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Oil prices are tumbling after U.S. crude inventory numbers came in at +5m barrels, instead of the priced-in number of -1m barrels. The read draws in the amount of divergence that we have reported on between speculative interest and forward contract prices. The price appreciation had got ahead of itself when compare to global demand, and to add 6m barrels over the expected inventory read justifies the 2.5% haircut that August crude prices have just had. The impact is for Usd to strengthen, and by default that will add to the move to bonds, which in turn will pressure equity valuations in the near-term.
Regional currency values are dropping against the dollar, to the delight of the regional central banks who have been weighing Treasury reserve values dropping, at the same time that regional currencies have been gaining in value; not something that many would want to see in the current economic recovery cycle that the global markets are in. Wednesday brings with it a read that the markets have fair value of the dollar, after a run by the major pairs recently that got them to the outer ranges of the 4 hour charts.
The reversal from main resistance areas this week has taken some froth off the dollar selling, but interestingly, has still left the major currencies in long mode against the greenback. It all points to possible reversals, of the reversal seen this week, which maybe now will offer the time to look to buy the test of support on the major currencies, if global equity markets hold steady, and oil holds above 63.50 a barrel.
The global sentiment has fizzled as this week has progressed, and has not been helped by the headline that Chinese markets had dropped 5% overnight. Looking deeper, however, that is a 5% drop from an 80% yearly move higher, and most would accept that reversal without too much fuss. The more important aspect of the Chinese moves, and the reason why it will be a headline that quickly gathers dust, is that is was a regional reversal.
The global markets did not sell into the big drop, nor would they be expected to, due to the fact that the Chinese economy links and pegs its currency to the Usd; the drop has been contained within the Chinese Wall. Maybe once that headline fades, the equity markets can show whether they will reverse to support, and then make the move higher, or break through to move lower, and send the major currencies to the opposite side of the 4 hour channels.
A sign of the market's reluctance to get too involved in Usd selling can be seen in the Usd/Cad pair. Lower oil, reduced equity sentiment, global markets at an impasse, and an oversold pair, would regularly result in a large move higher, in Usd appreciation. Instead, the pair is comfortably sitting within the previous session trading range, and easily holding the lows of the year. That adds up to a thought process that, if Wall Street holds current valuations, the dollar may get reversed in Asian trade. If not, we will see things on the other side of the 4 hour chart ranges by Friday. This is a pivotal session to monitor.