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Key Points:

• Saudi Arabia signals potential extension to production cuts.
• Price action being pushed to the update by geopolitical risk.
• Medium term outlook remains unchanged despite recent rally

Crude oil prices have experienced a renaissance over the past week as concerted rallies have harkened back to the days of complete OPEC control. In particular, the price of West Texas Intermediate (WTI) has soared over the past 24 hours as, a combination of geopolitical risk and further potential supply cuts from Saudi Arabia, have buoyed the commodity. Subsequently, WTI prices currently trade around the $53.39 a barrel mark but it remains to be seen if oil can retain this level over the medium term.

The Saudi Announcement that they will seek an extension to the current production cuts during the May OPEC meeting was certainly well received by the market. Future prices immediately spiked on the prospect of additional production constraints but the reality is that this is far from a done deal given the various OPEC members propensity to cheat on production cuts. This risk is amplified given the fact that many OPEC members are currently experiencing pressures upon their foreign currency reserves and require the market share to balance their books. Subsequently, there are plenty of external pressures to suggest that the May meeting could be contentious

Additionally, the success of any future production cut agreement is likely to hinge upon the participation of a range of non-OPEC members. In the new oil reality, OPEC no longer is able to control the globally integrated oil markets without the tacit agreement, or direct collusion, of external producers. However, this is difficult to see given the levels of crude production currently being obtained in the Canadian oil sands and U.S. shale operations. It is relatively clear that advances in North American oil extraction is strongly altering the balance of power within the marketplace and sorely testing the cartel’s ability to respond.

Realistically, once most of the geopolitical risks around Syria and North Korea ebb away, so too will the upward pressure on oil prices. Rebalancing is still occurring within global markets and the rise in WTI prices is simply a distraction as U.S. shale production activity is likely to now increase, in response to the price rises. The reality is that there is plenty of pain still required before supply is balanced to a sustainable level globally.

In addition, there are also some specific concerns over the current level of demand as we head into what is effectively the driving season for the United States. There are some indications that consumer sentiment is slipping ahead of a planned tightening phase from the Federal Reserve. This could have a marked impact on crude prices, especially if we continue to see growing inventory figures emanating from the EIA.

Ultimately, Crude prices are unlikely to persist at their current level in the medium term, even with an extension of the OPEC production cut agreement. As long as we manage to avoid a conflict in either Syria or North Korea the price of oil is likely to slide back towards the $50.00 handle over the next month. This will especially be the case of EIA inventory figures continue to disappoint the market with builds. Subsequently, realise that the long play is running out of momentum and that the downside is beckoning regardless of any OPEC action.

EURUSD

The EURUSD had another indecisive movement yesterday. The bias is neutral in nearest term. Overall price is still in a short-term bearish phase after a false break above 1.0873 two weeks ago, but needs a clear break below the trend line support as you can see on my H4 below to continue the bearish phase testing 1.0500. Immediate support is seen around 1.0575. A clear break below that area could trigger further bearish pressure testing 1.500 region. Immediate resistance is seen around 1.0630. A clear break above that area could trigger further bullish pressure testing 1.0700 area. Overall I remain neutral.

GBPUSD

The GBPUSD had a bullish momentum yesterday topped at 1.2494. The bearish scenario after broke below the triangle formation is no longer valid and price is now traded back above the H1 EMA 200 as you can see on my H1 chart below suggests a potential bullish outlook. The bias is bullish in nearest term retesting 1.2615. Immediate support is seen around 1.2450. A clear break back below that area could lead price to neutral zone in nearest term as direction would become unclear. Overall I remain neutral.

USDJPY

The USDJPY had a significant bearish momentum yesterday, broke below 110.10 key support and hit 109.34 earlier today in Asian session. The bias is bearish in nearest term testing 108.50 area. Immediate resistance is seen around 110.10. A clear break back above that area could lead price to neutral zone in nearest term as direction would become unclear. I am bearish on this pair.

USDCHF

The USDCHF had another indecisive movement yesterday. The bias remains neutral in nearest term but price is still in a bullish phase with key support seen at 1.0060 – 1.0020 region targeting 1.0170 area. A clear break back below 1.0020 (H4 EMA 200) would interrupt the bullish phase started from 0.9813. On the upside, a clear break and daily close above 1.0170 would expose 1.0250 or higher. Overall I remain neutral.

Daily Pivots: (S1) 109.15; (P) 110.04; (R1) 110.49; More....

USD/JPY's strong break of 110.10 support confirms resumption of near term decline from 118.65. Intraday bias is back on the downside for 50% retracement of 98.97 to 118.65 at 108.81. At this point, there is no clear indication of reversal yet and it's staying comfortably inside a falling channel. Break of 108.81 will target 61.8% retracement at 106.48 and possibly below. Meanwhile, on the upside, break of 111.57 resistance is needed to be the first sign of reversal. Otherwise, outlook will remain bearish in case of recovery.

In the bigger picture, price actions from 125.85 high are seen as a corrective pattern. Sustained trading below 55 week EMA (now at 111.15) will indicate that the second leg from 98.97 has completed at 118.65. And in that case, USD/JPY would start the third leg down through 98.97 low to 61.8% retracement of 75.56 to 125.85 at 94.77. On the upside, break of 115.49 resistance should resume the rise from 98.97 for a test on 125.85 high.

The financial markets are clearly in risk averse mode on escalating geopolitical tensions. Gold jumps to as high as 1281.8 so far, comparing to last week's close at 1257.3, and is heading towards 1300 handle. WTI crude oil also extends recent rally to as high as 53.6, still on course to 55.24 key resistance. Safe haven flows into US treasury also pushed yield lower with 10-year yield losing -0.063 to close at 2.298. And 10-year yield is now having last week's spike low at 2.271 in sight. Reactions in stock were relatively muted as DJIA dipped to 20512.56 but closed at 20651, down just -0.03%. Though, notable weakness is seen in Nikkei as it's trading down -1.2% at the time of writing.

In the currency markets, the Japanese Yen jumps broadly on risk aversion. And technically, USD/JPY, EUR/JPY and GBP/JPY are extending recent near term fall. Aussie and Kiwi are the weakest ones but Canadian Dollar is supported by oil price. Falling US treasury yield drags down Dollar, which is trading as the second weakest for the time being.

North Korea tension escalates

Geopolitical tension escalated again when US President Donald Trump tweeted saying that North Korea is looking for trouble. And, "if China decides to help, that would be great. If not, we will solve the problem without them! U.S.A." And then Trump sent an "Armada. Very powerful" to Korean peninsula in a show of force. North Korean government responded by warning to take "the toughest counteraction against the provocateurs". And, North Korea will "not miss a chance to sweep the imperialist group with a nuclear fire of justice." The official Rodong Sinmun newspaper also warned that "Our revolutionary strong army is keenly watching every move by enemy elements with our nuclear sight focused on the U.S. invasionary bases not only in South Korea and the Pacific operation theater but also in the U.S. mainland."

How about tensions with Russia?

Meanwhile, US Defense Secretary Jim Mattis said that the US and Russia tensions will not "spiral out of control" as the military operation in Syria was a one-off. Mattis put the responsibility on Russia and said that "I'm confident the Russians will act in their own best interest and there is nothing in their best interest to say they want this situation to go out of control." Separately, US Secretary of State Rex Tillerson arrived in Moscow yesterday, less than a week after US bombed Syria in response to the government's use of chemical weapons on civilians. Tillerson warned that Russia can choose to a part to "relieve suffering of the Syrian people", or "maintain" its alliance with Syria and Iran. Russian President Vladimir Putin said he knew about the panned "provocations" to blame Syrian government and emphasized that UN should first investigate the attack.

San Francisco Fed Williams Blasts tariffs

San Francisco Fed President John Williams said that "three to four rate hikes seem appropriate this year". And Fed should "also begin to normalize our balance sheet towards the end of this year". Meanwhile, William also criticized the idea of imposing tariffs on countries that run a trade surplus with US. He said that higher tariffs would be "bad for growth, bad for jobs and bad for inflation." And he hoped that "there may be some separating of campaign rhetoric from what actually happens". Separately, Minneapolis Fed President Neel Kashkari said Fed "can do a little bit better" on inflation and employment.

BoJ Kuroda sounds more conscious on stimulus exit

BoJ Governor Haruhiko Kuroda told the parliament that the central bank's policy "doesn't directly target exchange rate". Nonetheless, "it's true that if the yen weakens, it may quicken achievement of our price target." Meanwhile, Kuroda also noted there are "a lot of measures" at the central bank's disposal for stimulus exit. And he pledged that BoJ can "take the most appropriate policy steps while maintaining market stability, which would include reducing the size of our balance sheet." Some analysts noted that Kuroda sounds more conscious about stimulus exit. And that could either be because he's more confidence in inflation, or he just wanted to avoid criticism of not having a plan.

On the data front...

Japan machine orders rose 1.5% mom in February. Domestic CGPI rose 1.4% yoy in March. China CPI rose 0.9% yoy in March, PPI rose 7.6% yoy. Australia Westpac consumer confidence dropped -0.7% in April. UK job data will be the main focus in European session. BoC will also announce rate decision later in the day and is widely expected to keep interest rate unchanged at 0.50%.

USD/JPY Daily Outlook

Daily Pivots: (S1) 109.15; (P) 110.04; (R1) 110.49; More....

USD/JPY's strong break of 110.10 support confirms resumption of near term decline from 118.65. Intraday bias is back on the downside for 50% retracement of 98.97 to 118.65 at 108.81. At this point, there is no clear indication of reversal yet and it's staying comfortably inside a falling channel. Break of 108.81 will target 61.8% retracement at 106.48 and possibly below. Meanwhile, on the upside, break of 111.57 resistance is needed to be the first sign of reversal. Otherwise, outlook will remain bearish in case of recovery.

In the bigger picture, price actions from 125.85 high are seen as a corrective pattern. Sustained trading below 55 week EMA (now at 111.15) will indicate that the second leg from 98.97 has completed at 118.65. And in that case, USD/JPY would start the third leg down through 98.97 low to 61.8% retracement of 75.56 to 125.85 at 94.77. On the upside, break of 115.49 resistance should resume the rise from 98.97 for a test on 125.85 high.

Economic Indicators Update

STOCKS

Overall stocks are mixed. Some scope of rise is visible for the coming sessions.

Dow (20651.30,-000.03%) has bounced from very short term support near 20510. While that holds, the index could bounce back towards 20780 in the next couple of sessions.

Dax (12139.35, -0.50%) tested support at 12049 on the downside before closing at slightly higher levels yesterday. While the support holds, there is a fair chance of moving up towards 12200-12400 in the near term. Near term looks bullish.

Shanghai (3278.70, -0.31%) is unable to break above 3280 just now but could eventually test 3300 on the upside. Near term looks bullish.

Nikkei (18521.64, -1.21%) has come off below 18650 again and this could be an indication of a sharp fall as mentioned in our earlier editions. Initial target is 18200 for the coming sessions.

Nifty (9237, +0.61%) bounced back from 9174 instead of testing the lower support at 9130. Looking at the daily channel, there is scope of rising towards 9300-9400 in the medium term.

COMMODITIES

As we had expected yesterday, weakness in Dollar index (from 101 to 100.61) has boosted bullion significantly. Gold (1279) has closed above its crucial resistance of 1265. If it will penetrate 1285 on a daily basis then we may see 1300 levels within a couple of days. Due to the near term overbought nature, we may see some correction thereafter but buyer could take every dip as an opportunity for fresh buying.

Similar kind of move has been seen in silver (18.39) also but it is still under its crucial resistance of 18.5. Initial signs of a possible bounce to 19 are visible but confidence will come only on a close above 18.55 levels.

Copper (2.60) has been stuck in the range of 2.55-2.70, which may go on for another week. In the medium term 2.55-57 are going to be a strong support now but a close below that could open up 2.50 and 2.45 levels respectively.

Brent (56.40) and WTI (53.54) are trading within the range of 55-57 and 53-55 and considering the short term overbought state, possibility of a near term correction can’t be ignored. We have US crude oil inventory data at 8.00 pm IST and the U.S. forecast is -0.1M. But a lower than expected decrease or an increase in weekly inventory could open up 53.60 levels for Brent and 51 for WTI respectively.

FOREX

The geopolitical anxieties have increased after North Korea’s threat of nuclear retaliation if attacked and have driven money away from the risk assets.

Dollar Index (100.75) is in a grinding decline which may keep it range bound in 100.00-101.50 for the next few days till it makes up its mind for the next directional move. Interim support at 100.35

All Euro (1.0596) has managed so far is a feeble bounce to 1.0630 from the support of 1.0550 but the chances of a retest of the support looks strong, below which comes 1.0450.

The rejection from our resistance of 111.60 has pushed Dollar Yen (1.0947) sharply below the support around 110.00, in line with our expectations. As long as it trades below 110.00, the chances of further decline to 108.25-107.85 remain open. The possibility of Nikkei (18516.04, -1.24%) going down to 18200 in the coming sessions increases the possibility of Yen strengthening. (Check Equities section)

Pound (1.2485) has achieved our immediate upside target of 1.2465 and wiped out most of the losses incurred last week which keeps it in the sideways mode in the broader range of 1.2350-1.2600. The consolidation phase may continue for a few more sessions.

Aussie (0.7490) consolidates in the lower levels but may resume the larger downtrend in the next few days for our downside target of 0.7450 and 0.7375.

Dollar-Rupee (64.50) has come off the highs after it nearly tested our resistance of 64.70. While 64.70 holds, Dollar-

INTEREST RATES

The US yields have fallen sharply and is testing support at current levels. The 5YR 91.82%), 10yr (2.29%) and the 30YR (2.92%) are down from 1.88%, 2.35% and 2.98% respectively but could bounce back in the coming sessions,

The German-US 2Yr (-2.08%) and 10Yr (-2.08%) have moved up sharply and could both head higher towards -2.05% in the near term. Euro could see some strength in the next few sessions before again coming off in the medium term.

The UK-US 10YR (-1.23%) has started rising and could test resistance near -1.13% in the coming sessions. This could prevent further losses on the Pound just now and could keep the currency stable against the US Dollar.

Short term Elliott Wave view in Crude Oil (CL_F) suggests that cycle from 3/22 low (47.01) is unfolding as a double three Elliott wave structure where Minute wave ((w)) ended at 50.85 and Minute wave ((x)) ended at 49.88. Minute wave ((y)) is in progress and the internal is unfolding also as a double three Elliott wave structure where Minutte wave (w) ended at 52.94 and Minutte wave (x) pullback ended at 51.49. Cycle from 3/22 low is mature but near term, while pullbacks stay above 51.49, Crude has scope to extend higher to 53.71 – 54.61 area to complete Minor wave 1 and end cycle from 3/22 low, then Crude Oil should pullback in Minor wave 2 to correct cycle from 3/22 low before the rally resumes. We don’t like selling the pullback and expect buyers to appear once Minor wave 2 pullback is complete in 3, 7, or 11 swing for an extension higher.

CL_F 1 Hour Elliott Wave Chart

While trying to keep these blogs topical, with an escalating war in the Middle East, I can't go past another feature on Oil.

We had been looking for an opportunity to short oil off daily resistance, but the buyers haven't given up just yet. Oil's strength was of course exacerbated by the recent US missile attack on Syria, helping push the commodity back into our daily resistance zone.

Here is the daily resistance level that has been on our radar:

The daily could also be seen to have broken out of a bearish trend line, retested it this time as support, and now be looking to push higher. Zoom out on your own charts and take a look at the trend line I'm referring to.

It's also just simply a higher low and with further pressure on a resistance level that is becoming weaker with every touch, I don't want to keep shorting.

Zooming into the 15 minute chart and you can see how price has reacted to the first level of resistance:

A clean breakout and then retest of the level that has been tested in both directions multiple times before and after.

Just keep in mind that there's still plenty of resistance up here and that it should be viewed as a zone more than a hard level.

Safe trading!

US 10-year yields broke out of the 4-month range as risk aversion gripped markets Tuesday. It was a classic flight to safety in FX as the yen was the top performer while the commodity currencies lagged. Japanese PPI is due next. A new Premium trades in the Aussie has been issued after it had last been opened on March 8 and closed at a gain.

US 10-year yields closed at the lowest level since November 29 in a break below a clear and critical support line. The range between 2.30% and 2.62% has been pivotal since December with tests (and holds) on both sides. The next level of major support is 2.00% to the 200-dma at 2.03% in a slide that would highlight trouble elsewhere.

Some of the nerves in markets were calmed when the S&P 500 recovered to finish 3 points lower from down 20 points but it was the exception. Gold broke out higher and the yen was heavily bid.

But it's the bond market that has led major moves lately. In March, the failure of the 10-year to break 2.63% was the earliest sign of trouble that later spread elsewhere.

The USD/JPY chart also flashed trouble ahead as it finally broke (and closed) below 110.00 after four failed attempts over the past two weeks.

No single headline was responsible for the change in sentiment, which didn't take hold until a few hours into US trading. One concern was geopolitics as Trump warned China that it would get a better trade deal if it dealt with North Korea. He followed that by saying if China didn't cooperate, the US could deal with North Korea itself. A later report said US and Japanese leaders had discussed notification if/when the US planned to attack. That's a sign that the talk was more than bluster.

In addition, there was more talk about some of the problems we outlined earlier including high debt and tight lending.

We will be watching closely on whether these moves reverse or continue in the day ahead. The Asia-Pacific calendar features Japanese PPI and machine orders at 2350 GMT. PPI is forecast to rise 1.4% y/y and machine orders +2.5% y/y.

The Canadian dollar gave back the gains form the previous session as risk aversion made investors seek safety. There is little economic data to drive markets this week leaving all the spotlight to diplomatic and less than diplomatic exchanges between foreign powers. Comments from Donald Trump urging China to help or get out of the way on North Korea has ruffled some feathers. As the G7 meeting concludes with no new sanctions towards Russia, Putin has said that US-Russia relations are at Cold War lows. The appetite for gold has risen as the yellow metal is being used as a safe haven during turbulent times.

The Bank of Canada (BoC) will publish its monetary policy report and rate statement tomorrow at 10:00 am EDT. Governor Poloz will find it hard to maintain a dovish tone and talk to the loonie down after strong gains in employment and inflation could be signs that the central bank needs to get out of the sidelines sooner rather than later. In January cutting rates was still an option for Poloz, but now the March rate hike by the U.S. Federal Reserve and improving economic fundamentals in Canada could bring about a rate hike. Rising household debt and the housing bubble born out of low rates will be a concern for the central bank. The market consensus calls for no changes to the rate this time, but the pressure will rise if the economy is able to maintain its momentum and imports drive inflation higher urging the BoC to act sooner rather than later.

USD/CAD has lost 0.101 percent in the Tuesday trading session. The pair is trading at 1.3343 as the USD is losing traction after comments from US President Donald Trump have put China on the spot regarding North Korea. The G7 meeting in Germany has yielded no new sanctions for Russia after the Syrian attacks were condemned internationally.

The Canadian dollar remains stable as oil prices are still up 0.325 percent today. West Texas is trading at $52.61 ahead of tomorrow's US crude inventories. Oil prices have risen of late on the back of supply disruptions and the anticipation of an extension to the original Organization of the Petroleum Exporting Countries (OPEC) production cut agreement.

Gold has risen 1.257 percent in the last 24 hours. The price of the yellow metal is trading at $1,266 where it trades near daily highs after geopolitical anxiety has sent investors looking for safety. Gold has hit a five month high as this week's geopolitical factors are taken into consideration on a already full risk agenda with the French elections the next major event on April 23. The Trump administration has boosted the metal as a safe haven after it appeared to have been reprioritized by investors in the last couple of years.

Comments from Fed Chair Janet Yellen yesterday at the University of Michigan were positive for the commodity as once again the "patient" Fed was on display.

USD/CHF - 1.0070

Most recent candlesticks pattern : N/A

Trend                                    : Near term up

Tenkan-Sen level                  : 1.0074

Kijun-Sen level                    : 1.0076

Ichimoku cloud top                 : 1.0088

Ichimoku cloud bottom              : 1.0067

Original strategy :

Buy at 1.0000, Target: 1.0100, Stop: 0.9965

Position : -

Target :  -

Stop : -

New strategy  :

Buy at 1.0000, Target: 1.0100, Stop: 0.9965

Position : -

Target :  -

Stop : -

As the greenback has retreated after rising to 1.0108 yesterday, suggesting consolidation below this level would be seen and initial downside risk is for pullback to 1.0050, then towards support at 1.0026, however, reckon 0.9995 support would contain weakness and bring another rise later, above indicated resistance at 1.0108-09 would extend recent upmove from 0.9813 towards 1.0140-45 but loss of upward momentum should prevent sharp move beyond another previous resistance at 1.0171, risk from there has increased for a retreat to take place later. 

In view of this, would not chase this rise here and would be prudent to buy dollar on subsequent pullback as support at 0.9995 should limit downside. Below 0.9970 (50% Fibonacci retracement of 0.9831-1.0108) would abort and signal top is formed instead, bring correction to support at 0.9948.