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Global Prime: Daily Market Digest

Discussion in 'Market Predictions and Reports' started by IvanGlobalPrime, Aug 8, 2018.

  1. IvanGlobalPrime

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    ECB Preview: Gauging QE2 Timing Is Key

    Posted on: 25 Jul, 2019

    The ECB monetary policy meeting takes center stage this Thursday. The real debate comes down to whether the Central Bank will take pre-emptive precautionary actions by slashing the deposit rate by 10bp to -50bp in today’s meeting or will prudence ensue by not getting involved in further easing until the new ECB macro projections are published.

    The Daily Edge is authored by Ivan Delgado, Market Insights Commentator at Global Prime. The purpose of this content is to provide an assessment of the market conditions. The report takes an in-depth look of market dynamics, factoring in fundamentals, technicals, inter-market in order to determine daily biases and assist one’s decisions on a regular basis. Feel free to follow Ivan on Twitter & Youtube. You can also subscribe to the mailing list to receive Ivan’s Daily wrap.

    The ECB monetary policy meeting takes center stage today. There are two debates at play. The first comes down to whether the Central Bank will take pre-emptive precautionary actions by slashing the deposit rate or will prudence ensue by not getting involved in further easing until the new ECB macro projections are published.

    The second discourse, perhaps not as urgent to be delivered as the steps to properly formalize its commencement are yet to be telegraphed, involves the re-activation of asset purchases as part of a new stimulus package aimed at re-invigorating growth in the EU.

    Rate cut: Will the ECB wait until Sept?

    Out of all the bank research reports I get to scan daily, in particular, those concerning the ECB previews, the rationale I’ve observed by those calling for no explicit action this month is that historically, the ECB has had the tendency to act once new economic updates come due.

    However, the preponderance of evidence is overwhelming in that macroeconomic conditions for further easing seem to have already been met. The question becomes if the ECB front-runs an anticipated downgrade in the Sept macroeconomic revisions, which at this point, stand rather unrealistic with the central bank models forecasting an acceleration in the pace of growth from the 2nd half of the year with a notable acceleration in core inflation.

    Keeping in mind that the few forward-looking indicators for QE such as the ZEW survey in Germany have come weaker, that Wednesday’s miss in EZ PMIs became yet another warning, alongside this week’s ECB report highlighting credit standards for loans to firms as well as consumer credit and other lendings to households tightening in Q2, it continues to clearly flag the state of uncertainty in the Euro area as fears over the economic outlook mount.

    The obvious deterioration in the EU economic conditions, surprisingly, has barely budged the survey published by Bloomberg, where over 87% of all the economists polled expect the ECB to hold rates unchanged even as the case for ECB to signal further easing has increased.

    If one takes a look at the price action in the EUR index (equally-weighted vs G8 FX), we head into the ECB with a loss in the valuation of the currency of over 2% vs its main peers. This translates into a market that has aggressively discounted action by the ECB today.

    [​IMG]
    There is no doubt that ECB President Draghi could cater a stance that would still resonate with further downside momentum, but whenever a critical event is due with such a consistent selling for over a month in the EUR index, we need to ask ourselves where the bar has been set.

    I am personally of the opinion that the bar has been set quite high, in other words, Draghi should overdeliver unless the risk of a ‘sell the rumor, buy the fact’ in this case ensues. So, what exactly does the market need to see from the ECB to avoid a run to the exits in EUR shorts?

    The ECB should get ahead of the curve by cutting its deposit rate by 10bp. Failure to do so would be an outcome I can’t see sellers latching on to sustain the downside even if Draghi does telegraph a change in the forward guidance on policy rates for an actual cut come Sept. That’s the first clear risk for the so far committed EUR sellers to have a rethink.

    As part of the ECB’s policy rate guidance, if the bank cuts and still open the door for extra cuts, essentially hinting at a rate-cutting cycle, which I highly doubt they will commit to set a path, then there is definitely quite a lot to chew on for sellers to wash, rinse and repeat its bias.

    To pre-announce that the rate cut coming is not a one-and-done, the ECB should message its forward guidance by removing the reference to mid-2020 and adding the possibility or lower levels. This is what it may sound like if the ECB is serious about hinting at a cycle of cuts.

    "The Council now expects the key ECB interest rates to remain at present or lower levels for as long as necessary to ensure the continued sustained convergence of inflation…".

    The timing of QE2 a key factor

    A second debate that may not be as pressing as per the timing of delivery yet will have a major influence on EUR price action today orbits around the rhetoric to restart QE. This will involve an exercise by market speculators to immediately update the views on when the resumption of a stimulus package is likely. The more its proximity to be re-activated, the greater the case for the macro trade to still be selling EURs at attractive levels.

    For the ECB to speed up its efforts towards QE II, there needs to be broad-based recognition that the protracted epidemic of chronic low inflation since the GFC is set to extend in time. The more it acknowledges this problem, the higher the risk that the ECB will restart net asset purchases earlier rather than later. The key question thus would be, how soon and how much?

    On the hypothetical estimate of the size of the stimulus, my fear is that even if the ECB aims to bring the option to the table, the amount could be limited for now because consensus on a new round of net asset purchases won’t be easy to come by. The Presidency transition is another limitation to how much Draghi can commit before Lagarde takes the reins.

    Before moving on, it’s important to remind the readership that a moment of reckoning for the ECB inflation mandate came to my attention last week. It was precisely this revelation, cited by Bloomberg, that makes me think the ECB has recognized the problem of persistently low inflation.

    The moment I read that the ECB is considering to study a potential revamp of its inflation goal framework, with some of the ECB staff seemingly critics of the 'below, but close to 2%' definition as part of the mandate, my reaction was to think that the Central Bank is starting to make the admission to potentially pursue longer stimulus programs based on the acceptance of lower inflation projections. The immediate markdown in the EUR last week supports this notion.

    Even if core inflationary measures have bounced of cyclical lows, the recovery has so far been marginal at best, and even more important, which is what may be causing this shift above, during the times when the EU GDP rose above trend, CPI was still low by historical standards.

    What’s more, in September, the new projections by the ECB, set to be revised down, will most likely match suppressed growth levels and inflation to those before QE I in late 2014. Besides, market-based inflation expectations remain very low, which means that any long pause by the ECB without any immediate action to address this problem also raises concerns about its credibility

    Granted, the market consensus, by reading over a dozen bank research reports, appears to be Q4 at the earliest or worst case, Q1 next year. This essentially gives some room (July or Sept) as the months the ECB could aim for to start implementing the new buying program.

    But quite frankly, since the ECB has not been characterized to make such bold decisions without a prior formalized hint to the markets, it boils down to whether or not Draghi can give a sufficiently strong indication that QE2 is coming in September. This would still be music to the ears of EUR bears, who won’t get disappointed, as it’d come ahead of most views at this point.

    If instead, QE2 is left to the newly appointed ECB President Lagarde to formalize and implement, which would not be an aberration to think about as she is the one set to take charge, it means the market may find that disappointing as that can’t happen until the November meeting.

    I’ve skipped the October meeting as a strong consideration as I can’t sincerely picture Draghi inking the legal format of a QE2 program the same month he departs.

    If history is any indication, while a marginal rate cut deeper into the negative plays a role in how the EUR can react to the ECB announcement today, the messaging around the likely future policy accommodation should prove more relevant as an influencer of the EUR pricing.

    In terms of the key areas in the EUR/USD chart to keep in mind, find the chart below. The highlighted green refers to the areas where market participants in the EUR futures have allocated their maximum options exposure through OTM (out the money) Puts.

    [​IMG]

    The area from 1.1050-1.11 in the Euro futures contract represents the line in the sand where the most bets have been placed, which suggests an increasing number of long EURUSD spot traders requite cheap protection as a dynamic stop loss in case long plays succumb.

    [​IMG]

    Wrap up: Risk of disappointment runs high

    A lot in today’s EUR price fluctuation will hinge on the prospects for a restart of QE2, with Sept the make or break month to kickstart the program to minimize disappointments. I have my reservations that the ECB can be prompt enough to recalibrate its communication to have QE2 it implemented by such date even if the evidence to act is mounting. I’ve always perceived the ECB like a slow-moving whale also tasked to properly prepare the market for when there is a critical sea change.

    So, if today’s outcome offers strong hints that it won’t be until Lagarde is in command in November as I highly doubt the month of the Presidency transition (Oct) will be appropriate, I again have my doubts that a rate cut in July, let alone a pre-announcement for Sept, can avoid the unwinding of EUR shorts. So, as you can see, the hurdles to favor EUR shorts are there. Alternatively, if Draghi comes forward with a rate cut of 10bp to -50bp in the deposit rate and clarification ensues that QE2 is due by Sept, then EUR shorts remain a logic play.
     
  2. IvanGlobalPrime

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    'Hard Brexit' Fears Turbo-Charge GBP Sellers

    Posted on: 30 Jul, 2019

    The Pound is the main talking point in the trading floors as fears continue to mount that a no-deal Brexit may eventuate given the latest “turbo-charged” headlines by UK government members.

    The article is authored by Ivan Delgado, Market Insights Commentator at Global Prime. This content aims to provide an insightful look into topics of interest for traders. Feel free to follow Ivan on Twitter & Youtube. Make sure you join our discord room if you'd like to interact with Ivan and other like-minded traders. You can also subscribe to the mailing list to receive Ivan’s Daily wrap. Also, find out why Global Prime is the highest-rated broker at Forex Peace Army.

    Quick Take

    The Sterling has been sold hard to start the week, losing over 1.5% in its index measure as the scenario of a 'no-deal' Brexit is clearly no longer taken for granted. There was always the big assumption that a soft Brexit will eventuate, but with Boris Johnson's 'dream team' flexing their muscle by warning that the working assumption now is a 'no-deal' Brexit, the market has been given the green light for the valuation of the Pound to keep catching up to the current political climate. The USD and the EUR, especially the latter, continues to enjoy the approval of the market to sustain the bullish momentum on the back of an ECB that failed to overdeliver last week. However, further gains may be harder to come by as the EUR index tests a key resistance on low volume. In the case of the USD index (equally-weighted vs G8 FX), while gains have slowed down, it's achieved 7 days of gain in a row even if the quality of the rise is waning. The USD has not out on such a run since early March this year. When it comes to the Oceanic currency block, both the AUD and NZD indexes have reached meaningful technical levels of support, and I do suspect that more efforts will be made to revert the bear trends near term. The Swissy and the Canadian Dollar, even if more so the former, portray an interest technical setting as the Swissy index breaks into new highs. The Yen is still finding a decent amount of demand as falling real yields and steeper curves in US yields incentivizes Japanese investors to hedge out their US exposure by buying JPY in greater sums.

    [​IMG]
    The indices show the performance of a particular currency vs G8 FX. An educational article on how to build your own currency meter can be found in the Global Prime's Research section.

    Brexit Dominates Monday's Narrative

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

    The Pound is the main talking point in the trading floors as fears continue to mount that a no-deal Brexit may eventuate given the latest “turbo-charged” headlines by UK government members. The ball got rolling after Michael Gove, man in charge of preparations for a no-deal Brexit outcome said that the government is now operating under a no-deal Brexit assumption, adding further fuel to the fire by noting that a "no-deal is now a very real prospect".

    Then came the comments by UK foreign secretary, Dominic Raab, stating that the government is now turbo-charging no-deal Brexit preparations with a daily government committee looking at no-deal Brexit planning. Note, this is an inner-circle "war cabinet" of Brexiteers supportive of a "no-deal" strategy. Raab added that the EU is being stubborn and a deal with the EU is what the UK government is after but contention plans must be in place in case it fails. UK Boris Johnson applied further pressure to the GBP, reiterating “we are going to come out on Oct 31, deal or no deal”, adding “if our partners won't move on the backstop, we have to get ready for no-deal.”

    If the EU leaders won't budge (Juncker was clear last week they won’t) and the Brexit rhetoric continues to ramp up, the Sterling is realistically facing the prospect of further falls to catch up with recent political events. The market is starting to freak out on the realization that a soft Brexit may not happen after all. However, one must be reminded that the maths in the House of Commons have not changed, so it will be a tall order to force a no-deal Brexit, in which case, a general election or another agreed extension on Brexit may ensue. Be reminded, with the UK parliament about to go into recess until Sept, the timing to think of these positive GBP scenarios remains far-fetched, hence the current negative sentiment is likely to be dominant.

    The risk that a general election is announced if the standoff by parliament ensues has gone up due to the current government’s marginal majority. This new election would be what leads to a more credible call to pave the way for a 2nd referendum. If history is any indication, when it comes down to the wire, the E.U. may agree to another extension, with several officials signaling a more lenient stance to grant it, which would allow breathing room for a general election.

    [​IMG]

    According to the Telegraph, the government is reportedly preparing a big advertisement campaign to get the UK ready for a "no deal' Brexit. An important point, which takes me back to the mention of the wrong timing to lean on the GBP fence is the fact that headlines are likely to be dominated by Brexiteers in the coming weeks as Parliament is in recess. What this means is that there will be little to no voice being heard from the politicians on the ‘soft Brexit camp’, which may potentially act as a counter-force to the incessant GBP selling we are seeing.

    The next key dates on Brexit are as follow. July 25 Sept. 3: U.K. Parliamentary recess, Sept. 29 Oct. 3: U.K. Conservative Party conference, Oct. 17 18: E.U. leaders’ summit, Oct. 31: New Article 50 deadline and expiration of current European Commission term.

    Recent Economic Indicators & Events Ahead

    The BoJ is the next central bank to update the market on its monetary policy stance, although to be frank, with Wednesday FOMC around the corner, moves are most likely to be contained. The Central Bank will provide updated macro forecasts on growth and inflation targets.

    As a precursor of the foreboding signals to come by the BoJ, the Japanese government downgraded its economic growth forecast for the current fiscal year, citing weaker exports as global demand wanes. Additionally, the planned sales tax hike in October may also weight further on the economic numbers, the government stated.

    In Europe, we get the French flash Q2 GDP and the German preliminary CPI for July. Since both data points are the first estimates of the series, it may have a significant impact on the EUR, in what’s considered fundamentally key data for the ECB to aid in its policy decision, even if last week’s meeting left little doubt that the Central Bank is readying the market for further easing.

    The US has July pending home sales, the core PCE index (Fed’s favorite measure of inflation), personal spending and the Conference Board’s consumer confidence reading.

    [​IMG]
    Source: Forexfactory

    A Dive Into The Charts

    The indices show the performance of a particular currency vs G8 FX. An educational article on how to build your own currency meter can be found in the Global Prime's Research section.

    With Monday's low tick volume activity out of the way, the first push to start the week reveal an interesting setting as some of the currencies most recently “turbo-charged” may start to feel the phobia to revert back to the mean from its lofty levels. For instance, the Euro index (equally-weighted vs G8 FX) has risen on a white soldier 3 candle pattern with taping volume into a level of critical resistance in the chart. It means that the risk for a correction is on the rise. The USD index, the best performer in the last week as it completes its best winning streak since early March (7 days), has also been its relentless appreciation on lower tick volume dynamics, which again, doesn’t make the currency the strongest contender as low volume = running out of fuel. The Japanese Yen index is struggling at a key supply area, so buy flows are expected to face a major cluster of selling orders not far overhead which should limit Yen strength. The Kiwi index, after being on a slump for the last 5 days, it’s reached a key trendline level, and it’s reacted as one would expect (by rejecting the level and printing a bullish candle) to potentially anticipate the move off the bottom to gather steam for further recovery. The key support level where the Aussie index is bouncing off after it landed there on a low vol tap sequence, strengthens the case for the Oceanic currency complex to find some more love. The Sterling index, as anticipated in yesterday’s note, has found additional selling pressure, even if the magnitude of the selling is something I didn’t see coming. It’s precisely such an outlier overextension that makes the prospects to play short GBP a ‘no go’ short term unless it goes back to more attractive levels. The CAD index, meanwhile, is one to watch closely as it’s gathering further strength even if the sequence of tick volume increase is not encouraging as it tests resistance. Lastly, a currency I’ve been keen to give it my ‘blessing’ since last week is the CHF, as the index did a ‘touch and go’ move after re-visiting its July POC, now at new highs.

    [​IMG]

    The first two charts where I must command your attention, if only for the purposes of updating what’s proven to be another decent call, is the shorts in Oceanic currencies vs the Swissy. AUD/CHF has sold off for 2 days in a row after rejecting the 69c. resistance while the major pin bar rejection in the NZD/CHF has also fared quite well. Both positions should have been by now secured by moving stops to breakeven in the assumption of anyone carrying shorts, especially on the basis that the study of the indexes model warns of a potential AUD, NZD recovery.

    [​IMG]
    [​IMG]

    A pair where further bullish upside momentum appears to be running a high risk of seeing ‘reversal to the mean’ dynamics is the EUR/NZD. Not only the EUR and NZD indexes communicate tentative short and long positions to starting to be built, but the technical events in the EUR/NZD do corroborate that too as the pair has kept its ascent on lower volume into a key resistance area, which also happens to be a round number (1.68). A key level indeed.

    [​IMG]

    Akin to the technical relevance found in the EUR/NZD, the NZD/USD also displays a technical setting congruent with a market that may see the buying interest revitalized judging by the colossal technical level it’s resting at (3rd touch of an ascending trendline). The price has headed into the level on lower volume before a doji candle was printed on Monday. The break of the doji high should validate a short-term play to support NZD longs one could consider.

    [​IMG]

    Another pair where on Monday I fleshed out details as to why we may see buying off the lows to ensue is the EUR/USD, as it headed into critical macro support at 1.11 under a debilitating bearish pattern consisting of volume fizzling out. When a key level is attacked on low volume, more often than not, the side in control will struggle to absorb the sitting limit orders there.

    [​IMG]

    Next, out of the next three GBP-centric charts, where I personally see the most potential is to see follow-through selling in the GBP/CAD, as the pair is still far from reaching its 100% projection target. Whereas in the GBP/USD and GBP/CHF, which as a reminder, have been short trades I’ve endorsed to consider since last week (read Friday’s note), both have now hit its respective 100% projection targets, which is an area where market makers, profit-taking tends to lead to potential reversals back to the mean. Granted, the close by NY in the GBP index, with almost nil interest to bid the Pound off the lows, suggests the GBP currency does pass the cut for intraday momentum traders to pile into it for further downside.

    [​IMG]
    [​IMG]
    [​IMG]

    Important Footnotes


    • Risk model: The fact that financial markets have become so intertwined and dynamic makes it essential to stay constantly in tune with market conditions and adapt to new environments. This prop model will assist you to gauge the context that you are trading so that you can significantly reduce the downside risks. To understand the principles applied in the assessment of this model, refer to the tutorial How to Unpack Risk Sentiment Profiles
    • Cycles: 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
    • POC: It refers to the point of control. It represents the areas of most interest by trading volume and should act as walls of bids/offers that may result in price reversals. The volume profile analysis tracks trading activity over a specified time period at specified price levels. The study reveals the constant evolution of the market auction process. If you wish to find out more about the importance of the POC, refer to the tutorial How to Read Volume Profile Structures
    • Tick Volume: Price updates activity provides great insights into the actual buy or sell-side commitment to be engaged into a specific directional movement. Studies validate that price updates (tick volume) are highly correlated to actual traded volume, with the correlation being very high, when looking at hourly data. If you wish to find out more about the importance tick volume, refer to the tutorial on Why Is Tick Volume Important To Monitor?
    • 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
    • Trendlines: Besides the horizontal lines, trendlines are helpful as a visual representation of the trend. The trendlines are drawn respecting a series of rules that determine the validation of a new cycle being created. Therefore, these trendline drawn in the chart hinge to a certain interpretation of market structures.
    • Correlations: Each forex pair has a series of highly correlated assets to assess valuations. This type of study is called inter-market analysis and it involves scoping out anomalies in the ever-evolving global interconnectivity between equities, bonds, currencies, and commodities. If you would like to understand more about this concept, refer to the tutorial How Divergence In Correlated Assets Can Help You Add An Edge.
    • 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% projection resides in the symmetry and harmonic relationships of market cycles. By drawing a 100% 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% Fibonacci Projection
     
  3. IvanGlobalPrime

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    FOMC Preview: What To Expect?

    Posted on: 31 Jul, 2019

    The puzzle is not easy to put together by the Fed, and that’s why it may result in today’s FOMC meeting to conclude that not only a 25bp rate cut was needed as an insurance, but amid such dicey global backdrop and low inflation, it’s best to keep sufficient dovish options on the table.

    The US Dollar is going to command the attention of the whole financial system as the Federal Reserve is just hours away from updating its setting of monetary policy.

    According to the Fedwatch tool by the CME Group, which looks at the probability of an FOMC move on rates, the overwhelming assumption is that the Fed will execute on its well-telegraphed rate cut, but only by a reduction of 25bp, currently standing at a 78% chance vs 50bp, which is assigned a 22% probability only.

    [​IMG]
    Today’s FOMC represents a historical meeting, given that if expectations are ratified by Powell & Co., it will be the first time since 2008 that the Fed will lower interest rates, in what’s been dubbed an ‘insurance rate cut’ to better accommodate the tight US monetary policy to a gloomier global outlook amid low domestic inflation.

    Fed Cut Represents A Historical Event

    It’s important to note that when the Fed officially concludes a tightening cycle, as it’s more likely to be the case in a few hours’ time, it marks a meaningful top and sets the Central Bank out for what’s historically been a prolonged period of lower rates. Therefore, if history is any indication, today’s landmark moment to return to an official easing, even if still debated as a one and done rather than the commencement of a rate-cutting cycle, it runs the risk of morphing into one.

    The chart below doesn’t lie. The Fed has nailed it over and over in dialing back to an easing cycle as it forebodes signals of distress in the financial system. However, this time, rather than originated by internal US economic factors, the Fed’s rationale to act lies on waning global slowdown as the dicey trade war takes its toll on business investment intentions (CAPEX) at a time when we see convergence in the overmaturity of both the business and economic cycles in the US.

    [​IMG]
    But it gets more spooky, even if at this point is just anecdotal evidence. The last three recessions all took place within 3 months of the first-rate cut after a hiking cycle.

    Akin To The ECB, The Market Has Set A High Bar For The Fed

    But I digress. Today, which is what really matters, we need to deconstruct what and how the Fed does in order to gauge the potential ramifications for the US Dollar.

    An event that’s probably raised some red flags by Forex traders is the fact that the US Dollar index (USD vs G8 FX) has put on its largest winning streak (8 days) this year, just ahead of the FOMC fireworks. This dynamic is the exact reverse of what we saw last week in the EUR index (vs G8 FX) if you think about it.

    Ahead of the ECB, the EUR index had sold off mercilessly for over 2 weeks in anticipation of a big dovish announcement by the ECB, which never came in the degree expected, as the CB failed to flesh out the necessary QE II details the market was waiting for to justify further downside.

    In the case of today’s USD lofty valuation, the pre-FOMC run tells us that just as the bar was set high for the ECB to keep the bearish party going, the Fed is going to have to cut the wings from those perma dovish by hinting that this is not a rate-cutting cycle (for now) and probably dismiss the immediate prospects for more cuts in Sept.

    At present, there is certainly a disconnect between what the market is discounting and reality. According to market pricing, the Fed is contemplating 100bp of rate cuts by the end of 2020, but the logic seems to defy such action in the very short-term. The bond market thinks Trump’s pressure on the Fed and his trade policies will result in an easier Fed, which in and by itself has proven, along with stock valuations, to be a signal for the Fed to act in what’s seen as “a hall-of-mirrors situation.”

    Fed's Dot Plot To Initiate Today's USD Valuation

    A first crucial clue will come out of the Fed’s update dot plot graph, which is the method used to convey each member’s benchmark Federal Funds interest rate outlook going forward. How the dots gets re-distributed will have a first initial impact on how the USD react.

    What will be important to watch is whether or not the Fed’s dot plot under or over-delivers in its forward guidance. Therefore, if the Fed decides to cut rates by 25bp and that happened to be a unanimous decision, we could initially see a modest USD rally as the market interprets that as a sign that there is a low conviction on delivering a second rate cut at this point.

    What would really turbo-charge the USD is if the Fed cuts by 25bp but a minority of the members disagreed by voting to keep rates unchanged. That’s not my central case though, as the line-up of Fedspeakers in July has really carried a consistent message about a small cut. Both Kansas City Fed President Esther George and Boston’s Rosengren have expressed their opinion against cutting rates, and if anyone else joins, it will cause more uncertainty (USD+).

    Now, if the Fed wants to practice a major harakiri by committing the suicidal decision of not cutting rates, not only it’d represent an epic failure in communication, but the USD would go absolutely ballistic. This is a scenario the market finds as having nil probabilities and I agree.

    On the contrary, if a few members dissent by endorsing a 50bp rate cut, which at this point, judging by the raft of Fedspeakers in the last month, looks quite unlikely, then the potential initial move by the US Dollar would be to pull back from the elevated levels it trades from.

    A scenario that should not be ruled out, as the 22% Fedwatch tool demonstrates, is that the Fed does indeed cut rates by 50bp, which is the central case defended by Morgan Stanley’s Research Team. “The worry lies in the US' sharply weakening capex cycle” they note. “We believe that the Fed will be concerned about capex weakness and its impact on productivity/neutral rates, among other solid reasons for our 50 bp rate cut call.” If it turns out to be true, the USD would collapse.

    In my opinion, the risk appears to be skewed towards under delivering and USD longs added. This is a thesis that is predicated on the basis of paying attention to all Fedspeakers in July.

    To portray the overall sentiment at the Fed, I find it quite revealing that when a perma dovish like Fed St. Louis President James Bullard has ruled out support for more than 25bp this month, really makes you question how on earth we’d get aggressive rate cut calls in near term.

    Add to the mixture of reasons the solid US economic data in recent weeks (US NFP, retail sales, core durable goods, US ISM, …) and it fortifies the notion of the Fed under-delivering.

    Fed's Powell Intervention To Set The Real Tone In The USD

    But the largest concentration of volatility should come as Fed’s Chair Powell gives his speech and answers journalists’ questions on monetary policy. Since no one really knows how Powell will play his hand on such a high wire act, the communication around how likely it is that further rate cuts follow suit is crucial, and here, I believe the Fed is in no position to commit at this stage.

    My sense is that the Fed wants to cut more as it recognizes the current interest rate level is out of whack with the perceived neutral rate. The unprecedented shift in the Fed rhetoric into a dovish stance at a time of above-trend economic expansion has found its roots on the anticipation of the knock-on effects of the global troubles to the US economy, hence it has grown uncomfortable with the backdrop seen for the US to keep up its growth momentum.

    Jerome Powell has been quite vocal alongside his closest confidants Fed’s Clarida and Williams that lower rates are coming due to “uncertainties around trade tensions and concerns about the strength of the global economy continuing to weigh on the US economic outlook”.

    In the Fed view, there are many moving pieces and uncertainties that warrant caution but with the US economy still on a stubbornly solid footing, and the trade war in a bit of a recess as US-China feel each other out on the truce, they must be prepared to act further at any time.

    What this means is that for Powell to contain volatility and the rise in the USD, he has to play a bit of an ambiguous role by providing enough evidence, as a unified front, that the intention is not to embark on protracted lower rates, but still affording to sneak in enough of a hint for another 25bp cut in September or October. That expectation should cap the USD.

    If the Fed is serious about doing something to minimize future risks in the US from external factors plus contribute to keeping inflation firmer, I don’t see how a 25bp rate cut will cut it, let alone that the onset of a rate cut phase barely ever is followed by just a one-off as I mentioned at the beginning of the article. It should be reflected by a hint of a follow-up 25bp cut.

    If Powell, instead, resorts to a conditional stance with flexibility as the central rhetoric to adapt to developing economic conditions without making the case for further cuts in Sept, that might not serve too well to USD bears, and the cost of that would probably be pretty sizeable in terms of the downside in the US stock market. Financial conditions would probably tighten too.

    Powell will get leverage by leaving the door open to act near-term if needed, but the markets aim for meat in the bone (read reassurance), that the Fed wants to bring the interest rate lower by at least 50bp before re-assessing. It should force them to promise something more.

    And that reassessment, in large part, will come down to how Trump plays its trade policy card, to how fast a global slowdown can spread into the US economy, to the levels high levels of the USD which may create further disinflationary pressures and keep missing the Fed target inflation, to the attractiveness of keep investing by businesses in the US, etc.

    The puzzle is not easy to put together, and that’s why it may result in today’s FOMC meeting to conclude that amid such dicey terrain, it’s best to keep sufficient dovish options on the table. That’s why I still think it’s in their best interest to pre-announce further action in Sept or Oct, which in my opinion, should put a cap on the rise in the USD short-term.
     
  4. IvanGlobalPrime

    IvanGlobalPrime Private

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    The Fed Under Delivers, USD Adds To Winning Streak


    The market didn’t get to hear what it wanted and by Powell resorting to a somehow conditional stance with flexibility to adjust on the go to new developments was not sufficiently committal rhetoric to satisfy the market, which for now has fallen victim of its own high-bar setting dynamics.

    The article is authored by Ivan Delgado, Market Insights Commentator at Global Prime. This content aims to provide an insightful look into topics of interest for traders. Feel free to follow Ivan on Twitter & Youtube. Make sure you join our discord room if you'd like to interact with Ivan and other like-minded traders. You can also subscribe to the mailing list to receive Ivan’s Daily wrap. Also, find out why Global Prime is the highest-rated broker at Forex Peace Army.

    The FOMC Dominates Narrative In Financial Markets

    The FOMC has thrown cold water into the notion that the Fed will be as dovish as previously thought. Yes, the Central Bank cut its interest rate by 25bp and formalized the end of QT (Quantitative Tightening), which was merely the ‘anti-harakiri’ move to content a market that had fully priced in this outcome.

    What really mattered was. What hand Fed’s Chair Powell would play during the press conference? Powell deployed its fair share of ambiguity and conditionality to future rate policy, even contradicting in his view, but the end result is that the bar had been set, as emphasized during yesterday’s note, too high for the Fed to meet.

    A key lesson to take away from the most recent policy ‘showdowns’ at the helm of the ECB and the Fed, both now behind us, is that the market, as a discounting mechanism, tends to price into an asset a future perceived valuations, based on assumptions built up on the lead-up to these events.

    When the actual event comes due, the delivery of the outcome (reality) must meet these preconceived assumptions to keep the ball rolling and dynamics undeterred.

    For instance, to keep selling the Euro, given how much the currency had depreciated ahead of the ECB, the Central Bank should have really thrown all it had to fortify the dovish expectations. By failing to deliver a rate cut, even if pre-announced for Sept, and also not fleshing out details with regards to the composition and quantities to be purchased as part of its upcoming QE II, that’s where they could not meet the bar set by the market.

    In the case of the Fed, the playbook for the USD to stay bid had to be a Fed that under-delivers based on what the market had priced in. Heading into the meeting, participants held the belief that a 22% chance of a 50bp rate cut was still possible, a 25bp rate baked in the cake, while a total of 66bp of rate cuts was still the central case by year-end. After all said and done, the market was left with the impression of a 'hawkish cut', hence the disconnect with the current Fed's view was further adjusted via a stronger USD.

    How It All Played Out

    The policy statement got off to the expected start with a 25bp rate cut citing “global developments” and “muted inflation pressures” and the announcement of the formal end to its balance sheet normalization program (QT), even if Fed's voting members George and Rosengren ended up being dissenters.

    But it wasn’t until Powell took the stage at the press conference that the markets had a real chance to filter out the wheat from the chaff by deciphering whether this ‘insurance cut’ was part of a longer rate-cutting cycle or a ‘one and done’.

    This time, the headline that grabbed the market’s attention came as Powell referred of today’s 25bp rate cut as being part of a “mid-cycle adjustment to policy”, and just like that, the market’s perception immediately switched to price out its implied ambitious easing notion.

    This led to a swift transition into ‘true risk-off’ in financial markets, with capital flows seeking out a shelter away from the risk curve back into long-dated US bonds, while keeping the front-end of the Treasury yield on a solid bid as the implied dovish policy was re-assessed.

    We also saw investors scrambling to the exits in the equity market as the accommodative path set by the Fed didn't cut it to keep the bid tone. It also resulted in a clean breakout in the VIX (vol index). The ‘true risk-off’ dynamics then went full circle as the market amassed Yen longs in a classic move to safety.

    [​IMG]

    As Powell’s presser continued, some conflicting signals started to feed through the markets, as he seemed to somehow walk back some of the ‘hawkish cut’ notions by denying that this is meant to be just one rate cut. The literal words he used “I didn’t say just one rate cut.”

    This helped to somehow re-calibrate the idea that a Sept rate cut might still be on the table, with the market now assigning a 50/50 chance according to the CME Fedwatch tool, conditional to how the US economic data, global growth, and trade dispute evolve in the next month.

    [​IMG]

    That ambiguity in Powell’s communication, with some logically thinking it was outright conflictive, poses a risk in the form of loss of confidence by market forces. This was reflected in the diminutive reprieve in equities, not buying into Powell's attempt to sneak in some ambiguity, while the USD index vs G8 FX barely budged either, ending NY business hours at the very end of the day, which communicates acceptance to keep the party going.

    Today’s FOMC leaves a foggy backdrop to take by heart as the ambivalence that I feared Powell would resort to has played out to a certain extent. Yesterday’s note read: “Powell must seek out leverage by leaving the door open to act near-term if needed, but the market aims for meat in the bone (read reassurance), which is why they want enough explicit acknowledgment that the Fed aims to bring the interest rate lower by at least 50bp before reassessing.”

    The market didn’t get to hear what it wanted and by Powell resorting to a somehow conditional stance with flexibility to adjust on the go to new developments was not sufficiently committal rhetoric to satisfy the market, which for now has fallen victim of its own high-bar setting dynamics. However, make no mistake, in a long enough time horizon, this easing bias by the Fed will be determined by the rhythm played in the market whether the Fed likes it or not.

    FOMC Statement Comparison

    [​IMG]
    Recent Economic Indicators & Events Ahead

    [​IMG]
    [​IMG]
    Source: Forexfactory

    A Dive Into The Charts (Tech, Funda, Intermarket)

    The USD remains king of FX en-route for its 10th straight day of gains in a row, a milestone that we’d have to refer back to April ‘18 to witness such a run. But fancy stats aside, what really matters here is that the USD index (against an equally-weighted basket of G8 FX) has found equilibrium at the highs of the day on Wednesday. I expect this close to lead to momentum strategies to pile into the currency for further follow-through, which appears to be a playbook in resonance with the current market’s view as Asian trading gets underway.

    [​IMG]

    The indices show the performance of a particular currency vs G8 FX. An educational article about how to build your own currency meter can be found in the Global Prime's Research section.

    In terms of the currencies that look most vulnerable for USD bulls to capitalize on, the usual suspects (AUD, NZD, GBP) are firm contenders to see further losses on a momentum play day. One could also consider the EUR as part of the group to depreciate against the USD. It’s a more tricky situation against the JPY, CHF due to the risk-averse conditions, while the CAD is also finding a fair share of buying interest after Canada’s May GDP beat estimates by a small margin.

    [​IMG]
    [​IMG]
    [​IMG]
    [​IMG]

    Important Footnotes


    • Risk model: The fact that financial markets have become so intertwined and dynamic makes it essential to stay constantly in tune with market conditions and adapt to new environments. This prop model will assist you to gauge the context that you are trading so that you can significantly reduce the downside risks. To understand the principles applied in the assessment of this model, refer to the tutorial How to Unpack Risk Sentiment Profiles
    • Cycles: 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
    • POC: It refers to the point of control. It represents the areas of most interest by trading volume and should act as walls of bids/offers that may result in price reversals. The volume profile analysis tracks trading activity over a specified time period at specified price levels. The study reveals the constant evolution of the market auction process. If you wish to find out more about the importance of the POC, refer to the tutorial How to Read Volume Profile Structures
    • Tick Volume: Price updates activity provides great insights into the actual buy or sell-side commitment to be engaged into a specific directional movement. Studies validate that price updates (tick volume) are highly correlated to actual traded volume, with the correlation being very high, when looking at hourly data. If you wish to find out more about the importance tick volume, refer to the tutorial on Why Is Tick Volume Important To Monitor?
    • 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
    • Trendlines: Besides the horizontal lines, trendlines are helpful as a visual representation of the trend. The trendlines are drawn respecting a series of rules that determine the validation of a new cycle being created. Therefore, these trendline drawn in the chart hinge to a certain interpretation of market structures.
    • Correlations: Each forex pair has a series of highly correlated assets to assess valuations. This type of study is called inter-market analysis and it involves scoping out anomalies in the ever-evolving global interconnectivity between equities, bonds, currencies, and commodities. If you would like to understand more about this concept, refer to the tutorial How Divergence In Correlated Assets Can Help You Add An Edge.
    • 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% projection resides in the symmetry and harmonic relationships of market cycles. By drawing a 100% 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% Fibonacci Projection
     
  5. IvanGlobalPrime

    IvanGlobalPrime Private

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    Find my latest market thoughts

    US-China Trade War Escalates, Text-Book Risk Aversion

    Posted on: 02 Aug, 2019

    The market was sent on a tailspin with stocks imploding, while Yen & Gold went gangbuster after US President Trump announced via Twitter a fresh round of 10% tariffs on the remaining $300 million of Chinese goods to the US.

    The Daily Edge is authored by Ivan Delgado, Market Insights Commentator at Global Prime. The purpose of this content is to provide an assessment of the market conditions. The report takes an in-depth look of market dynamics, factoring in fundamentals, technicals, inter-market in order to determine daily biases and assist one’s decisions on a regular basis. Feel free to follow Ivan on Twitter & Youtube. You can also subscribe to the mailing list to receive Ivan’s Daily wrap.

    Quick Take

    Thursday's US President Trump decision to escalate the trade war by imposing 10% tariffs on $300b of Chinese goods by Sept 1 has really hit the Achilles heel of the risk curve, with capital scrambling to bid the Yen, bonds and gold in a text-book 'risk-off' day. The strength of the Japanese Yen, especially, defies gravity but it also reflects the renewed concerns by market participants that this latest action by Trump will be quite costly for global growth and the extension of suppressed inflation. The Swiss Franc also managed to find solid bids as safe-haven flows swiftly moved into safe-haven assets. The US Dollar traded quite stable, barely changed on a daily net basis as the market digests the news of additional tariffs on China in a month time and what the dovish repercussions for the Fed and the rest of Central Banks. The Aussie, Kiwi, and Cable kept the bearish inertia that has characterized these 3 currencies since mid-July. Meanwhile, the EUR and CAD trade relatively unfazed, especially the former, while the Loonie does feel the pressure of 'risk-off' dynamics much more so. Today's Non-Farm Payrolls report is the next key even if the tariffs news has stolen the limelight.

    [​IMG]
    The indices show the performance of a particular currency vs G8 FX. An educational article about how to build your own currency meter can be found in the Global Prime's Research section.

    Narratives In Financial Markets

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

    The market was sent on a tailspin with stocks imploding, while Yen & Gold went gangbuster after US President Trump announced via Twitter a fresh round of 10% tariffs on the remaining $300 million of Chinese goods to the US. The bombshell, at a time when the market was still digesting the ‘hawkish cut’ by the FOMC, has caught the market by absolute surprise as Trump flexes his muscles after being briefed that the face-to-face trade talks in China, led by Treasury Secretary Mnuchin and Trade Representative Robert Lighthizer, failed to yield any results.

    The excerpt of Trump’s tweet acting as the catalyst for the unwinding of risk trades read: “Trade talks are continuing, and......during the talks the U.S. will start, on September 1st, putting a small additional Tariff of 10% on the remaining 300 Billion Dollars of goods and products coming from China into our Country. This does not include the 250 Billion Dollars already Tariffed at 25%.....We look forward to continuing our positive dialogue with China on a comprehensive Trade Deal, and feel that the future between our two countries will be a very bright one!”

    What makes the renewed tensions in the US-China trade saga even more worrisome is the fact that this was a cabinet team effort, with CNBC reporting that it was Trump's trade team, including the big guns Treasury Secretary Mnuchin, Acting COS Mulvaney, trade advisor Navarro, and NEC Director Kudlow, that assisted the President in drafting the tariff tweet. It does imply that the intentions of the Administration have the backup of the big influencers in trade.

    There has been no leakage of information to help us understand what exactly prompted Trump to kickstart another episode of escalation in the trade war. US President Trump’s latest action is meant to put further pressure on China, hoping that they cave to US demands. But the Chinese economic data has been improving recently, which gives them time to muddle through and makes the prospects to offer many concessions to the US a highly unlikely scenario. Watch for China to fight back via direct measures towards non-tariff barriers to US companies, and if necessary, they will not hesitate to provide further stimulus to the economy.

    This move by the Trump administration has caused the chances of another rate cut by the Fed to skyrocket up to 85% by the end of business in New York as the news may see subdued global inflation to extend as Chinese manufacturers get squeezed and global growth takes a hit. For the Fed and the majority of Central Banks for this matter, an escalation of the trade war runs the clear risk of causing the long-lasting easing cycle to stimulate waning domestic growth.

    To potentially make matters worse, U.S. President Trump will make an announcement on EU trade matters at 13:45 Eastern (18:45) on Friday, per the White House schedule.

    Another warning signs out of the US came in the form of US July ISM manufacturing index, missing expectations at 51.2 vs 52.0 expected, with the employment subcomponent the major drag at 51.7 vs 54.7 prior, while new orders saw a marginal uptick.

    The BOE left its bank rate unchanged at 0.75% with unanimous votes 0-0-9. As the Central Bank fleshed out its new updates on the inflation outlook and growth forecasts, the pattern, with the dark clouds of Brexit hovering around, was to decide across-the-board downgrades. The BOE stuck to its guns by not making a hard--Brexit its main working assumption. In the press conference, Governor Carney did not give much away from the initial statement.

    China’s Caixin manufacturing PMI for July came at 49.9 vs 49.6 estimates as new orders returned to a modest growth path, while new export orders remained week and factories still cutting jobs. The data, hardly encouraging despite the uptick, has been eclipsed by Trump’s trade tariff tweet today, hence making its influence in the pricing of risk assets largely irrelevant.

    Recent Economic Indicators & Events Ahead

    The trade war escalation has stolen the show away from this Friday’s Non-Farm Payrolls report, even if this is an event that still must be treated with the same amount of prudence. Should the NFP headline number and/or the wage inflation disappoint, alongside renewed fears of a protracted trade war and a FED in easing mode, it may lead to a rethink towards holding USD, especially at such elevated prices. However, with true risk-off hitting financial markets, the currency tends to find dip buyers looking for a safe-haven, and that’s USD positive too. If we look at key leading indicators ahead of the NFP, such as the ADP Employment Report, the ISM Manufacturing Survey employment component or the 4-week moving average of initial unemployment claims, it suggests the risk of a headline disappointment is not that high, with expectations ranging from 170-200k range. Note, we will also have to pay attention to the jobless rate and wage growth to decipher the full picture.

    [​IMG]
    [​IMG]
    Source: Forexfactory

    A Dive Into The Charts

    Some of the currencies displaying the strongest trends have strengthened to a magnitude that makes it hard to reinstate longs unless there is a significant pullback. I am talking about the JPY, CHF and to a lesser extent the USD indexes. It doesn’t mean that short-term the Yen won’t find further follow through as momentum strategies may easily pile in, just be aware that adding strategic longs as a position trader will cause you to pay a high price. The levels of the CHF are not as dramatic vs the JPY, but the index has reached such a key resistance, so be aware. Remember, the CHF has been on an absolute tear after it rejected July’s POC on July 25th.

    The weakest currencies, as per the technicals in the indexes, include the GBP, recently smashed by hard-Brexit risks, and the Oceanic currencies, as both Central Banks (RBA, RBNZ) send signals that the easing cycle is here to stay for as long as it takes. Caught in the crossfire of volatility we find the EUR and CAD. The former still finding buyers after the ECB under-delivered on overly dovish expectations pre-event last week, while the latter is still in an uptrend vs G8 FX but it’s finding mounting selling pressure as true ‘risk-off’ takes its toll.

    [​IMG]

    The first chart to bring to the reader’s attention in the CHF/JPY as it looks to have landed on a key juncture where a rebound may be seen, even if not a trade for the faint-hearted with tight stops. Note, this should be seen as a mean reversal type of trade as it against the strong momentum. But the area currently tested aligns with the 100% proj target, a key horizontal support, and last but not least, 108.00 has really proven the line in the sand this year (3 failed tests).

    [​IMG]

    Smashed by risk-off trades and fears of an intensification in global slowdown (traders price in less demand of energy products), Crude Oil looks set to further extend its losses and any retest of the area marked circle may see sellers re-grouping to keep control of price action. Note, Thursday’s price action is quite conclusive in that players indicate acceptance below the previous swing low, which validates a new cycle low, hence sell on strength makes technical sense.

    [​IMG]

    The upper shadow in the S&P 500 with a close below support as volume increases dramatically is a recipe to see further follow-through supply in the index. Besides, the bearish price action on Thursday has broken the bullish structure by closing below the previous swing low on July 17th. Technical evidence of more pain ahead.

    [​IMG]

    Gold has been a huge beneficiary of the escalation in the US-China trade war as reflected by the sizeable bullish outside day printed, which makes the prospects for an extension into new highs a logical expectation when considering both fundamentals and technicals.

    [​IMG]
    Important Footnotes

    • Risk model: The fact that financial markets have become so intertwined and dynamic makes it essential to stay constantly in tune with market conditions and adapt to new environments. This prop model will assist you to gauge the context that you are trading so that you can significantly reduce the downside risks. To understand the principles applied in the assessment of this model, refer to the tutorial How to Unpack Risk Sentiment Profiles
    • Cycles: 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
    • POC: It refers to the point of control. It represents the areas of most interest by trading volume and should act as walls of bids/offers that may result in price reversals. The volume profile analysis tracks trading activity over a specified time period at specified price levels. The study reveals the constant evolution of the market auction process. If you wish to find out more about the importance of the POC, refer to the tutorial How to Read Volume Profile Structures
    • Tick Volume: Price updates activity provides great insights into the actual buy or sell-side commitment to be engaged into a specific directional movement. Studies validate that price updates (tick volume) are highly correlated to actual traded volume, with the correlation being very high, when looking at hourly data. If you wish to find out more about the importance tick volume, refer to the tutorial on Why Is Tick Volume Important To Monitor?
    • 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
    • Trendlines: Besides the horizontal lines, trendlines are helpful as a visual representation of the trend. The trendlines are drawn respecting a series of rules that determine the validation of a new cycle being created. Therefore, these trendline drawn in the chart hinge to a certain interpretation of market structures.
    • Correlations: Each forex pair has a series of highly correlated assets to assess valuations. This type of study is called inter-market analysis and it involves scoping out anomalies in the ever-evolving global interconnectivity between equities, bonds, currencies, and commodities. If you would like to understand more about this concept, refer to the tutorial How Divergence In Correlated Assets Can Help You Add An Edge.
    • 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% projection resides in the symmetry and harmonic relationships of market cycles. By drawing a 100% 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% Fibonacci Projection
     
  6. IvanGlobalPrime

    IvanGlobalPrime Private

    Joined:
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    Find my latest market thoughts

    Currencies Discount Full-Blown Trade War


    As a full-blown trade war gets discounted, it revitalizes the central thematic that it really is a race to the bottom in the currency market as Central Bank will be forced to ease further, just as flows are headed into old school plays by backing the safe-haven status of the Yen and Swissy amid the implosion of global yields discounting gloomy times ahead.

    The article is authored by Ivan Delgado, Market Insights Commentator at Global Prime. This content aims to provide an insightful look into topics of interest for traders. Feel free to follow Ivan on Twitter & Youtube. Make sure you join our discord room if you'd like to interact with Ivan and other like-minded traders. You can also subscribe to the mailing list to receive Ivan’s Daily wrap. Also, find out why Global Prime is the highest-rated broker at Forex Peace Army.

    Quick Take

    In the last 2 trading days, as US President Trump's patience worn thin on China, which led to the announcement of further tariffs by Sept 1, the market is behaving as if both sides are moving closer to a full-blown trade crisis where the favorite trade, for now, has been to bid the Yen and the Swissy to the boots. Flows hitting the USD and the EUR saw a rather neutral performance of the respective indices, with both currencies suffering from its own demerits as the knock-on effect of a protracted trade war means the ECB and the Fed look poised to stick to their easing paths (QE II + rate cut by the ECB, back-to-back rate cut by the Fed). But it's not only the Fed or the ECB, the pathetic performance by the AUD or NZD, other than the influence risk-off has had, also tells us the RBA and the RBNZ will be forced to flex their muscles by further adjusting policy into an easier mode as we head into Sept/Oct. The RBNZ meets this week, and with such a dicey environment, a dovish outcome looks highly likely. In terms of the CAD and GBP indices, the former looks still quite constructive as the BOC has not been as explicit in its dovish bias compared to the rest of Central Bank, while we all know that GBP and the BoE continue to be in a hostage situation due to the political process of Brexit. As a full-blown trade war is an event being currently discounted, it revitalizes the central thematic that it really is a race to the bottom in the currency market as Central Bank are forced to ease, which leads to flows headed into old school plays by backing the safe-haven status of the Yen and Swissy as global yields implode discounting gloomy times ahead.

    [​IMG]
    The indices show the performance of a particular currency vs G8 FX. An educational article about how to build your own currency meter can be found in the Global Prime's Research section.

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

    Markets on the defensive: Amid the sudden escalation in the US-China trade war after Trump’s fresh 10% tariffs announcement last Thursday, the environment clearly remains to play defensive with derisking off leveraged positions still the name of the game as further negative-charged headlines on trade are likely to hit the market sentiment. Hu Xijin, Global Times editor and China’s government mouthpiece, notes that “Beijing was very disappointed with the latest flip-flops of the US”, adding that “it's understood Chinese side always has a plan B, which includes a series of countermeasures” via a well-informed official on condition of anonymity.

    Game of hardball 'ON': Signs that China is not going to budge by the latest threat by Trump keep emerging as the press is reporting that China is turning to Brazil to double down on soybeans purchases. It means that the game of hardball keeps going and with the truce essentially dead in the water, this may have been the final straw for markets to really assume this trade war is here to stay for the long run, with no end in sight during the Trump’s administration. Bad for risk and the global economy.

    Trump throws fuel to the fire: Speaking at a rally in Cincinnati, Ohio, President Trump told those attending that “we will be taxing the hell out of China.” Again, the threats by Trump run the risk of exhausting the patience of China, which bring us closer to a full-blown trade war. If that’s the case, the central thematic of buying risk on the belief that Central Banks will come to the rescue with further rounds of QE may no longer cut it as the market prices in protracted recessionary pressures globally, even if still not reflected in the US data.

    China set to retaliate: The type of action the market is expecting from China to retaliate against the US may include the announcement of an unreliable entity list, which would exclude some US companies from doing business in mainland China. To prohibit exporting "rare-earth" materials to US/US companies. Additionally, to increase tariffs on US goods. China may take a gradual approach applying these methods of taxation in a gradual manner vs all at once.

    USD/CNH breaks 7.00: The PBOC got the ball rolling by setting today's fixing above 6.9 for the first time this year, while the market finally pushed it past 7.00. What's important now is whether or not the PBOC lets the rate stay above this psychological area. One thing is clear. You don't see these overstretched moves in the Yen, Yuan or Swissy unless the market is freaking out by discounting a major event, which top of the mind for everyone is a full-blown trade war. The market has come to grips that the truce isn't working, so the next logical move might be to cancel further talks and declare the full-blown stage until the next US presidential election. The markets are behaving as if this is the central case otherwise u don't see these moves. But again, the market may be getting ahead of itself.

    US NFP a side-show eclipsed by trade: US July NFP headline number came bang on expectations at +164K vs +165K expected, with a slight uptick in the jobless rate at 3.7% vs 3.6% expected as participation rate went up by a 0.1% margin to 63.0% vs 62.9% prior. The average hourly earnings edged up to +0.3% vs +0.2% exp on a monthly basis, which puts the yearly reading at +3.2% y/y vs +3.1% exp. The positives and negatives in the US NFP canceled each other out for a rather neutral read overall. However, with the trade war clearly on the driving seat, this month’s US NFP will be mostly sidelined as a factor to influence the pricing of assets.

    New insights by Fed dissenters: Fed's Boston Rosengren and Fed's Kansas, who were the two dissenters not supporting a 25bp rate cut in last week’s FOMC meeting, made public appearances to update markets on their stance on monetary policy. George said that a clear and compelling case to ease is not in place given the strong domestic economic data, reduced cost of credit/vol and stocks at all-time highs. George’s neutral view is also anchored by the economic health seen in the US indicators, even if she made the admission that she is ready to back adjusting policy if data warrants it, also recognizing that the outlook including trade and global growth poses clear risks.


    Recent Economic Indicators & Events Ahead


    We have bank holidays both in Australia and Canada today, which will reduce liquidity in forex. In terms of data to watch out for, the only high-impact event to monitor during the course of Monday includes the US ISM Non-Manuf PMI, which is expected to come a tad better.

    [​IMG]
    [​IMG]
    Source: Forexfactory

    A Dive Into The Charts

    The overstretched nature of the movements seen in the JPY or CHF as a full-blown trade war between the US and China is priced in makes the current pricing of these currencies rather unsustainable unless backed by further negative headlines this Monday. It’s always telling to see both the Yen and the Swissy fly in sync as it indicates the market is really freaking out that this time we could be on the edge before the US and China officially give up on further trade talks. As a result, the Oceanic currencies have gone through an absolute bloodbath and the closes by NY business hours on Friday are far from encouraging.

    The Euro and the USD, as the two most highly liquid currencies, continue to experience a more moderate fluctuation, even if the mood in the market for the last 2 days has been to punish the USD (in the context of an uptrend) as the chances of further rate hikes by the Fed in Sept are almost fully priced in again. The Pound is another currency in a well-established downtrend due to a hard-Brexit scenario even if the currency is showing more resilience in the last 4 days of trading. Lastly, the CAD index, after the rejection off its baseline (13-d ema), looks to offer attractive levels to engage in longs.

    [​IMG]

    The first market I want to revisit in today’s note is the CHF/JPY as the confluent area of support I highlighted on Friday just ahead of 108.00 has found a sufficient demand imbalance to see a decent bounce. Remember, this is a reversal to the mean trade with a great deal of confluence to act as an area where market makers and sellers taking profits will apply enough pressure to increase the odds of a rebound significantly based on the concept of the 100% proj target.

    [​IMG]

    Another market, akin to the CHFJPY, that reaches its 100% projected target only to see a turnaround as offers built up there is the USD/SEK. Again, it coincided with a round number 9.70, a horizontal resistance and a 100% proj target all meeting in the same area.

    [​IMG]

    Talking about 100% proj targets. There will be times when the supply or demand imbalance is so one-sided that market makers and other participants/algos will pull their orders or won’t be sizeable enough to absorb the directional pressure, in which case, these breached proj targets tend to then act as the immediate area of support or resistance on a retest. This is something we’ve recently seen in markets such as the GBPCHF or GBPUSD. Judge by yourself.

    [​IMG]
    [​IMG]

    A second market that looks rather fragile for further sell-side follow-through is Oil, which I did point at it in my last note too, saying that any rebound towards 56.00 is likely to see sellers re-group for a potential extension lower into the 54.00 where a reassessment will be needed. The risk-averse conditions coupled with the pricing of greater risks of a global slowdown won’t do any favor for the outlook of Crude Oil as market participants forebode weaker demand.

    [​IMG]

    The S&P 500, which provided a huge warning that further selling the next day was a real possibility, has also found enough of an imbalance in supply to extend its downside. Not often we get clues via price action in the daily this clear, with a reversed pin bar with huge volume breaking through and closing past a key level of support. Whoever is a buyer, will have serious reservation engaging in business with any type of conviction until the level of support at 2,920 or thereabouts, which is precisely the area I mentioned as the next target in Friday’s note, and the actual target that was reached by sellers before a rebound in price worth over 10p.

    [​IMG]

    Important Footnotes

    • Risk model: The fact that financial markets have become so intertwined and dynamic makes it essential to stay constantly in tune with market conditions and adapt to new environments. This prop model will assist you to gauge the context that you are trading so that you can significantly reduce the downside risks. To understand the principles applied in the assessment of this model, refer to the tutorial How to Unpack Risk Sentiment Profiles
    • Cycles: 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
    • POC: It refers to the point of control. It represents the areas of most interest by trading volume and should act as walls of bids/offers that may result in price reversals. The volume profile analysis tracks trading activity over a specified time period at specified price levels. The study reveals the constant evolution of the market auction process. If you wish to find out more about the importance of the POC, refer to the tutorial How to Read Volume Profile Structures
    • Tick Volume: Price updates activity provides great insights into the actual buy or sell-side commitment to be engaged into a specific directional movement. Studies validate that price updates (tick volume) are highly correlated to actual traded volume, with the correlation being very high, when looking at hourly data. If you wish to find out more about the importance tick volume, refer to the tutorial on Why Is Tick Volume Important To Monitor?
    • 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
    • Trendlines: Besides the horizontal lines, trendlines are helpful as a visual representation of the trend. The trendlines are drawn respecting a series of rules that determine the validation of a new cycle being created. Therefore, these trendline drawn in the chart hinge to a certain interpretation of market structures.
    • Correlations: Each forex pair has a series of highly correlated assets to assess valuations. This type of study is called inter-market analysis and it involves scoping out anomalies in the ever-evolving global interconnectivity between equities, bonds, currencies, and commodities. If you would like to understand more about this concept, refer to the tutorial How Divergence In Correlated Assets Can Help You Add An Edge.
    • 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% projection resides in the symmetry and harmonic relationships of market cycles. By drawing a 100% 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% Fibonacci Projection
     
  7. IvanGlobalPrime

    IvanGlobalPrime Private

    Joined:
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    Messages:
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    Find my latest market thoughts

    Trade Conflict Morph Into Currency War

    Posted on: 06 Aug, 2019


    The markets are engulfed by a sense of fear and uncertainty about a new low Yuan regime as the focus shifts from a trade-centric conflict into a currency war. The ramifications in the currency market, amid a vivid risk-averse environment, has been for capital flows to stick with the usual suspects (Yen, Swissy, Gold, Bitcoin, Bonds)...

    The Daily Edge is authored by Ivan Delgado, Market Insights Commentator at Global Prime. The purpose of this content is to provide an assessment of the market conditions. The report takes an in-depth look of market dynamics, factoring in fundamentals, technicals, inter-market in order to determine daily biases and assist one’s decisions on a regular basis. Feel free to follow Ivan on Twitter & Youtube. You can also subscribe to the mailing list to receive Ivan’s Daily wrap.


    Quick Take

    The first week of August 2019 will mark the time when China finally opted to draw a line in the sand by telling US President Trump, enough is enough. That's the key takeaway by not intervening in the USD/CNH but instead letting market forces determine the exchange rate, which as of the close of NY, sit around 7.10. The US Treasury has been fast to label China a currency manipulator, which essentially puts the nail in the coffin to any glimmer of hopes for trade negotiations to continue. The markets are obviously engulfed by a sense of fear and uncertainty about this new environment as the focus shifts from a trade-centric conflict into a currency war. The ramifications in the currency market, amid a vivid risk-averse environment, has been for capital flows to stick with the usual suspects (Yen, Swissy, Gold, Bitcoin, Bonds) as equities sell-off in a disorderly manner.

    [​IMG]
    The indices show the performance of a particular currency vs G8 FX. An educational article about how to build your own currency meter can be found in the Global Prime's Research section.

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

    PBOC spooks the market by letting Yuan depreciate: The story of the day is the tumbling of the Chinese Yuan, breaking above the 7.00 mark in USD/CNH terms (close near 7.10) as the full-blown trade war swiftly morph into a currency war. The fact that the PBOC has not intervened to keep the exchange rate below the psychological level but instead allowing the rate to be market-determined is a clear statement of intent that they are looking to weaponize their exchange rate to offset the increasing number of Chinese products being taxed as part of the trade war.

    USD/CNH above 7.00 is an inflection point: It really looks like the breakout and close way past the 7.00 level in USD/CNH is a major inflection point and markets are reacting accordingly. The Chinese central bank has been largely on the sidelines doing its job to keep the yuan stable in order to facilitate trade negotiations aimed at projecting a message of goodwill. But with the trade war escalating, its lack of intervention must be interpreted as a clear message that the US has gone too far. Interestingly, iIf China had the intent to use the currency to completely offset the full impact of the US tariffs, it implies further depreciation until levels closer to 7.40, according to ANZ Strategists.

    A weaker Yuan as a double-edged sword: But allowing the yuan to depreciate, while it acts as a mechanism to offset trade tariffs, it can also backfire as the action could be quite costly for China’s financial conditions. The disorderly depreciation of the Yuan has led to a major sell-off in China’s equity market, which also heightens the risk of acceleration of capital outflows and putting pressure on the economy.

    Trump calls China's action a major violation: While the PBOC has just simply let the market take over without the normal interventions being conducted, US President Trump has responded such ‘inaction’ by calling it a ‘major violation’. Trump’s tweet read as follows: “China dropped the price of their currency to an almost a historic low. It's called "currency manipulation." Are you listening to Federal Reserve? This is a major violation…” What's ironic from reading Trump's comments is that it was precisely the PBOC intervention that kept the Yuan strong.

    China set to retaliate via hold of US Agric purchases: As part of China’s set of measures to retaliate against the US after last week’s tariff hike announcement by Trump, China is now mulling to place tariffs on US agricultural products purchased after August 3, according to the state media. This is news that was confirmed by the China Global Times editor Hu Xijin via Twitter, who stated that the exemption of tariffs for US farmers will be lifted alongside the pause to buying US farm goods such as soybeans.

    Pay attention what they do, not what they say: PBOC governor, Yi Gang, made official comments via a state media channel by stating that the current yuan exchange rate is at an appropriate level, adding that China won't engage in competitive currency devaluation, even if the actions demonstrate otherwise. Yi Gang expanded his contradictory statement by noting that the PBOC “will not use the yuan as a tool to cope with external disturbances, such as trade tensions”, and that “fluctuations in the yuan exchange rate are driven by the market.” Some disconnect with reality indeed as the PBOC has been defending the psychological level of 7.00 whenever its been on its best interest.

    US Treasury labels China 'currency manipulator': It gets worse, as US Treasury Secretary Mnuchin, via an official Treasury statement, has labeled China as a currency manipulator, causing further mayhem in the markets. The highlights of the statement included a reference to engage with the IMF to eliminate unfair competitive advantage or that China's actions are a violation of their G20 commitments. This decision by the US Treasury really puts the nail in the coffin for hopes of trade talks resuming. Rather than restoring calm to the markets, it throws more fuel to the fire for uncertainty to build.

    True 'risk-off' markets w/ usual suspects benefiting: The trading dynamics continue to be characterized as “true risk-off” with the usual suspects (Yen, Swissy, Gold, Bonds), even Bitcoin, benefiting from the run to safety as the USD tumbles. One potential circuit breaker for today would be the setting of a lower USD/CNH fix rate, PBOC intervention in the USD/CNH or the addition of liquidity via HK.

    Probability of a 50bp rate cut by the Fed on the rise: As the markets take a hit and financial conditions tighten in the US, one of the reasons for the US Dollar not to be as appealing as an investment vehicle today is the fact that the Fedwatch tool is now assigning a 35% chance of a 50bp rate cut in Sept, with a 25bp cut fully priced in.

    All the while US & China economic data disappoint: If the market turmoil caused by the trade war was not sufficient, the July US ISM non-manufacturing came at a disappointing 53.7 vs 55.5 expected, which marks the lowest level since August 2016 as momentum continues to be lost from the peaks above 60. On the Chinese side, its latest China Caixin Services PMI also underwhelmed at 51.6 vs 52 expected.

    Former Fed bosses send a message to Trump: Former Fed Chairs at the Fed are calling for independence at the Central Bank. In an article signed by Paul Volcker, Alan Greenspan, Ben Bernanke, and Janet Yellen, they take aim to send a clear message to Trump to stop bashing the Fed and don’t get his nose into its affairs.

    NZ Treasury warns of tough times ahead: The New Zealand Monthly Economic Indicators, released by the NZ Treasury, sent a warning to the market by noting that the downside risk to near-term GDP growth forecasts have increased. The more pessimistic outlook was attributed to weak domestic business confidence due to ongoing trade uncertainty which is weighing on global business activity too. On the bright side, they mentioned household confidence remains resilient, supporting the consumption outlook.

    But NZ jobs tells us a completely different story: The latest employment report released Tuesday morning local time caught the market by surprise as the Q2 unemployment rate dropped to 3.9% 4.3% expected. We don’t get to see these types of beats in the jobless rate that often, which has been reflected in a major spike in the Kiwi, since the rest of jobs-related data was also supportive, including a 0.8% employment change q/q vs 0.3% expected or the steady participation rate at 70.4% (inline). Even the average hourly earnings, including private wages, jumped to 0.8% vs 0.5% expected.

    Yuan's event eclipses today's RBA meeting: The RBA monetary policy statement is next: Just as last week's US NFP was eclipsed by the trade war escalation, today's RBA meeting will also see its focus stolen by the events in the Yuan. The RBA is expected to hold rates unchanged at 1% yet strike a rather dovish message in its willingness to cut rates further in Q4. The RBA is likely to repeat the statement that, “the board will continue to monitor developments in the labour market closely and adjust monetary policy if needed to support sustainable growth in the economy and the achievement of the inflation target over time (emphasis added)”. .

    Recent Economic Indicators & Events Ahead

    [​IMG]
    [​IMG]
    Source: Forexfactory

    A Dive Into The Charts

    At the center of every day’s analysis, we must understand the overall performance of the currency indices when cross-checked against a basket of the most heavily traded currencies. With the market engulfed by huge risk aversion, the likes of the Yen or the Swissy continue to do well, with the latter accelerating its gains dramatically in a move that starts to look overdone. Also note, the Yen index has reached its 100% proj target, so I’d expect the currency to find a cap in its relentless appreciation right around these levels. The Euro index, against conventional belief, has broken into a new cycle high, as the implied probability of further and deeper rate cuts by the Fed in Sept keeps rising. That’s what might be interpreted as a key driver for the lower USD valuation, however, be aware that the USD index is now testing a key resistance-turned-support, which makes it an appealing technical buy if one’s system triggers the signal to enter. What is important to note is that the USD is retesting a level where a flurry of buy-side activity may be seen, with the ‘risk-off’ context still justifying the play. The commodity currencies (AUD, CAD) were smashed down once again, while the NZD is now reverting its downward momentum after a stellar NZ jobs report. Last but not least, amid the crossfire of trade/currency war headlines, the GBP index has been flying largely off the radar, but its weakness on Brexit uncertainty remains dominant in what’s become the steadiest trend.

    [​IMG]

    The indices show the performance of a particular currency vs G8 FX. An educational article about how to build your own currency meter can be found in the Global Prime's Research section.

    First off, let’s start looking at the outlook for USD/CNH, without a doubt the pair that dominates the market thematic at present. From a technical standpoint, the huge spike from the 6.96 breakout point all the way to hit the 100% projection target hints the move is overdone and some type of pullback is needed to bring stability back to the markets. Fundamentally, as one would have expected, the setting of the USD/CNH by the PBOC today at 6.9683 has induced the anticipated unwinding of CNH shorts, with the announcement of PBOC issuing bills in Hong Kong in an attempt to help stabilize the Yuan also a contributing factor.

    [​IMG]

    With the Yuan fluctuations what’s going to determine the variations in the ‘risk-on’ & ‘risk-off’ dynamics, it’s no surprise that some assets in high demand amid the escalation of the trade war are experiencing some minor corrections such as the price of Bitcoin. However, the resolution of the digital asset above a descending trendline after carving out a double bottom makes the current bullish dynamics an unfinished business phase until the next target at 13.2k is reached.

    [​IMG]

    Another asset class finding plenty of interest as capital flows seek out protection is gold. I’ve been interested to narrate a bullish story in this market since the formation of the bullish outside day last Thursday, which to me implied a major shift in order flow and a market ripe to extend into new highs with the clear target to be achieved next at 1,500.00, which would coincide with, you guessed it, another 100% projection target.

    [​IMG]

    Another market that I find extremely appealing to see a rebound today is the USD/JPY. Not only the USD index has met support and the Yen index has reached its 100% proj target, but in the pair USD/JPY, we’ve hit the 105.50 mid-round level, which is confluent with the 100% proj. So far, as one could have anticipated by tapping into the magic of the 100% proj symmetries, where market makers are going to form clusters of orders, we’ve indeed seen a rebound. As long as the Yuan depreciation is contained around present levels, the trade today is to find levels to engage in buy-side action.

    [​IMG]

    I won’t get tired of emphasizing the power of the 100% proj because it really is that precise at helping us understand when turns in the market occur as traders take profits in anticipation that heavy limit orders by market makers will cause a shift in order flow at points in the chart where no longer exists a perception that the currency pair is rated at a fair price. Judge by yourself, as today it’s the case of the EUR/CHF, AUD/USD (other Aussie pairs too). Since last week, I also pointed at the potential reversal in the making due to the confluence that existed in CHF/JPY; in this latter, fast forward to present levels and check where the rate has been sent to…

    [​IMG]
    [​IMG]
    [​IMG]

    Alongside the conviction for gold to resume its uptrend, I’ve also reflected on the probability that if Crude Oil were to make a correction to retest its breakout point, which it did on the back of last Friday’s US NFP, that the market was poised to at least retest the lows before a re-assessment, and that’s precisely what we’ve seen.

    [​IMG]

    Similarly, on the S&P 500, after last Thursday’s reversal in order flow, which was manifested in an inverse bearish pin bar re-taking a level of support, I posted the following: “The upper shadow with a close below support as volume increases dramatically is a recipe to see further follow-through supply in the index. Besides, the bearish price action on Thursday has broken the bullish structure by closing below the previous swing low on July 17th.” Today, the index is more than 150 points lower on the back of that price action clue post-Trump’s new tariffs to China.

    [​IMG]

    Important Footnotes


    • Risk model: The fact that financial markets have become so intertwined and dynamic makes it essential to stay constantly in tune with market conditions and adapt to new environments. This prop model will assist you to gauge the context that you are trading so that you can significantly reduce the downside risks. To understand the principles applied in the assessment of this model, refer to the tutorial How to Unpack Risk Sentiment Profiles
    • Cycles: 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
    • POC: It refers to the point of control. It represents the areas of most interest by trading volume and should act as walls of bids/offers that may result in price reversals. The volume profile analysis tracks trading activity over a specified time period at specified price levels. The study reveals the constant evolution of the market auction process. If you wish to find out more about the importance of the POC, refer to the tutorial How to Read Volume Profile Structures
    • Tick Volume: Price updates activity provides great insights into the actual buy or sell-side commitment to be engaged into a specific directional movement. Studies validate that price updates (tick volume) are highly correlated to actual traded volume, with the correlation being very high, when looking at hourly data. If you wish to find out more about the importance tick volume, refer to the tutorial on Why Is Tick Volume Important To Monitor?
    • 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
    • Trendlines: Besides the horizontal lines, trendlines are helpful as a visual representation of the trend. The trendlines are drawn respecting a series of rules that determine the validation of a new cycle being created. Therefore, these trendline drawn in the chart hinge to a certain interpretation of market structures.
    • Correlations: Each forex pair has a series of highly correlated assets to assess valuations. This type of study is called inter-market analysis and it involves scoping out anomalies in the ever-evolving global interconnectivity between equities, bonds, currencies, and commodities. If you would like to understand more about this concept, refer to the tutorial How Divergence In Correlated Assets Can Help You Add An Edge.
    • 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% projection resides in the symmetry and harmonic relationships of market cycles. By drawing a 100% 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% Fibonacci Projection
     
  8. IvanGlobalPrime

    IvanGlobalPrime Private

    Joined:
    Aug 1, 2018
    Messages:
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    Likes Received:
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    Find my latest market thoughts

    Extreme Risk Aversion Takes A Respite


    The PBOC stepped in to soothe the market's mayhem seen, with stocks rebounding hard even if bond traders are not buying into it by keeping long-dated US paper under extreme downside pressure, which implies that the outlook for the US/global economy keeps deteriorating.

    The article is authored by Ivan Delgado, Market Insights Commentator at Global Prime. This content aims to provide an insightful look into topics of interest for traders. Feel free to follow Ivan on Twitter & Youtube. Make sure you join our discord room if you'd like to interact with Ivan and other like-minded traders. You can also subscribe to the mailing list to receive Ivan’s Daily wrap. Also, find out why Global Prime is the highest-rated broker at Forex Peace Army.

    Quick Take

    The PBOC finally acted as the circuit breaker to ameliorate financial conditions by setting a firmer Yuan fixing and looking to conduct bond operations to soak up offshore Yuan liquidity via a series of bond issuances in Hong Kong. It did make the trick to soothe the market's mayhem seen, with stocks rebounding hard even if bond traders are not buying into it by keeping the long-dated US paper under extreme downside pressure, which implies that the outlook for the US/global economy keeps deteriorating. That's been reflected in another fully priced-in rate cut of 25bp by the Fed in Sept, with chances of a 50bp cut ranging from 15% today to as high as 50% at one stage yesterday. The rampant demand for Gold is yet another sign that the current setting remains ugly to see a sustainable recovery in risk trades. As we head into Wednesday, the USD has managed to contain its moderate fall, while the Canadian Dollar comes under the siege of sellers under intense pressure just as Oil keeps falling to new lows. The market's favorite long plays (JPY, CHF) finally found a meaningful phase of profit-taking as risk appetite made a temporary appearance although dip buyers are lurking around. The Euro remains supported from the unwinding of risk positions as EUR-funded carry trades get closed. The Sterling is drawing more interest from buyers too, as is the AUD despite a slightly more dovish RBA. Lastly, the NZD was smashed after the RBNZ went out of its way to cut the benchmark rate by 50bp to 1% and match Australia's rate-setting level.

    [​IMG]
    The indices show the performance of a particular currency vs G8 FX. An educational article about how to build your own currency meter can be found in the Global Prime's Research section.

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

    Risk on the mend as PBOC stabilizes the Yuan: The market has taken a bit of a breather with risk assets back on the green after the PBOC stepped in to facilitate a relaxation of the selling pressure in the Chinese Yuan by setting a firmer-than-expected fixing, while it also announced it plans to conduct a bond sale of 30 billion yuan ($4.25 billion) worth of yuan-denominated bills in the Hong Kong offshore market to improve liquidity and prevent speculative short-selling. USD/CNH ends the day circa 7.05.

    PBOC aims to project reassurance at home: Reports have emerged of a meeting between the PBOC and foreign exporters in Beijing to reassure that the yuan’s weakness will not continue in such a rapid manner, which is congruent with the actions we’ve seen by the PBOC to stabilize the Yuan exchange rate. The PBOC is obviously worried that the sharp Yuan depreciation may lead to capital outflows, so they need to strike a message of credibility and reassurance to manage the uncertain environment.

    PBOC keeps talking its own agenda: The PBOC has made a statement by which it opposes US' accusations of being a currency manipulator, noting that the unfair claim is related to unilateralism and protectionism, adding that the yuan exchange rate is decided by market supply and demand. They also reiterated that they will not use the yuan as a tool to deal with trade disputes. The actions from this week, however, imply that China is looking to take a new approach in the Yuan by letting it be more market-determined, with the break and close above the 7.00 last Monday the proof in the pudding, which has been read by the market as a measure to offset the US tariffs.

    China yet to rule out further trade talks: If the US and China have genuine intentions to disentangle this new phase of provocations by both sides, the negotiations must resume rapidly or else it may create further negative spillover effects in China, the US and globally, with especially tough repercussions in Asia. The latest episode of a Yuan-induced risk aversion in the markets must still be read in the context of upcoming US-China trade talks next month with neither side having canceled talks. At least, China is yet to rule out the next round of negotiation due in September. Besides, US economic advisor Kudlow said on Tuesday the US is still expecting talks with China in September.

    Trump is playing with fire: The Washington Post notes “Trump thinks that continuing to punish China will spur Beijing to negotiate. But some aides fear that his hard-line stance will backfire” and that “aides have brought Trump charts to convince him that the currency charge is untrue, but the president remains firm in his beliefs”.

    RBA sticks to dovish script but patience warranted: The RBA monetary policy was left unchanged, with the rate at a record low of 1%, while keeping a dovish bias in its statement, which is a position expected to remain for a prolonged period of time, as per the latest public comments made by the RBA Governor Lowe. In the August statement, this was reflected via the following passage "It is reasonable to expect that an extended period of low-interest rates will be required in Australia to make progress in reducing unemployment and achieve more assured progress towards the inflation target. On the latter, a separate more pessimistic view was also issued by noting that while “the central scenario remains for inflation to increase gradually, it is likely to take longer than earlier expected for inflation to return to 2 percent.”

    The RBNZ takes bold action by slashing the rate 50bp: Ahead of the event, the market had fully priced a cut. However, given the strong labour market figures yesterday (unemployment rate fell to 3.9% vs 4.3% expected), it had somehow troubled the market as to how aggressive the RBNZ would be as the global outlook softens. The decision left the market in perplexity, as the Central Bank decided to cut its rate by more-than-expected (50bp), sending a clear message that, as the backdrop stands, the domestic tailwinds in the labor data won't prevent the Central Bank from conducting an aggressive adjustment to ensure the easing of financial conditions. What made this outcome ultra dovish for the NZD was the fact that the decision reached by the Board was unanimous. The RBNZ states that "our actions today demonstrate our ongoing commitment to ensure inflation increases to the mid-point of the target range, and employment remains around its maximum sustainable level."

    Fed's Bullard not as dovish in rates: Fed's Bullard continues to walk back its perma dovish stance by flipping his view to now think that the FOMC should not react to "tit-for-tat trade war", adding that US interest rates are "in the right neighborhood", while watching data to further shape his opinion. These comments by Bullard, who happens to be the most vocal dovish among Fed officials, is dollar-positive, which alongside the risk rebound, has placed the odds for a 50bp rate cut in Sept to just 18% vs 50%.

    Recent Economic Indicators & Events Ahead
    [​IMG]
    [​IMG]
    Source: Forexfactory

    A Dive Into The Charts

    My hat goes off to those holding such a challenging long trade as is the EUR, one that while it sounds counterintuitive to endorse based on the ECB’s ultra-dovish stance, yet it has benefited from the unwinding of risk positions as EUR-funded carry trades get closed. The Pound, this time, played catch up with the Euro’s bullish bias, by putting on a similar performance. Meanwhile, the USD index (equally-weighted against G8 FX) has found expected pockets of demand as a key level of support was tested. The Canadian Dollar looks like one of the weakest currencies heading into Wednesday as the close in the index indicates, with a high volume sell-side candle breaking through a key level of support. Not the time to be bullish on the Canadian Dollar this Wednesday judging by the sentiment obtained through the index. We’ve also witnessed a rejection of the 100% proj target in the Yen index, even if the long lower tail in the daily suggests the interest to buy the dips in the preferred ‘risk-off’ currency remains substantial. An identical pattern applies in the Swissy index chart. The Australian Dollar has managed to duck relatively successfully the RBA bullets, as the Central Bank left its policy unchanged even if maintaining a clear dovish path. There is definitely stronger interest to be buyers of the Aussie around these depressed levels, especially if the Chinese keep their word in facilitating the conditions to stabilize the Yuan. Lastly, the NZD has found demand where one would have expected it to emerge from, that is, a key level of support.

    [​IMG]

    The first chart to outline is the pair that has become the center of the financial universe to set the tone in the currency market for the day. On Tuesday, I did highlight that the rapid weakness in the Chinese Yuan, which had reached its 100% proj target, was always going to be the precursor that would activate the PBOC alarm bells to act in some manner to stabilize the rate. Through the issuance of Chinese bonds to mop up liquidity offshore and discourage short-selling, alongside the firmer Yuan fixing, this scenario played out, which is what set the ball rolling for the improvement in risk appetite, even if still a drop in an ocean of weekly reds.

    [​IMG]

    Next, I’d like to bring to the readers’ attention the rebounds seen off the 100% projection levels in a handful of Aussie pairs as we headed into the RBA policy decision. AUD/CHF, AUD/USD or AUD/JPY could have been long trades to consider upon one’s own strategy, knowing that these are reactionary areas where prices tends to find a blockage by the cluster of orders, causing an absorption of offers in this case, which leads to an initial rebound one can capitalize on.

    [​IMG]
    [​IMG]
    [​IMG]

    But there were other 100% proj-derived long propositions one could have considered as the risk curve in financial markets ameliorated. Those cunningly in the wings to inspect long plays in pairs such as USD/JPY or EUR/CHF were certainly rewarded. Again, you can’t make this stuff up. The reversals, as is often the case, occurred right at the projected target, which once again, validates the virtue of those that pay close attention to market symmetries to follow the flows.

    [​IMG]
    [​IMG]

    A chart that strikes me by the price action formed on Tuesday is the CAD/CHF, printing the type of bearish bar that one wants to see to keep its short bias intact. Not only we’ve seen the resolution of price by closing below a key support, but the candle carries an increase in the commitment of sellers as reflected by the tick volume spike seen. This is a price action-based candle pattern reminiscent to the setup that led to a major selloff in the S&P 500 this week.

    [​IMG]

    Part of the reason the CAD has come under sellers’ siege to surround further ground has to do with the impulsive sell-off seen in Oil. Readers of my daily edge know that I’ve been endorsing the solid likelihood of Oil finding further supply imbalance on the basis of its clear bearish market structure, with price action, volume and fundamentals aiding the negative view.

    [​IMG]

    Another commodity that remains steady on its quest to reach its next milestone is gold, which after printing a notoriously sizeable bullish outside day, has displayed a similar long play by experiencing rampant demand en-route to its next target around the 1,500.00 level.

    [​IMG]
    Important Footnotes

    • Risk model: The fact that financial markets have become so intertwined and dynamic makes it essential to stay constantly in tune with market conditions and adapt to new environments. This prop model will assist you to gauge the context that you are trading so that you can significantly reduce the downside risks. To understand the principles applied in the assessment of this model, refer to the tutorial How to Unpack Risk Sentiment Profiles
    • Cycles: 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
    • POC: It refers to the point of control. It represents the areas of most interest by trading volume and should act as walls of bids/offers that may result in price reversals. The volume profile analysis tracks trading activity over a specified time period at specified price levels. The study reveals the constant evolution of the market auction process. If you wish to find out more about the importance of the POC, refer to the tutorial How to Read Volume Profile Structures
    • Tick Volume: Price updates activity provides great insights into the actual buy or sell-side commitment to be engaged into a specific directional movement. Studies validate that price updates (tick volume) are highly correlated to actual traded volume, with the correlation being very high, when looking at hourly data. If you wish to find out more about the importance tick volume, refer to the tutorial on Why Is Tick Volume Important To Monitor?
    • 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
    • Trendlines: Besides the horizontal lines, trendlines are helpful as a visual representation of the trend. The trendlines are drawn respecting a series of rules that determine the validation of a new cycle being created. Therefore, these trendline drawn in the chart hinge to a certain interpretation of market structures.
    • Correlations: Each forex pair has a series of highly correlated assets to assess valuations. This type of study is called inter-market analysis and it involves scoping out anomalies in the ever-evolving global interconnectivity between equities, bonds, currencies, and commodities. If you would like to understand more about this concept, refer to the tutorial How Divergence In Correlated Assets Can Help You Add An Edge.
    • 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% projection resides in the symmetry and harmonic relationships of market cycles. By drawing a 100% 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% Fibonacci Projection
     
  9. IvanGlobalPrime

    IvanGlobalPrime Private

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    Find my latest

    Funding Currencies Face Downside Risks

    Posted on: 08 Aug, 2019

    We might be approaching a key inflection point in the charts where funding currencies take a breather from its elongated movements just as the PBOC continues to make sure that the volatility and weakness around the Yuan slow down as global Central Banks commit to more easing, some quite aggressively as seen by the RBNZ.

    The Daily Edge is authored by Ivan Delgado, Market Insights Commentator at Global Prime. The purpose of this content is to provide an assessment of the market conditions. The report takes an in-depth look of market dynamics, factoring in fundamentals, technicals, inter-market in order to determine daily biases and assist one’s decisions on a regular basis. Feel free to follow Ivan on Twitter & Youtube. You can also subscribe to the mailing list to receive Ivan’s Daily wrap.

    Quick Take

    The favorite play by the market has been to keep a sustained bid on funding-currencies (EUR, JPY, CHF) as derisking dynamics led to an unwind of carry trades. Capital that was borrowed in low yielding currencies and put to work in a high-return currency has scrambled to the exits as the problem becomes that on episodes of 'risk aversion' as seen in the US-China trade conflict morphing into a currency war, these positions tend to quickly go underwater as the market psyche resorts to old fashion safe havens. However, we might be approaching a key inflection point in the charts where funding currencies take a breather from its elongated movements just as the PBOC continues to make sure that the volatility and weakness around the Yuan slow down as global Central Banks commit to more easing, some quite aggressively as seen by the RBNZ. The Fed and ECB, amid this backdrop, are also readying more ammunition to come to the rescue to control volatility, even if might be harder to do so if the focus stays on currency wars. The key barometer to determine the market profile on a daily basis remains the Yuan valuation, and in line with the synopsis presented today, we continue to see a PBOC that has taken the foot off the gas pedal by relaxing the fixing rate, which came not as weak as expected. This appears to be helping risk trades early on Thursday.

    [​IMG]
    The indices show the performance of a particular currency vs G8 FX. An educational article about how to build your own currency meter can be found in the Global Prime's Research section.

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

    The RBNZ shocks the market: The market was flummoxed to witness the New Zealand Central Bank cutting its rate by more-than-expected (50bp), essentially dismissing the spectacular labor data from earlier in the week to instead reach a unanimous rate cute decision on the basis that, as the statement notes, “the actions demonstrate our ongoing commitment to ensure inflation increases to the midpoint of the target range, and employment remains around its maximum sustainable level." In his press conference, RBNZ Governor Orr did not rule out the possibility of neither further action nor negative interest rates.

    Other CBs deliver surprise cuts: The universal easing paths taken by Central Banks globally reveals a troubling backdrop. It wasn’t just the RBNZ cutting rates aggressively on Wednesday, but this decision was followed by a surprising 35bp depo rate cut by the RBI (Reserve Bank of India) to 5.4% versus expectations for a 25bp cut, which is the lowest since 2010. In another unexpected move, the BoT (Bank of Thailand) also cut its interest rate by 25bp to 1.5% after a 5-2 vote by the committee. What all these cuts portray is the perception that further pre-emptive measures must be taken to weather the economic headwinds (both globally and domestically) as the US-China trade war escalates, which incentivizes CBs to resort to lower rates not only to stimulate their economies and make money cheaper but also for a more competitive exchange rate (currency wars).

    Odds of RBA rate cut edge up: The shocking 50bp cut by the RBNZ has spilled over into the Australian money market, with the odds of a Sept RBA rate cut rising sharply as indicated by the Australian 10-year yields, which has fallen below the cash rate of 1.00%. If we were to compare where cash rate futures sit today vs yesterday, the chances of another cut by the RBA have risen by over 20% to currently stand at nearly 70& from the roughly 50% chances pre-RBNZ. Traders will be able to get further insights from the RBA this Friday, as RBA governor Lowe delivers the central bank's semi-annual testimony to the House Economics Committee while at the same time, the latest Statement on Monetary Policy (SoMP) from the central bank will be released.

    It keeps getting uglier in Germany: German industrial production fell sharply in June, coming at -1.5% MoM vs -0.5% expected, caused by broad-based weakness across all subcomponents (consumer, capital intermediate goods) with the exception of construction. There are mounting risks that the persistent weakness leads to broader economy fragility in the German economy over the coming months. Under such a vulnerable global backdrop with Central Banks bringing their A ‘dovish game’, this data will only solidify the idea that the ECB will need to act quite aggressive in Sept.

    Fed to choose between cuts or vol: The dynamics we continue to see in the forex market mean that leveraged and carry trades face the prospects of being further unwound, which tends to lead to funding currencies the likes of the EUR, CHF, and JPY to see further demand. Moreover, as yield curves all over the world keep flattening sharply with further inversions around the corner, Central Bank must keep acting via further easing measures in order to stabilize market volatility. This makes the case for further rate cuts by the Fed during the Sept meeting a highly likely outcome reflected by the CME Fedwatch tool. For now, the risk pendulum remains the level of the RMB (Yuan).

    China-US trade pretense still 'on': Even if the stalemate between the US and China looks worse than prior to the truce reached in the G20, the SCMP is out with an article suggesting that the Asian giant still keeps the door open to September talks in Washington despite the clear escalation seen. The report cites Wei Jianguo, former vice-minister of commerce, noting that the meeting is likely to happen, with video conferences planned to set the groundwork before the next round of face-to-face talks.

    Fed's Evans defends dovish stance: Chicago Fed President Charles Evans, who is a voting member, keeps supporting the notion that further rate cuts may be needed by stating that “economic headwinds mean cutting rates further could be reasonable,'' adding that “on the basis of the low US inflation alone, July interest rate cut was justified and more policy accommodation needed.” On the hot topic of the trade war, Evans said that the brinkmanship trade negotiations mean volatility, which is why attention is required to guard the economy against spillover effects. Evans sees a midcycle adjustment as Fed now aims for 50 basis points below neutral rate, rather than 50 bp above.

    US President Trump keeps bashing on the Fed Another round of tweets by Mr. President, where he places the blame on the Fed for not cutting rates deeper. The tweet, for anyone who is experienced in covering market news, is an insult to our own intelligence, as he demands that the Fed must stop QT (Quantitative Tightening), when it’s formal conclusion was already announced in the last FOMC meeting, while mentioning that the US yield curve is “at too wide a margin”, which is absolute nonsense since the inversion dynamics are across the board and the narrowest since pre GFC (Global Financial Crisis).

    Trump’s tweet read: “Three more Central Banks cut rates. Our problem is not China - We are stronger than ever, money is pouring into the U.S. while China is losing companies by the thousands to other countries, and their currency is under siege - Our problem is a Federal Reserve that is too.........proud to admit their mistake of acting too fast and tightening too much (and that I was right!). They must Cut Rates bigger and faster, and stop their ridiculous quantitative tightening NOW. Yield curve is at too wide a margin, and no inflation! Incompetence is a.........terrible thing to watch, especially when things could be taken care of sooo easily. We will WIN anyway, but it would be much easier if the Fed understood, which they don't, that we are competing against other countries, all of whom want to do well at our expense!”

    Most important juncture in FX in decades? Raoul Pal, Founder/CEO at RealVision and well-respected Global Macro Investor, has put out a series of tweets that have really caught my attention. In them, Raoul notes that “We are at the most important juncture in FX markets in my entire 30-year career.” Read on here.

    Recent Economic Indicators & Events Ahead

    [​IMG]
    [​IMG]
    Source: Forexfactory

    A Dive Into The Charts

    By disseminating the latest currency movements in its index terms against a basket of G8 FX, we can understand the overall market sentiment and where turns are most likely to occur. An educational article about how to build your own currency meter can be found in the Global Prime's Research section. For instance, the unwinding of low yielding currencies (EUR, JPY, CHF) used for the funding of carry trades appears to have reached a technical inflection point in the charts. This leads me to think the heat might start coming off these outperformers as derisking flows adjust to a firmer Yuan. This initial premise is predicated on the fact that all three currencies have reached macro symmetrical targets, what I often refer as 100% projection targets, which implies that we may be nearing a meaningful top, a possibility if one expects risk to recover a tad from here on out.

    [​IMG]
    [​IMG]
    [​IMG]

    Next, let's ask ourselves, what’s our main barometer driving risk in today’s market dynamics? The clear answer here is the unfolding currency war, centered around the Yuan. Therefore, by scanning the USD/CNH chart, we can also obtain some clues and here we see that the pair has reached its 100% projection target, in other words, further sustained gains seem to be unlikely if abiding by the market structure logic I continuously dwell on. This assumption marries well with the rhetoric from the PBOC to stabilize the Yuan as it’s not in their best interest at all to see this type of sharp Yuan depreciation so rapidly.

    [​IMG]

    Now let’s turn our attention to the high-beta currencies, which have been absolutely smashed in value for the last 3 weeks. This includes the AUD, NZD indices but I will also add GBP. Incredible but true, the moment each one landed on the 100% proj target, the market appears to have found a temporary bottom as market makers’ bids and profit-taking ensues. It tells me that short-term, the prospects to see a further recovery have some solid technical grounds.

    [​IMG]
    [​IMG]
    [​IMG]

    We’ve seen the USD index finding consistent bids off its support area since Tuesday, which is an outcome I made sure readers were on high alert to watch for as per my notes earlier in the week (read below). The currency is in a bullish phase, so there is little reason not to expect further upward pressure for at least a retest of the previous resistance.

    [​IMG]

    The CAD looks like it’s evolving into one of the weakest currencies out there in the G8 FX space even if a major macro area of support was found on the way down which made it an attractive proposition to play longs off of it. By the way, if you notice, the CAD index bull run of June/July stopped in its tracks at, you guessed it, the 100% projection target, location in the chart when you start to be suspicious of a reversal. Find below the notes I sent last month warning about this 100% target to find a top.


    [​IMG]

    Ok, now that we’ve been able to deconstruct the overall sentiment and market structures in the main currencies, we can start to take the next step, moving from the individual technical merits of each currency index to the potential exploitation of opportunities by pairing up these currencies.

    The first pair that as I scan for possible combinations to capitalize turns my alarm bells ‘on’ is the prospects of a recovery in the AUD/CHF. The pair has found a major volume absorption candle with a huge lower shadow tail at the 100% projection target. This view also plays in congruence with the tentative negative outlook on funding currencies (CHF), while it’s also backed by the more constructive view on the Aussie on the basis that the PBOC won’t allow the Yuan to weaken much further in the short-term. Note, one could also consider investigating the AUD/JPY chart, even if the absorption is not as pronounced judging by the tick volume of the rejection candle on Wednesday.

    [​IMG]
    [​IMG]

    The next market to highlight is the short play in CAD/CHF as per the note I put out yesterday. This is a market that as I noted yesterday, had printed a clear rejection off the highs as the massive upper tail indicated, which coupled with the breakout and acceptance below support, made it a market with increasing risk of going through a period of follow-through supply, which is what we’ve seen (over 75 pips).

    [​IMG]

    The sell-side campaign in Oil has also made further inroads by extending the downside into its next area of support around the 51.00 area where I’d expect profit-taking and market makers action to start absorbing late sellers. Note, the area is the 100% proj target + key support. Upside risks may be building up short-term.

    [​IMG]

    The next chart is an interesting one. The logic to have played a potential short here was to get the trigger right at the juncture when the EUR index hit resistance and the AUD index reached its 100% projection target. If one was sharp enough to marry up these 2 inflection points in the indices charts to conclude that a pair like the EUR/AUD run the clear risk of exhausting its move, you’d probably have gotten a trigger entry very near to the top. A short at the very top here clearly demonstrates that the prop currency indices, as a standalone sentiment indicator, can play a huge role in understanding when certain currency combinations can find a reversal.

    [​IMG]

    Another market I have my eyes on is USD/CHF. My analysis tells me that it'd be logical to expect upward pressure as the CHF looks overstretched on an index measure, while the USD index does seem to have further upside in store as my analysis indicates. This warrants a closer inspection on USD/CHF only to realize that we’ve seen an absorption candle at a huge level of support, hence the price action evidence is also there to make me think that in the short-run, bulls may regain control for an initial target of 0.98.

    [​IMG]

    Last but not least, let's briefly touch on gold as this was yet another market where the order book sweep (sudden order flow change) led me to expect an upside target of around 1,500.00 as per last Thursday when Trump went all out by imposing further tariffs to China from Sept 1. Find a screenshot of my note below.

    [​IMG]

    Fast forward to the last NY close...

    [​IMG]

    Important Footnotes

    • Risk model: The fact that financial markets have become so intertwined and dynamic makes it essential to stay constantly in tune with market conditions and adapt to new environments. This prop model will assist you to gauge the context that you are trading so that you can significantly reduce the downside risks. To understand the principles applied in the assessment of this model, refer to the tutorial How to Unpack Risk Sentiment Profiles
    • Cycles: 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
    • POC: It refers to the point of control. It represents the areas of most interest by trading volume and should act as walls of bids/offers that may result in price reversals. The volume profile analysis tracks trading activity over a specified time period at specified price levels. The study reveals the constant evolution of the market auction process. If you wish to find out more about the importance of the POC, refer to the tutorial How to Read Volume Profile Structures
    • Tick Volume: Price updates activity provides great insights into the actual buy or sell-side commitment to be engaged into a specific directional movement. Studies validate that price updates (tick volume) are highly correlated to actual traded volume, with the correlation being very high, when looking at hourly data. If you wish to find out more about the importance tick volume, refer to the tutorial on Why Is Tick Volume Important To Monitor?
    • 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
    • Trendlines: Besides the horizontal lines, trendlines are helpful as a visual representation of the trend. The trendlines are drawn respecting a series of rules that determine the validation of a new cycle being created. Therefore, these trendline drawn in the chart hinge to a certain interpretation of market structures.
    • Correlations: Each forex pair has a series of highly correlated assets to assess valuations. This type of study is called inter-market analysis and it involves scoping out anomalies in the ever-evolving global interconnectivity between equities, bonds, currencies, and commodities. If you would like to understand more about this concept, refer to the tutorial How Divergence In Correlated Assets Can Help You Add An Edge.
    • 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% projection resides in the symmetry and harmonic relationships of market cycles. By drawing a 100% 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% Fibonacci Projection
     
  10. IvanGlobalPrime

    IvanGlobalPrime Private

    Joined:
    Aug 1, 2018
    Messages:
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    Find my latest market thoughts

    China's Central Bank Sets Friendlier Risk Tone

    Posted on: 09 Aug, 2019

    The PBOC continues to assist the recovery in risk by setting a firmer-than-expected Yuan, which has so far played in favor of risk trades to be revitalized, as reflected by the weakness in funding currencies.

    The Daily Edge is authored by Ivan Delgado, Market Insights Commentator at Global Prime. The purpose of this content is to provide an assessment of the market conditions. The report takes an in-depth look of market dynamics, factoring in fundamentals, technicals, inter-market in order to determine daily biases and assist one’s decisions on a regular basis. Feel free to follow Ivan on Twitter & Youtube. You can also subscribe to the mailing list to receive Ivan’s Daily wrap.

    Quick Take

    The anticipated transition into calmer waters in financial markets as the PBOC relaxes its approach towards a weaker Yuan has so far played in favor of risk trades to be revitalized, as reflected by the weakness seen in funding currencies, especially the Euro and the Swissy, while the Yen keeps a more combative stance. The USD traded lower as US President Trump engaged in a series of tweets looking to jawbone the USD lower, leading to an unwinding of longs. In an environment of higher US stock valuations as the S&P 500 extends its impressive bounce, even if the bond markets are sending us the complete opposite signal, commodity currencies the likes of the AUD, NZD, CAD did better. On the flip side, both European currencies (EUR, GBP) went through similar poor performances as the chatter of elections in Italy and the UK gets some air time.

    [​IMG]

    The indices show the performance of a particular currency vs G8 FX. An educational article about how to build your own currency meter can be found in the Global Prime's Research section.

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

    PBOC keeps risk dynamics in check: The last PBOC onshore yuan fixing kickstarted the risk recovery on Thursday after the setting was not as weak as expected based on market models, even if the fixing was the weakest for the CNY since 2008 just a tad above the 7.00 mark. In Friday's fixing, the PBOC set the USD/ CNY reference rate at 7.0136, which is again, marginally firmer than models were projecting, thus it should still be a catalyst to stimulate risk trades one would think.

    RBA SoMP cements the notion of lower rates for longer: The Quarterly Statement on Monetary Policy (SoMP) by the RBA has barely affected the pricing of the AUD as it did not carry any new information the market didn't know about. The RBA remains prepared to ease policy if needed, watching labour market closely. It solidified the notion that an extended period of low-interest rates should be expected. They also sounded a tad more optimistic on jobs by upgrading the unemployment forecast to 5.25% for both Dec 2019 and Dec 2020, sees 5% for Dec 2021.

    China's trade aids risk recovery: China’s trade balance for July helped to support risk trades during the last Asian session. It’s not a good sign to calm the waters to see the trade surplus with the US rising. In yuan terms, the headline number stood at 310.3 bn with a 10.3% y/y jump in exports the main highlight, while imports, which came at +0.4% y/y remained stagnant. In USD terms, the trade balance came at $45.06 bln, with imports diving -5.6% y/y, while exports ticked up +3.3% y/y.

    RBNZ's Orr repeats negative rates a possibility: After shocking the market with a 50bp rate cut, the Reserve Bank of New Zealand Governor Orr, reiterated, this time in front of a parliament committee, that negative rates are a possibility. He elaborated further by noting that it is within errors of margin of forecasts to end up in a position where negative interest rates would be needed to stimulate the economy. Orr repeated that the US-China trade war issue has lingered too long, creating global economic uncertainty.

    ECB's economic outlook inspires no one: The ECB published its economic bulletin, in which it once again gave an admission of the gloomy outlook held by the ECB by noting that the prolonged uncertainty is dampening economic sentiment, especially in the manufacturing sector. The report added that the drop in Q2 global services output PMI raises risk of more broad-based deterioration in the global growth outlook. As a reflection of the depressed state of affairs, this week’s German industrial production output was another reminder of the headwinds faced by the engine of growth in Europe.

    Italian election talks: The Euro came under pressure as Italy's Deputy PM Salvini warned that it's necessary to hold fresh elections on the grounds that there is no longer a majority to support the government. The political uncertainty in Italy is nothing new, but headlines from the horses’ mouth won’t help. Salvini has a case to be more vocal as he’s been strengthening in the polls as it builds a stronger base of supporters on his anti-immigration populist message.

    UK PM Johnson may consider a general election: There is also speculation, as reported by the Financial Times, that UK PM Boris Johnson may be mulling the prospects of a general election in the aftermath of the UK leaving the EU. If true, it would appear to be a strategy to prevent Parliament from rejecting a no-deal Brexit. This makes the chances of a no-confidence vote when parliament returns in Sept all the more likely, but during the August recess, with no counter-voices, the asymmetric downside risks in GBP remain.

    Trump jawbones the USD, no respect for the Fed: US President Trump is starting to make more noise in the Forex market by attempting to jawbone lower the value of the US Dollar. In a series of tweets, Trump said: “One would think that I would be thrilled with our very strong dollar. I am not! The Fed's high-interest rate level, in comparison to other countries, is keeping the dollar high, making it more difficult for our great manufacturers to compete on a level playing field. With substantial Fed Cuts (there is no inflation) and no quantitative tightening, the dollar will make it possible for our companies to win against any competition. We have the greatest companies.......in the world, there is nobody even close, but unfortunately the same cannot be said about our Federal Reserve.”

    US to delay Huawei licenses as tit for tat continues: Bloomberg reported, citing unnamed sources, that the US is set to delay Huawei licenses for US companies to restart business with Huawei in response to China stopping crop buying. The tit for tat response is a clear manifestation of the palpable tensions between the two sides.

    Fiscal stimulus chatter in Germany & China: News of potential fiscal stimulus by Germany and China are reverberating around the market. If confirmed, it might be one venue to put pressure on bond buyers at a time when the pool of negative-yielding bonds around the world has surpassed the $15 trillion mark. German lawmakers have hinted that they may violate their own rules for a balanced budget target as politicians mull an extra package to finance and tackle climate change. Meanwhile, there has also been reports of new stimulus measures by China to offset the effects of the trade war. If more meat on the bone in these two fronts, it should aid the recovery in risk.

    Recent Economic Indicators & Events Ahead


    [​IMG]
    [​IMG]
    Source: Forexfactory

    A Dive Into The Charts

    The anticipated slowdown of capital flocking into funding currencies (EUR, CHF, JPY) as the risk curve shows a temporary smile has indeed ensued. Out of the 3 low yielding FX alternatives, the Euro index was the most punished as it rejected off a critical confluence resistance zone coupled with the intersection of the 100% proj target. Throw into the mix the dovish ECB policy stance and the cheap price to own Euros had solid appeal. The USD index has not picked up the upside pace I’d have expected, partly due to the jawboning by Trump, which caused offers to pile in as the intervention rhetoric, while distant, makes a louder noise. The two commodity currencies (AUD, CAD) have put on the best performance, with some further room to correct towards its old support-turned-resistance in the case of the AUD index. The CAD index has already reached a critical level in the form of its 13-d ema baseline, so I won’t turn overly bullish on the current pricing offered unless a break and close above the baseline (watch for today’s Canadian jobs report). The only two currencies left include the NZD and GBP. I find it hard to be anything but bearish even if I recognize that both have reached low enough levels to make me think that a stabilization of its valuations may ensue. However, these two currencies are fundamentally some of the weakest following the overly dovish outcome by the RBNZ with more easing likely to come, while the GBP faces what I believe to still be asymmetric downside risks as hard-Brexit headlines are set to dominate until the UK parliament is back from its recess in September.

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    Let’s now delve into the charts that I personally find to be the most compelling to analyze. First off, the risk for an upside day in the AUD/CHF market has paid off so far. In this Twitter post, I explain in detail the rationale behind that made me turn bullish the market 24h ago.

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    But the upside in the Aussie has not only been centered around the CHF but rather buy-side flows have been broad-based, which happens in congruence with the across-the-board 100% proj targets reached in the majority of the AUD pairs, including the AUD equally-weighted index.

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    A market where I did warn about the confluence reaches was Oil. While I’ve been short and being a proponent to expect lower levels over the past week, to me, the area around 51.00 was the land in the sand where I’d expect a response, which is what we’ve seen. Whenever we find in the daily chart a confluence of horizontal levels + 100% proj, you must pay attention.

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    In the EUR/CAD, we’ve recently seen an incredible wholesale price up for grabs if you were nimble enough to set your orders. We had the overall market structure being bearish, a rapid rise towards the 100% proj target, paired with an epic 1.50 round number confluence. Any shorts off this level have paid off handsomely as the market trades 200p lower now.

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    I am not leaving the CAD just yet, as another trade potentially brewing, should Thursday’s low be broken, is the GBP/CAD. This is a trade that would fall under the category of a short-squeeze, which occurs when, in line with the dominant trend, there is a failure by buyers to rotate the price back up, which leads to the eventual take out of stops at the lows.

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    If you are looking for areas of confluences to trade off this Friday, NZD/USD offers a good one, as it’s currently retesting a broken double bottom at a mid-round number (0.6450). Besides, by drawing a 100% proj target, I suspect this is not yet a finished cycle until 0.6350 gets hit.

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    Lastly, two markets where the 100% proj target has been playing out beautifully as well include the USD/JPY and the USD/SEK. In the former, the initial rejection off the area has been followed by a retracement back down with decreasing volume, which still bodes well for bids to eventually overcome the downside pressure at such a critical area. Although much will depend also on the risk profile and whether or not the recovery can be sustained heading into next week.

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    Important Footnotes


    • Risk model: The fact that financial markets have become so intertwined and dynamic makes it essential to stay constantly in tune with market conditions and adapt to new environments. This prop model will assist you to gauge the context that you are trading so that you can significantly reduce the downside risks. To understand the principles applied in the assessment of this model, refer to the tutorial How to Unpack Risk Sentiment Profiles
    • Cycles: 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
    • POC: It refers to the point of control. It represents the areas of most interest by trading volume and should act as walls of bids/offers that may result in price reversals. The volume profile analysis tracks trading activity over a specified time period at specified price levels. The study reveals the constant evolution of the market auction process. If you wish to find out more about the importance of the POC, refer to the tutorial How to Read Volume Profile Structures
    • Tick Volume: Price updates activity provides great insights into the actual buy or sell-side commitment to be engaged into a specific directional movement. Studies validate that price updates (tick volume) are highly correlated to actual traded volume, with the correlation being very high, when looking at hourly data. If you wish to find out more about the importance tick volume, refer to the tutorial on Why Is Tick Volume Important To Monitor?
    • 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
    • Trendlines: Besides the horizontal lines, trendlines are helpful as a visual representation of the trend. The trendlines are drawn respecting a series of rules that determine the validation of a new cycle being created. Therefore, these trendline drawn in the chart hinge to a certain interpretation of market structures.
    • Correlations: Each forex pair has a series of highly correlated assets to assess valuations. This type of study is called inter-market analysis and it involves scoping out anomalies in the ever-evolving global interconnectivity between equities, bonds, currencies, and commodities. If you would like to understand more about this concept, refer to the tutorial How Divergence In Correlated Assets Can Help You Add An Edge.
    • 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% projection resides in the symmetry and harmonic relationships of market cycles. By drawing a 100% 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% Fibonacci Projection
     

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