Commodity currencies surged broadly last week, following strength in stocks in oil. DJIA took out recent resistance of 17118.48 to resume rise from 15450.56, reaching as high as 17962.14. Similar picture is seen in S&P 500 which reached as high as 2087.84. WTI crude oil also jumped on talk of output freeze and reached as high as 42.42. Dollar also tried to ride on strength in stocks with dollar index reaching as high as 95.20, comparing to last week's low of 93.62. Yen weakened against most major currencies but was overwhelmed by the weakness in Euro and Swiss Franc. Current development suggests that risk appetite likely continue in near term.
Markets' initial focus this week will be on the result of the Doha meeting during the weekend. According to the draft agreement, OPEC and non-OPEC oil producers agreed to limit monthly oil price to the level recorded in January this year. The freeze would last until October 1 this year. Then producers would meet again in October in Russia to review the progress of the recovery of oil market. However, this deal is still subject to agreement of the countries and refusal of one of them could still upend it.
Meanwhile, IMF said after a meeting on Saturday in Washington that "downside risks to the global economic outlook have increased since October, raising the possibility of a more generalized slowdown and a sudden pull-back of capital flows." And, to achieve stronger global growth, IMF urged countries to "employ a more forceful and balanced policy mix." It emphasized that using all policy tools "is vital to stimulate actual and potential growth, enhance financial stability and avert deflation risks."
Technically, DJIA finally took out medium term falling trend line decisive last week. And the development swung favor back to the case that consolidation pattern from 18351.36 has completed with three waves down to 15450.56. Near term outlook will stay bullish as long as 17484.23 support holds. Retest of 18351.36 should be seen next. Decisive break there would probably pave the way to 61.8% projection of 10404.49 to 18351.36 from 15450.56 at 20361.72.
Dollar index rebounded strongly from 93.62 last week. Considering bullish convergence in daily MACD, there is chance that fall from 100.51 is already finished. Further rise would be seen back to 55 days EMA (now at 96.03) first. Sustained trading there would target 98.58 resistance next. Overall, price actions from 100.39 should be a sideway consolidation pattern with fall from 100.51 as the third leg. Hence, in case of another fall, downside should be contained by 38.2% retracement of 78.90 to 100.39 at 92.18 and bring rebound.
Regarding trading strategies, our CAD/JPY short position was stopped out at breakeven on stronger than expected rebound. We'll take a look at initial reactions in oil and stocks and the subsequent actions in currency markets first this week.