the index is well reflected by the fact that the currency is not respecting the 100{c55dae091e2f4b96c42546a5edb68ce9f701c78980adb8fd55b74e573b5f59f6} bullish proj targets as of late, which is a sign that few market makers are willing to step in to get in the way of what’s a stampede of bulls which desentivizises sell-side commitment.

Important Footnotes

  • Market structure: Markets evolve in cycles followed by a period of distribution and/or accumulation. To understand the principles applied in the assessment of cycles, refer to the tutorial How To Read Market Structures In Forex
  • Horizontal Support/Resistance: Unlike levels of dynamic support or resistance or more subjective measurements such as fibonacci retracements, pivot points, trendlines, or other forms of reactive areas, the horizontal lines of support and resistance are universal concepts used by the majority of market participants. It, therefore, makes the areas the most widely followed and relevant to monitor. The Ultimate Guide To Identify Areas Of High Interest In Any Market
  • Fundamentals: It’s important to highlight that the daily market outlook provided in this report is subject to the impact of the fundamental news. Any unexpected news may cause the price to behave erratically in the short term.
  • Projection Targets: The usefulness of the 100{c55dae091e2f4b96c42546a5edb68ce9f701c78980adb8fd55b74e573b5f59f6} projection resides in the symmetry and harmonic relationships of market cycles. By drawing a 100{c55dae091e2f4b96c42546a5edb68ce9f701c78980adb8fd55b74e573b5f59f6} projection, you can anticipate the area in the chart where some type of pause and potential reversals in price is likely to occur, due to 1. The side in control of the cycle takes profits 2. Counter-trend positions are added by contrarian players 3. These are price points where limit orders are set by market-makers. You can find out more by reading the tutorial on The Magical 100{c55dae091e2f4b96c42546a5edb68ce9f701c78980adb8fd55b74e573b5f59f6} Fibonacci Projection


About the author

Ivan Delgado

Ivan Delgado is a decade-long Forex Trader. Feel free to follow Ivan on Youtube. Join thousands of traders who follow Ivan's insights to increase their profitability rate by learning the ins and outs of how to read and trade financial markets. Ivan has you covered with in-depth technical market analysis to help you turn the corner.


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