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[IvanGlobalPrime]

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US GDP Q1 Icing On The DXY Bullish Trend?
POSTED ON: 26 APR, 2019

Ahead of today's preliminary Q1 GDP in the US, the Greenback failed to hold onto its recent gains, even if its ascendancy this week remains undeniably impressive. The whole FX universe will orbit around today's US growth data...


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.

Quick Take

Ahead of today's preliminary Q1 GDP in the US, the Greenback failed to hold onto its recent gains, even if its ascendancy this week remains undeniably impressive. The whole FX universe will orbit around today's US growth data, as a strong number would most likely seal a weekly close above a massive technical level in the DXY. If the scenario materializes, when combined with a EUR/USD closing sub 1.12 critical support and a USD/CNH above its respective 6.74 resistance, it could really send shockwaves across financial markets, as the notion of a period dominated by broad-based USD strength may gather steam quite rapidly as technicals align. In the meantime, as we wait for the US Q1 GDP, and Japanese Yen has been the outperformer, aided by a reported unwinding of elevated Yen short positions ahead of the Japanese 10-day Golden week holidays. The drop in global yields, including the US 30Y as our bellwether, alongside a rejection of levels near the all-time high in the S&P 500 have fueled the Yen momentum. The Euro, on the heels of yet another negative economic release out of Germany (IFO survey), remains on the backfoot. The same applies to the Sterling, with no Brexit breakthroughs. The Aussie has been under follow-through pressure by briefly breaking below the 0.70 level before a decent rejection. Alongside the Yen, the Kiwi was the other outperformer.

Narrative In Financial Markets

• The fortitude of the US Dollar is going to have to pass a serious test on Friday as the US releases its advance Q1 GDP numbers. Consensus expects growth to be rather stable at around 2.2%, identical to Q4. However, the uncertainty surrounding the Q1 GDP releases is significant due to the government shutdown over December-January. The latest economic data, from retail sales, trade balance, US goods orders, has heightened the expectations.
• Stronger-than-anticipated US durable goods orders is yet another sign that today’s US GDP could print a solid number. Capital goods orders nondefense ex ai was the outlier even if the USD, in a counter-intuitive move, didn't see much follow-through buying on the data.
• The ascendancy of the USD should be interpreted, partly, as a response to a larger number of Central Banks shifting to a more pronounced dovish bias. This week, we’ve seen a tilt in dovish outlooks for the RBA (lower Aus CPI), BOC, BOJ, and Riskbank, joining the rest of G10 Central Banks (ECB, RBNZ) in this globally coordinated dovish rhetoric. By default, it makes the US Dollar a more appealing destination of capital flows as part of carry trades as the Fed waits patiently on the sidelines, coupled with capital repatriation on a soaring US stocks market.
• Other factors assisting the strength in the USD is the fragility in the EU, with the softer German IFO survey, alongside poor data out of a major global supply-chain location such as South Korea (GDP miss) increasing the market’s concerns towards a still evident sluggish global growth, making the US an island of stability in comparison.
• Besides, it’s important to reiterate that last Friday’s Politburo – China’s ruling body headed by President Xi – hinted that while pro-growth policies targeting local business are not going away anytime soon, the PBoC appears ready to take the foot off the pedal, growing more comfortable with the set of measures introduced since last year to stimulate the economy. It means expectations for further accommodative measures have been somewhat downgraded.
• On Thursday, the Bank of Japan adjusted its policy statement on low rates, noting that it would keep interest rates at depressed levels ‘through at least around the spring of 2020’ as opposed to staying extremely low for an extended period of time. Furthermore, it revised down its outlook for inflation and growth, delaying the CPI projected target of 2% until at least March 2022. Remember, as in the case of Germany, the market is pricing negative bond yields up to 10y.
• It’s been reported that the outperformance of the Japanese Yen, can be partly explained due to traders cutting elevated short JPY positions ahead of the Golden week starting next Monday, a time when the Japanese markets will be closed for 10 days in a row.

Recent Economic Indicators & Events Ahead

Source: Forexfactory

RORO (Risk On, Risk Off Conditions)

The worsening of the risk profile has been manifested in a higher Japanese Yen, bolstered even further as sources report traders are unwinding Yen short exposure ahead of the Japanese Golden week. To make the risk dynamics even less friendly, the DXY has accepted above the 97.60-70 resistance level for the second day in a row. Friday’s US GDP for Q1 takes an even greater degree of relevance, as a weekly close above the 97.60-70 in the DXY could potentially unravel a technically-driven rally in the USD (recent US fundamentals backing the trend) with a target of 99.50-100 as the next logical objective if one draws a 100% proj target.

When it comes to US yields, the aggressive slide away from the 3% mark in the US 30y bond, has anchored even more the sense of risk aversion, a narrative that is aided by the negative price action is US stocks away from all time highs in the last 24h, which has come accompanied with a VIX retesting the 14.00 handle. Friday’s price action is going to be a critical day for the interest of a shift in the low vol regime the Forex market has been trapped into in 2019. A weekly close above a resistance level not only in the DXY, but supported via an analogous weekly bullish picture whereby the USDCNH closes above 6.74 and a bearish one in the EUR/USD by closing sub 1.12, it would shake the grounds as expectations of a higher macro bullish USD trend will start rising, and with it, woes in emerging markets and risk.

Latest Key Technical Developments In G8 FX

Interested about downloading today's key levels in the major pairs? Find the MT4 templates, updated daily, by clicking the link.

EUR/USD: 200% Proj Target Hit, Firm Bearish Bias

The bearish extension has reached the 200% proj target, measured after the 1.1227-1.1191 breakout, first finding a cluster of bids at 1.1155 only to see the supply imbalance resume to the next target at 1.1120, where once again, market makers and profit taking have allowed a reversal. The market has been consolidating ever since the test of the 200% proj target, although with a descending trendline still guiding the price lower, the main bias remains clearly bearish this Friday ahead of the US Q1 GDP. Only a break above the 1.1163 would violate the bearish structure firmly in place.

GBP/USD: Bearish Cycle Maturity Evident

There are a number of factors that makes me think the exchange rate is reaching a potential technical bottom, even if the ultimate verdict is going to come via the US GDP Q1 release. Not only the selling has completed a set of 3 legs down, but each legs has been decreasing in magnitude. On top of that, the price has respected to the pip its 100% proj target, from where an aggressive buy-side campaign was initiated judging by the impulsiveness of the bullish move. The strong rebound got capped by the 3rd touch of a trendline, with price now finding support at 1.2890. If the exchange rate can hold above this latter level and break the descending trendline, a retest of 1.2915-20 is on the cards. On the contrary, acceptance below 1.2890 exposes a retest of the previous low.

USD/JPY: Bearish structure Emerges

The sharp 100p selloff from highs to lows in the last 24h has damaged the bullish technicals, leading to a new bearish cycle that should find a major cluster of offers around the 50% pullback and ADR limit for the day at 111.90 ahead of the round number at 112.00. Remember, today’s price action is going to be hugely conditioned by the US GDP print later on, with a beat on expectations likely to test the mentioned offers around the round number (depending on the data deviation), while disappointing figures will expose the next level of horizontal support found at the 111.30.

AUD/USD: Breaks 70c. On 3 Legs Tap

As in the case of the GBP/USD, the Aussie exchange rate is starting to show tentative signs that a more meaningful correction may develop, subject to the US Q1 GDP later today. The market has tested and rejected the liquidity-rich area under 70c. with a 3 legs compression on the way down, before transitioning into higher levels after a breakout of the 25MA on the hourly, which has also been accompanied by a change of structure on a micro scale as the pair starts printing higher highs. Finding equilibrium above the 0.7030 will be technically key to gain further momentum in such a much-needed correction after the intense selling seen. Note, the area of 7030, until proven violated, remains a sellers stronghold that will likely be defended for a continuation of the downtrend.

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. The weekly cycles are highlighted in red, blue refers to the daily, while the black lines represent the hourly cycles. 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
  
  https://www.fxcm.com/markets/education/traits-successful-traders/

 

[IvanGlobalPrime]

Find my latest market thoughts

USD On The Retreat, Clear Macro Dominance

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.

Quick Take

Granted, the thematic of USD strength does not look like it's going to go away anytime soon if one judges by the weekly closes achieved in the DXY and EUR/USD. It was such a pity that the bullish close outside a well -defined 6.70-75 range could not be replicated in the USD/CNH in order to up to a whole new level the prospects of vol in FX. The positive US GDP Q1 headline number, while it hides underlying softness in the details (lots of temporary factors led to the boost), in my view, should suffice to keep the common theme of USD buying flows at steady levels heading into May as the gap between US growth and the RoW widens. Near term though, there is enough evidence through the hourly price action in FX majors to be cautiously bearish the USD, after some technical cracks in the structures, especially in the Sterling, Canadian Dollar, and the Yen. The former may experience episodes of ultra-low liquidity at certain times of the day this week, as Japan goes offline until next Tuesday in celebration of the Golden Week. To start the week, we are seeing further buying pressure on the Oceanic currencies (AUD, NZD) as China's industrial profits published over the weekend printed a 10 month high. The Euro must be included in the pack of currencies with the prospects to print short-term gains vs the USD, even if remains one of the most vulnerable.

Narratives In Financial Markets

• The US GDP Q1 came with a very strong headline number of +3.2%, much higher than the calls for an ambitious 2.3%, bearing in mind the hinders for growth due to the government shutdown. Under the hood, the increase in growth was very much driven inventories, low inflation, and trade, while consumer spending was quite decent. Overall, it enhances the perception that the US is growing at a pace far different from other nations, period.
• The reaction to sell the USD after the US GDP Q1 beat could be partly explained by the temporary factors that led to the increase in the headline number, while hard data the likes of business investment or consumption remains quite soft in comparison. About 1.7% of the total 3.2% increase in the GDP was due to a build-up in inventories, while exports contributed 1%, primarily fueled by a significant slump in imports rather than a boost in exports activity.
• Another line of thinking is that the downside pressure in the USD post GDP release has to do with the low levels of inflation as indicated via the Fed’s preferred PCE deflator (1.3% vs 1.8% exp), which puts the Fed back on the spotlight as a Central Bank that may consider a cut in interest rates down the road if depressed price pressures is combined with tighter financial conditions. The drop in US yields was the clearest manifestation of increased easing odds.
• One of the main talks in the trading floors, according to sources I interact with, is the weekly close above a key level of resistance at 97.60/70 in the DXY. Technicals are favoring an extension of the USD gains beyond familiar levels, which may put further strains on some EM nations having to serve USD-denominated debt at a time of fragile growth. Besides, a bullish macro USD trend can also be perceived to be a positive for a pick up in vol.
• US White House Economic Advisor Larry Kudlow didn’t miss the chance to throw some juicy comments in line with the dovish endorsements of the Trump team for lower rates, noting that “slower US inflation could open the door for a Fed cut”. Again, further evidence of the attempts to politicize the Fed by the current administration led by Trump.
• US President Trump keeps putting pressure on OPEC nations, even if falling on deaf ears for now. The politician stated that he established conversations with OPEC members (one suspects Saudi Arabia) and told them to bring the prices down. Additionally, Trump kept talking his own agenda last Friday by saying China-US trade talks are going well. Again, a fully price-in story by now as reflected by the muted reaction.
• Over the weekend, China released its latest industrial profits data for the month of March, posting the largest rise in 10 months, which should act as a positive input for sentiment. The headlines number stood at +13.9 y/y driven by higher production, sales, and a lower VAT. It is yet more evidence that China is undergoing a clear growth rebound due to recent easing.
• In the Spanish general election, the left-wing Socialist Party (PSOE) won the elections even if way short of a majority in the lower house. It’s going to take a prolonged period of negotiations with other groups to form a coalition before reaching the needed majority. The outcome, at the bare minimum, prevents further unrest in the EU as the far-right stays away from power.

Recent Economic Indicators & Events Ahead

Source: Forexfactory

RORO (Risk On, Risk Off Conditions)

The US equity market, with the S&P 500 at its epicenter, continues to be an island of stability in which share buybacks, low inflation prospects, comparatively higher growth vs G10, US asset repatriation, are all contributing factors to keep buyers in absolute control.

It is precisely the element of low price pressures which is keeping the downside pressure in the US and global yields for this matter; the drop in the US 30-year bond yield from the 3% markdown towards a cycle low of 2.92% can be understood as a return of the pessimism towards global low inflation and subpar growth.

This is a theme that never went away, but it has been somehow reinforced as of late with further easing pricing in Australia, Canada, Sweden, and even Japan, where ultra-low rates are likely to stay at present levels even longer. The depressed PCE deflator in the US last Friday was the ultimate evidence to be a bond buyer.

The higher risk appetite in the US equity space, where the S&P 500 is just a whisker away from culminating one of the most epic comebacks in history by reaching a new all-time high after last year’s 20% drop, has also been reflected in a lower VIX, where sellers rule the roost again.

In credit markets, junk bonds are back in strong demand vs investment-grade paper, another sign of reigning risk-seeking dynamics. In the currency space, it’s not all that rosy, as the rise in the DXY has negative implications for risk, especially when combined with dropping US yields.

In this environment, the JPY can still fair pretty well and find plenty of buying interest especially in a world where even more Central Banks the likes of the RBA, BOC, Riskbank in Sweden are priced to adopt a fresh easing bias cycle.

One of the disappointing notes that makes the prospects of higher vol far from a done deal despite the bullishness in the DXY is the inability of the USD/CNH to close above its 6.70-75 range and join the DXY and EUR/USD in what I’d call a trifecta of breakouts that can result in the re-emergence of a USD bullish trend at a macro level, and with it, higher levels of volatility in the FX arena, something I am sure many non-carry type or range trading players would absolutely love.

Latest Key Technical Developments In G8 FX

Interested about downloading today's key levels in the major pairs? Find the MT4 templates, updated daily, by clicking the link.

EUR/USD: Bearish Dynamics Fading Near-Term

Short-term, the 3 legs tap formation breaking through the upside of a descending trendline is a technically bullish development to at least see a relaxation of the selling pressure. The vigorous rebound post the US GDP Q1 release has achieved the transition of bearish to neutral dynamics from an hourly perspective, as the slope of the 25-hourly moving average indicates. The range to use as a reference should be roughly 1.1165-70 down to 1.1120-25 with the midpoint of 1.1140-45. Besides, the pop in the exchange rate comes in the form of a counter-intuitive move following the headline beat in the US GDP, which in my view, makes the temporary bottom to potentially initiate a short-term buy-side campaign towards the next 100% proj target at 1.1180-85 all the more relevant.

GBP/USD: Bullish Structure With A 1.2960-65 Target

Even more obvious is the short-term bullish case in the Sterling, despite if it plays against a clear macro bearish context as the descending trendline drawn in the chart indicates. However, from a micro standpoint, the creation of higher highs following a double bottom at 1.2870-75 should be a precursor that topside risks are building up for a short-term buyside campaign towards the 100% proj target at 1.2960-65, where the confluence of the trendline, horizontal resistance, and proj target will pose a major challenge for buyers to make further headway. The current retest of 1.2915-20 old resistance-turned-support occurs amid the upward slope of the 25HMA, reinforcing the notion that the pullback has sufficient credence via momentum to attract further buying interest. As usual, the familiar caveats of Brexit headlines apply, even if the vol around headlines has dialed down for now.

USD/JPY: Technicals & Intermarket Bearish

The way sellers took control of the price action on the aftermath of the US GDP Q1 beat makes me think that any recoveries in the USD should be limited in nature, with 111.80 up to 112.00 the area where selling on strength offers the most value. Additionally, the depressed level of US yields, combined with short-term weakness in the USD expected, makes the rise in US equities as a standalone contributor of bullish tendencies in the USD/JPY exchange not sufficient. Granted, the area of support between 111.40-50 is proving formidably strong based on the failed 4 attempts, which coupled with the week-long holidays in Japan, it makes the prospects of a potential range play a realistic scenario ahead of Tuesday’s US data, including the consumer confidence.

AUD/USD: Ongoing Buying In Lower Timeframes

As manifested in the Aussie price action, the power of a 3 legs tap as a bottoming or topping formation, also referred to as compression, is quite powerful under the right set of circumstances. In the case of the Aussie, the test of the 70c macro support has marked the opportunity for buyers to emerge and initiate what’s until now an ongoing buyside campaign, even if the short-term relief rally could soon very running out of juice given the daily resistance faced, which comes at the exact same level as the completion of the 100% proj target, so expect a major cluster of offers. The first signs of rejection post the US GDP Q1 beat report is a red flag, granted, it hasn’t deterred the efforts by fast money to keep pushing higher as a new week gets underway, partly spurred by the positive economic data out of China, where Industrial profits in March surged to its highest in 10 months. Besides, higher US equities alongside a temporary reprieve in the USD strength is assisting the AUD.

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. The weekly cycles are highlighted in red, blue refers to the daily, while the black lines represent the hourly cycles. 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

 

[IvanGlobalPrime]

Find my latest market thoughts

AUD Sold On China PMIs Miss
POSTED ON: 30 APR, 2019

As we head into Tuesday's busy European session, the lead to be taken from Asia is one where caution is warranted, not only because of the miss in the Chinese PMIs (both official and Caixin), which has led to some spells of 'risk off' and a timid return of JPY buying...


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.

Quick Take

As we head into Tuesday's busy European session, the lead to be taken from Asia is one where caution is warranted, not only because of the miss in the Chinese PMIs (both official and Caixin), which has led to some spells of 'risk off' and a timid return of JPY buying but also due to the upcoming Fed's SOMA day. What this means is that as part of the Fed's QT program, April 30th marks the day when the Central Bank will shrink USD liquidity by 28.1bn in its balance sheet. Whenever liquidity is withdrawn via these redemptions, there is a patter of US Dollar strength, which more often than not, is accompanied by a greater apprehension towards risk-seeking strategies. The miss on revenue by Google does not help the case either, even if by the close of business in NY the conditions look rosier than the picture I am painting. The Aussie is the worst performer after a rapid decline on the back of the underwhelming Chinese data, while the Euro, Pound, and Yen, in this order, are performing with a firmer footing. The Canadian and the New Zealand Dollar, as part of the commodity bloc, were dragged down by the negative news out of China.

Narratives In Financial Markets

• The USD continues to retreat into month-end, even if the macro bullish trend remains firmly bullish after last week’s stellar performance. According to Citi's month-end FX hedge rebalancing model, moderate selling of USD on Tuesday, 30th April, is expected, “predominantly driven by equity investor rebalancing needs, which is is due to the positive US equity market performance leaving foreign investors under hedged on their equity assets.”
• USD liquidity will shrink by 28.1bn on April 30 with the same net impact on liquidity as part of the Fed’s SOMA redemptions, according to Nordea. Find the information in the following link table 2. SOMA is the liquidity shrinkage in the Fed’s balance sheet. By analyzing the maturity profile of the Fed’s bond portfolio (the SOMA portfolio), one can identify when these negative liquidity impacts take place. These redemptions tend to coincide with US Dollar strength.
• US consumer confidence keeps underwhelming after the latest US March PCE core release, which came at +1.6%y/y vs +1.7% exp y/y. The softness in the price of goods and services purchased by consumers reinforces the notion of low price pressures so deeply established all over the world, with the US no exception. Last Friday’s US GDP showed a low deflator too, so essentially we haven’t learnt anything new. Additionally, as part of yesterday’s US data, consumer income was also soft but personal spending saw a tick higher than exp.
• Google’s advertising business missed expectations in Q1, denting revenues and eroding over 6% from its parent company Alphabet’s share price in after trading. Raoul Pal, Founder at Realvision, makes a very legit point about the late state cycle in the US economic growth -> "Google is a media company almost wholly reliant on advertising. Advertising is massively leveraged to GDP. Advertising is slowing fast. Google is a cyclical, not a tech secular play."
• The USD faces a multitude of tests to prove its resilience this week, with the Fed’s monetary policy meeting on Wednesday (FOMC), including a Powell presser, followed by US ISM as one of the market’s preferred barometer of the economic health and US payrolls on Friday.
• The latest set of inflation data makes this week’s FOMC meeting an interesting as the Fed’s mandate on its inflation target is clearly falling behind the curve as is the RoW. The most prudent course of action is likely to be a stance of data-dependency through the summer, taking aim at not miscommunicating any new policy signals. The market pricing remains consistent with the view that the next move will be a rate cut towards year-end.
• US and China negotiators meet again in Beijing to resume trade talks before the Chinese travel back to Washington next week. US Treasury Secretary Mnuchin told the press that he hopes a deal can be finalized after next week’s round of talks. Mnuchin sounded optimistic, saying that the enforcement mechanism is nearly done. Ultimately, it will be down to Trump to decide if enough progress has been made to start preparations for a signing ceremony with China’s Xi.
• According to the Guardian Political Correspondent, as part of the Brexit saga, the talks between members of the UK government, including PM May, and Labour, have taken a positive turn. It’s been reported that the tone is markedly different with clear grounds to continue talking over the next few days and weeks, even if still far from a breakthrough.
• China’s Manufacturing PMI, both the official government number and the Caixin series, came below market expectations, with the Aussie suffering the consequences as a China proxy. The official PMI retreated to 50.1 vs 50.5 exp while the Caixin came at 50.2 vs 50.8 exp. From a policy perspective, it suggests a period of cooling down in Q2 as activities of PMI likely peaked in March, that a recovery is underway much slower in impetus, and that further targeted easing in certain areas of the economy is still necessary even if less intensive.
• A very busy day in the European calendar should see a pick up in EUR flows. The French, Spanish and the Eurozone flash GDP reports, alongside Germany’s preliminary CPI release for the month of March, are the top tier events traders will pay the most attention.

Recent Economic Indicators & Events Ahead

Source: Forexfactory

RORO (Risk On, Risk Off Conditions)

There has been a pick up in risk appetite conditions as the dual rise in US stocks and bond yields clearly reflects. The decline in the DXY and Yen index was another sign that we were supposed to be headed into Tuesday with an open mind when it comes to risk. However, the Chinese PMIs have clouded the landscape. Besides, a huge dose of prudence is warranted because even if the micro slopes (25HMA) have turned ‘risk on’ in the last 24h, in 3 out of the 4 primary markets monitored to evaluate risk dynamics (S&P 500 the exception), the macro slopes (125HMA) are still pointing towards the recovery in the long maturity bond yields, DXY, JPY as corrective in nature. Moreover, I must reiterate that it’s a big SOMA day on Tuesday, which essentially means that USD liquidity will be removed from the market, with the net daily impact in most cases positive for the currency. Whenever that’s the case, and if recent market dynamics prevail, it tends to increase the sense of risk aversion, keeping commodity-linked currencies subdued.

A lesson from last week’s ebbs and flows should be that one cannot be overly dependant on just equity movements alone to determine the direction of risk-sensitive currencies such as the Yen but rather always try to find compelling evidence by syncing up the direction of equities and bond yields, as was the case on Monday, where a ‘true risk on’ environment evolved as a function of the increases in the value of equities, bond yields, coupled with a USD on the backfoot. Always remember, these days we can separate currencies in 3 different packs, the risk-sensitive group (USD, JPY), commodity-linked (AUD, CAD, NZD), and the European block (EUR, GBP, CHF). The influx of activity in a particular currency will, therefore, be determined by RORO conditions, episodes of liquidity withdrawals, driven by fundamentally-motivated events, that’s why it’s always emphasized to treat the market as a mechanism of autoregulation based on fundamentals, Intermarket, and technicals.

Latest Key Technical Developments In FX Majors

Interested about downloading today's key levels in the major pairs? Find the MT4 templates, updated daily, by clicking the link.

EUR/USD: Mother Of All Confluences Reached

"While anything can happen, if you are looking for a pristine area where a compelling amount of technical confluence can be found, the area between 1.1185 up to 1.12 offers an absurd amount of technical confluence in the form of the 50% fib retrac of the last leg lower, 100% proj target hit through the 1.1166 breakout, horizontal resistance levels, 3rd touch of a descending trendline, and to top it off, USD liquidity will be pulled from the market as part of the Fed's SOMA day. Note, the impulsive correction has created a new cycle up in the lower timeframes, so it’s going to take potentially a few attempts before the current buyside tide can turn in favor of sellers again. That's why we usually see M or W formation before a change of behavior that aims to change the current motion/dynamics. The European data today will play an important role to dictate the next directional move, one that if it pans out higher, should be met by sellers ready to engage in what looks like an incomplete bearish cycle, having run only 2 legs down in what’s usually a move that evolves in a 3 legs down before a distribution/accumulation."

GBP/USD: Consolidation Into Descending Trendline

The inability of the Sterling to make further headway above the 1.2945 resistance area has led to a double rejection, with a subsequent retracement to retest 1.2910-15 support, creating a tight range. A resolution beyond the edges of the box is needed to see the next directional bias play out, with the well-defined target at 1.2960-65 ahead of 1.2975-80 (ADR limit, 100% proj target, horizontal resistance). On the downside, 1.2895-1.29 is the next area of liquidity that ma be exposed ahead of 1.2875-80 (ADR limit, 100% proj target, horizontal support). A break above 1.2945 resistance would be technically damaging as it will violate a descending trendline coming from April 12 high.

USD/JPY: Range Established Within Bearish Structure

The selloff above 112.00 achieved a change of dynamics in the exchange rate that should still be considered the dominant bias even if the lack of follow-through selling in the last 2 days allows us now to draw a range with the extremes found at 111.90 and 111.45 with 111.65-70 the midpoint. The release of the disappointing Chinese PMI in Asia has led to an influx of the JPY bids, reverting the ‘risk on’ profile slightly to the downside, hence potentially exposing the next area of support. Remember, activity around the JPY is much thinner than usual, especially during the Asian session, due to the week-long Golden week in Japan.

AUD/USD: Knocked Down By Weak China PMI

The AUD was marked down immediately after a poor set of Chinese PMI numbers, taking the rate towards its next area of support at the 0.7035, which also aligns with an intraday 100% proj target. If the Aussie gains further momentum from here (be warned the extension looks overstretched), the next destination upon price action maturity looks set to be 0.7020-25, where an area of horizontal support meets the ADR limit for the day. Ultimately, the target, if price accepts below 0.7035, appears to be a retest of 0.7010, which would coincide with the broader 100% proj target.

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. The weekly cycles are highlighted in red, blue refers to the daily, while the black lines represent the hourly cycles. 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

 

[IvanGlobalPrime]

Find my latest market thoughts

GBP Flies, FOMC Eyed

The Sterling was on an absolute tear on Wednesday, even as breakthroughs in Brexit are yet to transpire (don't hold your breath). It's always going to be a harder task to find a clear attribution to the movements seen during the last day of the month, as portfolio re-balancing on unhedged FX positions tend to rule the movements.


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.

Quick Take

The Sterling was on an absolute tear on Wednesday, even as breakthroughs in Brexit are yet to transpire (don't hold your breath). It's always going to be a harder task to find a clear attribution to the movements seen during the last day of the month, as portfolio re-balancing on unhedged FX positions tend to rule the movements. In the case of the Euro, which climbed at a steady pace against the majority of its peers (exc GBP), we can clearly pin down the improved European data as the main reason behind the rally. However, it still feels like the data samples need to be expanded not to think that the solid German CPI or higher EU, Spanish GDPs are mere paybacks for weaker previous data. Nonetheless, if more evidence of a minor recovery in Europe pans out, the ECB will feel in no rush to design further stimulatory policies (EUR positive). Another currency where we can clearly link its weakness to a particular event is the Aussie, unloved as a China proxy play after the country fell short of expectations in its PMI releases on Tuesday. The Japanese Yen did fairly well for half of the day, emboldened by the Chinese poor data, only to revert its buy-side flows as US equities were bought strongly off the lows. The Canadian Dollar, notwithstanding a negative GDP for Feb, exploited the slack by the Yen demand deficit late on the day, as BoC Poloz struck a constructive tone on the Canadian economy. Lastly, the two currencies suffering the most included the US Dollar and the Kiwi, the latter battered by a miss in NZ jobs. The focus is now shifting in its entirety towards the US ISM release as a barometer of US economic conditions, followed by the FOMC and Chairman Powell presser.

Narratives In Financial Markets

• The USD is broadly weaker even if by taking a look at the DXY, we’ve now reached the 50% fibonacci retracement level of the bull run originated off 96.80, suggesting that further buying interest to jump on the USD may emerge now that month-end flows are out of the way.
• The Euro was propped up following encouraging European data. The Eurozone preliminary GDP came a tad stronger-than-expected, and so did the Spanish. In terms of inflation, Germany’s April preliminary CPI was surprisingly strong at 1% vs 0.5% exp. If follow up positive inputs out of Europe emerge, the ECB may have a rethink and hold off further policy stimulus.
• The Australian Dollar was initially sold off on the back of the Chinese PMIs, with both the government official and the Caixin, coming significantly below expectations. The recovery during the European and US session was a function of USD weakness vs own merits.
• The S&P 500 managed to recover early losses by closing 0.1% higher, while the tech-heavy Nasdaq index didn’t get the same love, closing down 0.8%. The disappointing results my Alphabet, the parent company of Google, weighted on the mood, even if as a contrast, after the bell, Apple surprised the market with a blockbuster beat that should aid the ‘risk on’ mood.
• In the US, while the Chicago PMI came weak, probably weighted by the Boeing issues, both the consumer confidence and pending home sales came on the strong side. Nonetheless, it didn’t act as a catalyst to invigorate USD bulls, pretty much absent on Tuesday.
• The NZ Q1 unemployment rate fell to 4.2% vs 4.3% exp, despite the poor employment change headline number, which came at -0.2% vs 0.5% exp. The participation rate was also weak at 70.4% vs 70.9% exp, while the average hourly earnings rose by 1.1%, a beat on estimates.
• The UK Labour party has agreed to back a second referendum on Brexit if there is no way out in the current talks with the UK government on May’s divorce deal or through a general election. To recap, in order of priorities, they aim for changes of the standing agreement, followed by elections and if nothing resolves the conundrum, a 2nd referendum.
• The Canadian Feb GDP came at -0.1% vs 0% exp, which seems to compensate the strong number posted back in January when Canada reported a growth of +0.3%. The report falls very much in line with the annual expectations of +1.2% growth the BoC projects.
• In comments to a parliamentary committee, BoC Governor Poloz reiterated that the Central Bank will evaluate the appropriate degree of policy accommodation in coming months, while still sounding optimistic on the prospects of growth in the quarters ahead. The CAD celebrated the speech with a late-day rally.
• The pressure to finalize the US-China trade deal is building up based on the latest commentary by US politicians and the press. White House Chief of Staff Mulvaney came forward saying that the talks must end in a matter of weeks, ‘one way or another’. Remember, the deal is fully priced in, so any minor suggestion that both parties may be headed for an unexpected disagreement would most certainly wreak-havoc stocks and boost the Yen. According to the WSJ, the removal of the tariffs at the start of the US-China trade dispute, the enforcement mechanisms, access to agriculture and opening China’s market are the sticking points.
• Many financial centers, including Japan, China, France, Germany, Italy, are having public holidays today, which means thinner-than-usual liquidity until the US comes online.
• We get two major data releases out of the US on Wednesday. As an aperitif, the ISM manufacturing ISM will serve as a barometer to measure the health of the US economy via the relevant insights provided by the company’s purchasing managers. It is considered to be a forward-looking indicator of business conditions, employment, productivity, etc.
• The key event for the day will be the FOMC, including Powell presser afterward. The expectations are for a balanced message on the economy through the statement and the press conference. The Fed has made it clear it aims to stay patient, but with inflation underwhelming below the Central Bank’s mandate, it will be interesting to monitor any remarks about the policy actions planned to combat this low levels of price pressures.

Recent Economic Indicators & Events Ahead

Source: Forexfactory

RORO (Risk On, Risk Off Conditions)

Tuesday’s environment qualifies as broad-based USD weakness as depicted by the drops in both the DXY but also in the US bond yields, where both micro slopes are back to negative territory. Even the macro slopes (125 HMA) are also aligning, despite we must be aware that the US data and the FOMC, will cause a reset and re-evaluation of market flows depending on the type of number and messages. The S&P 500, meanwhile, continues to advance at the rhythm of its own drummers, finding strong buying interest after a deep retracement which has allowed to achieve fresh all-time highs. It is precisely the combination of higher US stocks (S&P 500 as reference) and a weaker USD that has resulted in the risk-sensitive Japanese Yen to go offered once again. The stability in the VIX, junk bonds, and the tight ranges recorded in the USD/CNH also act as a supporting factor for risk-seeking strategies to remain actively engaged. However, with main financial centers closed until the US, today’s moves will be very much dictated by fundamental-led learnings via the US ISM and the Fed, rather than taking much of a lead from the end of business in NY. A sensible strategy is to stay light in your positions until the usual pick up in vol during the London open, before a full-reassessment of the market permutations and whether or not the US data encourages the ‘risk on’ to prevail.

Latest Key Technical Developments In FX Majors

Interested about downloading today's key levels in the major pairs? Find the MT4 templates, updated daily, by clicking the link.

EUR/USD: Fundamentally-Driven Bullish Momentum

Improved European data has led to a resurgence of the EUR, this time able to exploit the deficit of USD demand on month-end flows and an overall constructive risk environment. The rally in the exchange rate has stopped on its tracks at a heavy offers cluster around 1.1225-30, which happens to align with the 100% projection level of the 1.1175 breakout measure as well as an H4 horizontal resistance. The bullish momentum, as reflected by the slope of the 25HMA, remains strong. The steepness of the newly created ascending trendline is yet another sign of the rampant movement, hence the retake of the trendline is a prerequisite to start seeing the first cracks in the trend.

GBP/USD: Sharpest Appreciation Since Early April

It’s certainly a rare occurrence to see the Sterling or any currency for this matter to fly past not only the 100% proj target but even the 200% proj target with such an ease, especially in these times of generally low volatility in FX. The slightly more constructive headlines over Brexit, where the Labour party and May’s government appear to be making progress, alongside a clear month-end rebalancing of FX flows in favor of the Sterling and against the USD, have also aided the one-way street trend. At the bare minimum, given the extreme stretching of the rise in the exchange value, a potential period of consolidation between 1.3050 to the topside (horizontal resistance) and 1.3020-25 to the downside (200% proj target retest and former resistance) could develop. Should the USD regain its mojo, the round number at 1.30, ahead of 1.2985 (100% proj target retest) is where the next cluster of bids may be expected. What’s clear, after Tuesday’s price action, is that the main bias has now permuted to buy on weakness as part of a newly created first leg of a bullish cycle.

USD/JPY: Fresh Bearish Leg Established

The story in this particular market is about the new low it found after the reversion back to buy Yen on the back of the miss in China PMIs. As the day went on, and amid the recovery in the S&P 500 and the 200% proj target reached, buyers managed to create a mild rebound to retest the previous area of support-turned-resistance and the broken 100% proj target. The new leg lower in the pair allows us to draw a new trendline, which as usual, should serve as a visual aid of the evolving market bias. The weakness in both the DXY and the US30y has been a burden too heavy to bear for buyers, with players now waiting the US ISM and the FOMC outcomes to determine the next directional bias. Looking at the next targets, any resumption of the downtrend should find an area rich in demand in the area highlighted in white, where two projected targets + round number intersect.

AUD/USD: Tight Range Post China PMIs

With no data releases of note until the US session, the Chinese market closed for public holidays, and the pair stuck in a tiny range worth 25 pips, the current conditions are clearly dominated by market makers, who act as liquidity providers in a sea of noise. Leveraged accounts, fast money, those with an interest to chase out directional movement, have 0 incentives to get involved in this market until a resolution of the consolidation, which will most likely transpite on the release of the US ISM data, followed by yet another re-evaluation of the price action as the FOMC releases its latest statement and Chairman Powell takes the stage to update the market on the latest set of policies. The Aussie has been clearly assisted to hold its range by broad-based USD weakness.

NZD/USD: Sold On NZ Jobs, Bought On Technicals

The play in the Asian session, in response to the downbeat NZ jobs headline number, has been to initially sell the Kiwi hard, only for the exchange rate to rebound at the anticipated cluster of bids circa 0.6625-30, where the 100% proj target, the ADR limit and the hourly horizontal support all met. Ever since the bottom found, the Kiwi has rebounded over 30p to now be retesting the former range bottom which should act as a solid area of resistance for the price to stall awaiting the next directional push once either London comes online or in response to the US ISM data.

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. The weekly cycles are highlighted in red, blue refers to the daily, while the black lines represent the hourly cycles. 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

 

[IvanGlobalPrime]

Find my latest market thoughts

Fed Powell Presser Invigorates the USD

As the market adopts a 'true risk-off' mood on the back of Fed's Powell less dovish remarks on inflation, the USD reigns in the forex firmament while commodity-linked currencies see the greatest supply imbalances, especially the Aussie and the Kiwi, both recently hit by negative fundamentals (low CPI in Aus last week & bad NZ jobs on Wed).


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.

Quick Take

As the market adopts a 'true risk-off' mood on the back of Fed's Powell less dovish remarks on inflation, the USD reigns in the forex firmament while commodity-linked currencies see the greatest supply imbalances, especially the Aussie and the Kiwi, both recently hit by negative fundamentals (low CPI in Aus last week & bad NZ jobs on Wed). The Canadian Dollar is holding up firmer as BOC Governor Poloz dials down his dovishness by making the case for a stronger economic recovery from Q2, in which case, considerations for another round of tightening may be justified. Too early to tell but expectations towards Canadian rate cuts have taken a step back. The Japanese Yen, emboldened by the deleveraging flows in equities and global yields, has benefited once again, while the Sterling, driven by tentative progress in the talks between the UK Labour and May's government on Brexit, continues to follow the Yen in locksteps. Lastly, weakness in the Euro has made its way back as a function of USD strength mainly.

Narratives In Financial Markets

• The USD dominates buyside flows on the aftermath of the FOMC, driven by comments on inflation by Fed’s Powell at the press conference. The strength in the USD came in response to Powell’s view that recent low inflation is ‘transitory’, which spurred the buying of the world’s reserve currency and US bond yields, hurting equities.
• Chairman Powell did not buy into the notion that the slowdown in core inflation as revealed in last Friday’s US Q1 GDP will last, citing the Dallas Fed Trimmed Mean Measure as the preferred indicator to conclude that inflation remains stable circa 1.9%. Powell downplayed the core-PCE inflation read of 1.6% we learned last Friday.
• In the money market, following the less dovish comments by Fed’s Powell, the pricing for a rate cut by year end was slashed from a 1 fully priced in cut to 82% chance now.
• As part of the policy statement right before the public appearance by Jerome Powell, there was little new information to chew on other than a merely technical 5bp adjustment of the interest on excess reserves (IOER) while slightly upgrading its description of labor tightness, which is no longer a rhetoric that is going to move the market. Patience was still warranted, and in words of Powell, “there is no strong case to move in either direction”.
• The US ISM Manufacturing PMI fell way below expectation at 52.8 vs 55 exp, the lowest level since October 2016, and a clear signal that the calls for a slowdown in growth heading into Q2 are very much justified based on early tentative evidence. Still, the US is comparatively running an economy on 3rd gear vs the RoW, which is barely getting out of 1st gear. Any calls for a Fed rate cut are way too premature, especially with consumer spending looking solid and yesterday’s ADP non-farm employment data running at its highest in years.
• BOC Governor Poloz made yet another appearance before a standing committee, allowing the CAD to recover back some of its mojo, reiterating the less dovish message from just 24h ago, this time stating that rate could rise if headwinds affecting the economy dissipate. Assuming that the BOC anticipation of a recovery in growth materializes, the market appears to be setting the stage for a more balanced and neutral approach towards the BOC policy setting. Money markets are still pricing about a 50% chance of a rate cut in 2019.
• According to a report by CNBC, the US-China trade deal could be done and dusted by next Friday, which if the case, would make true the heads up by US Treasury Secretary Mnuchin, who said this week it shouldn’t take longer than 2 weeks before an agreement is finalized.
• As European markets come back to life after yesterday’s public holiday, the calendar looks quite busy, especially on the manufacturing data front out of multiple European countries. The BOE inflation report is also due later on, but with Brexit having taken the Central Bank hostage, there is very little maneuver for Governor Carney until a resolution of the impasse. In the US, only low-tier data is set to be released, including unemployment claims and factory orders.

Recent Economic Indicators & Events Ahead

Source: Forexfactory

RORO (Risk On, Risk Off Conditions)

On the heels of the FOMC outcome, where a less dovish Fed was the final verdict, the market has permuted into a ‘true risk off’ profile as evidenced by the sharp selloff in the S&P 500, which comes with the added caveat of breaking the bullish structure of higher highs and higher lows on the hourly. Besides, the US 30y bond yield keeps exploring lower levels, also finding a new leg down. The dreaded alignment of the micro and macro moving averages towards the bearish side in both US equities as well as in the US bond yields space, coupled with bearish structures off the hourly, portends an ugly technical picture for risk going forward.

Is this, yet again, another miscalculated move by Fed Chair Jerome Powell at a time when stocks were bought up in earnest amid the anticipation of little to no inflation, hence increasing the attractiveness towards equities’ free cash flows? Judging by price action, the suggestion that the miss in the Fed’s inflation target is just transitionary is an admission that the Central Bank is setting higher expectations towards a pick up in price pressures, which tends to be a hawkish message to the market.

As a result, we see the DXY bid after a very sizeable daily outside bar which has allowed the micro slope (25HMA) to turn positive, which more often than not, when combined with such aggressive buyside action, tends to lead to a change in behaviour, so I am expecting the USD to stay firmer ahead of Friday’s US NFP report. The preponderance of evidence to determine the clear state of ‘risk off flows’ is found everywhere, with the Japanese Yen index retesting the highest level for the week, previously achieved on the miss of the Chinese PMIs last Tuesday, a shocker that led to a brief upset in risk too. A pair that should be in everyone’s radar as an indicator of the USD prospects in the USD/CNH, currently retesting a key support, which has so far done its job to prevent the micro slope to turn bullish. The ugly risk dynamics were also clearly manifested through the spike in the VIX towards 15.00. USD, JPY vs Commodity-linked currencies (esp AUD, NZD) looks an interesting short bias intraday.

Latest Key Technical Developments In FX Majors

Interested about downloading today's key levels in the major pairs? Find the MT4 templates, updated daily, by clicking the link.

EUR/USD: Bearish Outside Day Shifts Bias

The sharp selloff in the exchange rate, driven by USD buyside flows, has made it to the 100% proj target, which as the daily reader of my notes can tell, it’s a very common occurrence. While marginally trespassed, the target at 1.1194 has found sufficient absorption to allow for a tepid recovery. The bias has clearly shifted to the downside based on the break of the price structure, confirmed after 1.1197 was taken out and the hourly achieved a brief acceptance below the level. In the next 24h, with only low-tier events out of Europe and the US, I suspect the market bias to take its cue from the most recent technical cues, which has clearly turned negative as the micro slope (25HMA) also indicates. The way to play this market, bearing in mind that ‘true risk off’ dynamics are present, is with the idea that the risk appears to be more skewed towards the downside during Thursday.

GBP/USD: Not The Pair To Exploit USD Strength

I wouldn’t rush to turn the bias short on this exchange rate, as one would essentially be trading the two strongest currencies in the forex firmament, which is not the best way to spot clear demand/supply imbalances. The concentration of volume via April 30-May 1 POC has led to a temporary change of behaviour by the way of a mild recovery, now faced with an immediate area of horizontal resistance at the 1.3055-60 level. Should the USD rally extend, I am looking at 1.3020 as the next projected target based on a 100% measured move, confluent with a horizontal support. Alternatively, a break above 1.3060 allows a minor void area to be exploited until 1.3075 ahead of 1.3095-1.31, where I expect offers, if filled, to pose a real challenge as it aligns with today’s ADR limit.

USD/JPY: Bullish Structure But Risk Off Caps Upside

Today’s price action in the pair is going to be a function of how intermarket flows play out. We are in a true risk-off environment amid rising interest to bid the USD, which means the pair should stay directionless and struggle to develop a concise bias in either direction. Technically, the USD has achieved a successful leg up to revert the structure on the hourly from bearish to bullish. Any retest of 111.25-30 is expected to be met with strong buying interest as part of a right-hand shoulder. The lack of direction in the pair comes as Japan continues on holidays until next Tuesday.

AUD/USD: Range Breakout Allows 0.70c Retest

The resolution of the range incentivizes the market to keep adding short positions, setting the sight on the next obvious target at the 0.70, which coincides with the 100% proj target. The first area where the Aussie should struggle can be found at 0.7020 ahead of a retest of the broken range at 0.7030. This is a market that has written all over the wall a selling on strength bias, as both technicals and recent fundamentals argue for a lower value. Besides, the intermarket tide has turned negative, with the DXY on the rise and the Chinese Yuan also printing lower levels vs the USD, not to mention that the true risk off won’t do any favor to those looking to play AUD longs.

NZD/USD: Poised To Stay Pressured

This is an exchange rate where the most recent developments, both technicals and fundamentals, suggest that the risks keep building up for a follow through bearish continuation. Wednesday’s poor NZ jobs report has heightened the possibility that the RBNZ may cut rates, while Fed Powell’s presser has shifted the expectations towards a less dovish Central Bank. The printing of a new lower low in the hourly firms up the notion that the exchange rate should continue to find enough selling interest on bounces. If the scenario pans out, the round number at 0.66 would be the next target ahead of 0.6588, which as usual, would be the 100% proj target after the 0.6627 breakout point.

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. The weekly cycles are highlighted in red, blue refers to the daily, while the black lines represent the hourly cycles. 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

 

[IvanGlobalPrime]

US NFP Special: Analysis Of Historical Patterns

The US is set to release the change in the number of people employed during the month of April, in what should be seen as yet another critical piece of information about the US economy.


The US is set to release the change in the number of people employed during the month of April, in what should be seen as yet another critical piece of information about the US economy. What’s interesting about today’s set of numbers is that after the volatile range observed from Jan to March, primarily due to the US government shutdown, the data should start to normalize again, so whatever number comes out today, should give us a more accurate picture of the state of affairs in the US labor market.

It’s worth noting that the US jobs market has unquestionably reached levels considered to be at full capacity, with little to no slack to account for. It’s not that workers are not in demand by employers, but the real issue, whenever an economy reaches full capacity utilization of its labor force, is to find the qualified employees due to constrained supply, which paradoxically, tends to pose an increase in downside risk in the headline number, today expected at 175-180k.

What this means is, rather than taking at face value the breakdown of the US jobs number and the unemployment rate, the debate has been gradually shifting towards whether or not employers are forced to increase the average hourly wages paid in order to attract the shortage of qualified labor force. Therefore, the reaction in the USD comes as a function of not simply fixated on the breakdown of the change in the labor force, but it must come accompanied with an encouraging pick up in earnings too.

Let’s now deconstruct the event, category by category, before coming up with some conclusions that could help prepare for the volatile event.

Historical Data: Any Patterns Worth Taking Notice?

As the chart below indicates, the average of 175-180k expected is very much in line with the projections from the last 12 months, where the 200k threshold appears to be the clear psychological ceiling. Looking at the recent historical patterns, a few insights are revealed. The first noticeable development is that the US employment change has broken above the 200k mark 6 times out of the last 12 months, in other words, in 50% of the events, the US NFP not only beat estimates but it also printed a strong number.

Source: www.forexfactory.com

In 3 occasions in the last 12 months, the headline number made it into the 300k, in Dec 2018 and Jan 2019 the most recent occurrences. However, not all is rosy on the change of employment front, as in the other 6 months, the data underwhelmed, with last February’s paltry print of just 30k, due to the US government shutdown disruption, weighting. What’s interesting, with the exception of February’s outlier, is that whenever a beat occurs, it far exceeds the misses, which should be an important data point to reflect on.

Even if by the law of averages, if only based on the last 12 months, it suggests that today’s number is going to be the toss of a coin, the magnitude of the beat in the change of employment tends to be far greater, which makes perfect sense as it's no secret that the US economy has been growing at a very steady pace for years now, far outpacing the RoW (rest of the world), which implies the downside risk in the USD is more contained vs the upside potential on a beat, if only based on this category alone.

Looking at seasonals, April tends to be a month that offers no clear insights on the possible outcome, judging by the data sets compiled from the last 5 years, with the number coming above estimates 2 times, below estimates another 2 times while another time came in line with expectations.

What about the average earnings? Can we obtain some insights by analyzing the latest set of numbers? If in the case of the change in employment the number to use as a reference is clearly the 200k handle, when extrapolated to the average earnings growth on a monthly basis, 0.3% is clearly the ceiling to use as a reference. What’s encouraging about the trajectory of the US economy is the fact that in 2 out of the last 4 releases, or 4 out of the last 8, that level was either matched (1 time) or surpassed (in 3 occasions).

Source: www.forexfactory.com

What’s a bit more disheartening, is that in the last 3 releases, in 2 of them the average earnings missed estimates by a deviation of 0.2%. Even if we were to remove these 2 months of bad misses out of the equation, the picture remains pretty even with no clear patterns arising when accounting for the numbers from 2018 and these first 3 months. Also, when it comes to the month of April, it’s a rather weak month in terms of seasonals, with 3 misses and 2 in-line prints in the last 5 years.

An important input to consider for today’s wage growth data is the positive rhetoric out of the last Beige Book report, where it was highlighted that “many districts reported that firms have offered perks such as bonuses and expanded benefits packages in order to attract and retain employees.” In my view, this can tilt the risk to the upside for a potential in-line or above consensus read, while it acts as a reassurance that a bad miss like last month should be avoided.

The chart where I will spend the least time is on the unemployment rate, which is expected to remain at historically low levels (50y low to be more precise) with expectations calling for 3.8%. Some economists are expecting a return back to the 3.7% print seen last Sept and Nov of 2018, which if the case, would be the icing on the cake to prop up the USD if the rest of data points agree. However, with the labor market so tight, one could expect a potential marginal increase in the participation rate, which would make the reduction in the employment rate more challenging. On the contrary, the increase in people coming out of the labor force due to retirement is a trend on the increase, which means a lower participation rate is a risk this year based on demographics; if that outweighs new job seekers actively looking for a job, the jobless rate may keep decreasing.

Source: www.forexfactory.com

Average USD Movement Based On Historical Data

Each US NFP data release tends to be reflected in the EUR/USD chart by a price volatility of about 30 pips on average in the first 15 minutes before a range extension worth over 80 pips on average if the data points show a clear bear or miss, as illustrated in the historical data below, courtesy of FXStreet. One can dive deeper into each individual event and the market response by visiting fasteconomicnews. Simply click at the US NFP event and then select chart.

What’s interesting is that in the last 12 months, a pattern emerges which reinforces the rationale to play this even. From my observations in the EUR/USD chart via www.fasteconomicnews.com , which could well be extrapolated into other USD pairs, since the EUR/USD is a reflection of the DXY (USD index), judging by each price movement immediately after the data release, algos tend to pick up on the headline number first as long as the earnings change doesn’t miss badly by more than 0.1bp deviation. If it’s a beat on expectations in the change of employment without less than a 0.1bp miss in salary growth, the average reaction is for the USD to spike on average 20-30 pip.

However, a follow through continuation is conditioned to the average hourly wages also coming at or above expectations. If the salary inflation underwhelms, the strategy seems to be a reversion back to the origin of the USD demand area. This can also be observed the other way around, if US NFP misses yet the salary inflation doesn’t surprise strongly to the upside by more than 0.1bp deviation from the 0.3% threshold on a m/m, the initial fall in the USD is subject to also a miss in the earnings figure.

See last month’s price activity as an example. A spike in the EUR/USD worth about 20 pips after the US NFP number beat estimates by a narrow margin of 15k but the salary growth stood at just 0.1%, hence, the market took notice of the latter to initiate the first move before fading it.

Source: www.fasteconomicnews.com

Putting The Findings Together

Trend for the last 12 months in the US NFP: No particular insights obtained.

Outcomes in the last 12 months in the US NFP: Mixed-bag with 6 positive and 6 negatives.

Deviations last 12 months in the US NFP: Risk skewed towards a larger positive deviation.

Seasonals in the last 5 years in the US NFP: No particular insights obtained.

Trend for the last 12 months in the US salary growth: No particular insights obtained.

Outcomes in the last 12 months in the US salary growth: Unclear withan even number of beats and misses.

Deviations last 12 months in the US salary growth: Risk evenly balanced due to the poor deviations in 2019, which has distorted an otherwise encouraging average.

Seasonals in the last 5 years in the US salary growth:Slightly weak month but far from conclusive (3 vs 2).

Based on the most recent historical data gathered, the saying that the US NFP number is a 'lottery' should hold true based on the analysis of data trends in recent times. However, by diving deeper, the risk appears to be skewed towards a potential larger USD move if the US NFP beats expectations vs if it’s a miss. This thesis is conditioned to not having a bad miss beyond 0.1bp negative deviation in the US wage growth m/m. One should consider this week's blowout in the ADP employment report as an event that may create further upside risks in the headline number via the services sector. The jobless rate is the data point that is set to influence the immediate algo-led reaction the least given the clear downtrend established ever since the GFC. However, a reduction towards the 3.7% mark should be, subject to the heavy-weights agreeing, the icing on the cake to reinforce a USD bullish move. The opposite is true if US NFP and/or wage growth misses badly and the US jobless rate surprisingly increases even if marginally.

FX Majors: Key Levels To Watch Post US NFP

The momentum on the EUR/USD heading into the event is clearly negative as the micro slope of the 25HMA reflects, which is further underpinned by a bearish structure of lower lows and lower highs, which so far has achieved two drives lower, hence, we are theoretically still missing one. Even the extension of this 2nd drive down doesn't seem to be complete yet, with a 100% proj target of 1.1155 eyed, as long as sellers can muster further momentum through the horizontal support. Should a clear miss in the US employment numbers materialize, a major area of confluence to expect a strong cluster of offers can be found at 1.1220 (ADR limit, resistance line). On the contrary, any major beat in today's number may see sellers looking to exploit the momentum for an ultimate target of 1.1120 or thereabouts where a major confluence is found.

When it comes to the Sterling, the next 100% proj target aligns perfectly with the 1.30 round number, which is always going to be an area rich in liquidity. Any major beat in the US NFP data series and we could even expect the ADR limit at 1.2975-80 to be tested. On the upside, there are up to three levels that will act as resistances around 1.3080, 1.31 and 1.3115-20. Technically, despite an environment of a rather constructive USD across the board, the GBP should still draw significant buying interest on any overstretched move lower as the bullish structure remains firmly in place and far from being negated following the mega move from the lows on Tuesday.

It's been a very choppy affair trading the USD/JPY this week, which, fortunately, may soon be over if there is enough of a stimulant for price activity to beak in either direction. For now, the lines of battles have been clearly defined post US NFP, with 111.65-70 the first resistance to watch (H4 resistance level), ahead of 111.80 (ADR limit) and 111.90 (hourly resistance). To the downside, an area rich in liquidity is going to be between 111.00 and 111.10, where the ADR limit, hourly support, and the round number meet.

Last but not least, the AUD/USD is heading into the US NFP with a strong negative bias, having reached an intraday 100% proj target sub 0.70c a few minutes ago. A beat in the US NFP will have serious technical ramifications in the Aussie from a macro perspective, as the currency is now staring into an abyss below the massive 0.70 round number. This means that technically speaking, there would be a void area to exploit until faced with 0.6960-65, which would be the 200% intraday proj target and ADR limit. On the way up, a miss in the US NFP exposes a retest of resistance at 0.7030-35 (ADR limit), with 0.70 easily taken out one thinks given the proximity at present time.

 

[IvanGlobalPrime]

Find my latest market thoughts

Yen Rules As US-China Trade Deal At Risk

Today's explosion in volatility in the Forex market right off the gates comes after an incendiary tweet by US President Trump, taking the whole market by surprise at a time when based on the price action across various asset classes since the beginning of the year, a trade deal between the US and China had been fully discounted.


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.

Quick Take

Today's explosion in volatility in the Forex market right off the gates comes after an incendiary tweet by US President Trump, taking the whole market by surprise at a time when based on the price action across various asset classes since the beginning of the year, a trade deal between the US and China had been fully discounted. The 180-degree turn by Trump, now formally threatening China to hike tariffs to 25% on $200bn by this very Friday, it gives a market with highly committed capital into equities sufficient reasons for a macro re-think, which is currently being manifested by a serious unwinding of positions in the S&P 500 futures, the Shanghai Composite and the rest of equity indexes. The rampant buying on the Japanese Yen or the aggressive selloffs in the Aussie reflects the new state of concerns about the outlook for global growth if China doesn't buy into Trump's threats. The fate of the market hinges on whether or nor China confirms the rumors circulating around about the cancelation of this week's trade talks by Liu He and his team of representatives. Be prepared for a tumultuous week as each unfolding scenario will have ramifications with one common theme to be expected, a volatility pickup.

Narratives In Financial Markets

• Major gaps as the market caught off guard by Trump's tweets on China over the weekend, threatening to hike tariffs, reportedly frustrated at the slow pace of progress. This is an event fully priced in, so any setback will have significant ramifications as not expected by the market.
• Selling commodity-linked FX and buying the Yen right off the gates as 'true risk off' dominates has been the main hand played by the markets, with the ‘risk off’ swing finding a new leg lower as reports emerge China may be considering to cancel this week’s trade talk trip.
• If a US-China trade deal is put on hold for the time being, it equates to a lower US trade deficit, which we’ve already seen evidence of it in the last report. This translates into less USD in circulation globally, which tends to see a higher USD, further boosted by ‘risk off’ flows.
• The RMB has seen a fairly punchy move down in early Asia, reaching its cheapest level since January this year in the largest 1-day move since Aug ‘15, as CNH outflows dominate. China will need a significantly weaker Yuan to offset the increase in tariffs amid slower global trade.
• The low vol FX regime, where carry USD longs as a strategy have thrived, is at risk as the stable Yuan trade unwinds. This means a change of dynamics with wilder intraday movements in FX as the USD finds, via ‘risk off’ and not carry, a new source of strength.
• Traders are now waiting for news on how the Chinese Central Bank will react to the threats by US President Trump. The longer it takes for the PBOC to communicate its strategy, the more uncertainty is to reign. As a precursor that they won’t budge for now, the PBOC has set the USD/CNY reference rate at 6.7344, way below USD/CNH current rate of 6.80.
• Then we have the perky GBP and its relentless rise as the UK press reports that Labour MPs will not back a Brexit deal without a second referendum. Besides, UK PM May, according to the UK Telegraph, has held discussions behind closed doors over a possible 3-way second referendum. This week, PM May is about to outline plans for a comprehensive but temporary customs arrangement with the EU, with the timeline deadline until the next general election.
• Last Friday’s US NFP, which looks like a distant prospect given the latest headlines, reinforced the notion that the US labor market remains very tight even if wage pressure still underwhelms. The headline number came very strong nearly at 263k while the jobless rate made a new low of 3.6%. The increase in monthly salaries stood at 0.2%.

Recent Economic Indicators & Events Ahead

Source: Forexfactory

RORO (Risk On, Risk Off Conditions)

Unless China comes forward to calm the markets with some type of bona fide intention to completely ignore the latest threats by US President Trump, the environment is set to remain hectic. A wildly lower Yuan and Aussie as a proxy to play the Yuan short trade in international markets has been the play most aggressively manifested. On the contrary, long the Japanese Yen and bonds is paying off handsomely, especially the former as the Yen index depicts. Goes without saying, there is currently a major unwind in the US equity market, where the S&P 500 futures are down by over 2%.

The picture is even uglier when it comes to the Chinese stocks, selling by as much as 4% at the open of the Shanghai Comp. The VIX is also set to torpedo towards its highest levels in months. Remember, the next VIX short futures outstanding has recently overtaken the VIX Feb ‘18 highs. It is a perilous terrain to be trading FX with the same risk dynamics. Be aware that the volatility looks set to to pick up further this week, contingent to China’s response, so be prepared to expand your usual stop loss placements while allow to be more generous with targets as these are the type of volatile environments that tend to promote outsized movements that may eventuate in higher risks to reward.

Latest Key Developments In FX (Technicals, Fundamentals, Intermarket)

EUR/USD: Not Budged By ‘True Risk Off’ As Structure Improves

The pair is a sea of relative tranquility when cross-checked against the volatility seen elsewhere in FX. The exchange rate has managed to contain its move in a rather limited range, which has been confirmed after the Bollinger band turned flat. Whenever you see a market with the external Bollinger band going from directional to flat, that’s telling us the market has entered a consolidation phase. A break above the 1.12-1205 resistance area, which happens to be the 100% proj target of last Friday’s US NFP extension would expose the next level of resistance at 1.1220-25, ahead of the 1.1235 target. On the downside, breaking 1.1175-80 with acceptance below suggests 1.1165-60 as the next stepping stone in the form of Friday’s POC, ahead of 1.1145-50. Note, the breakout of the descending trendline in the exchange rate, coupled with a double distribution up where the POC got trapped behind, tends to be a recipe for sellers to experience further setbacks, especially judging by how impulsive the shift in flows was on the upside break from last Friday.

GBP/USD: Supply Ensues After Double Rejection of 100% Target

The exchange rate, which has been on an absolute tear as of late, met one of its possible 100% proj targets to the pip on the back of last Friday’s US NFP, coupled with positive Brexit headlines. A more ambitious upside target that is still pending to be reached would be 1.3220, a 1:1 full extension through the 1.2985 - 1.31 breakout extension. At the open of markets in Asia, the pair appears to be losing some of its strong bullish momentum after the double rejection of the 100% proj target and the increased pockets of demand in the USD we are seeing as the US-China trade deal is in jeopardy. The first area of engagement by buyers should be on an approach of the 1.31 liquidity-rich area, followed by 1.3075-80, which happens to be the 50% fib retrac of Friday’s US NFP-led rally. Even if the GBP setback extends all the way to 1.3040-45, which I see as the next critical support, that won’t damage the bullish structure in the price of the exchange rate. For that, A break and hold sub 1.3020 (Friday’s POC) is necessary, which tells you a lot about how insane the rise in the Sterling has been, judging of course, by recent standards or much more compressed volatility in the Sterling.

USD/JPY: Sold With Earnest On Trump Tweets

The weekend tariff spat by Trump against China has reinvigorated the demand towards the Yen as the risk profile turns aggressively ‘true risk off’ as the value lines on the 2nd and 3rd windows demonstrate. Not only the S&P 500 and bonds, especially the former, are imploding, but the USD has failed to draw much demand interest so far, hence fueling the downside momentum. The inability of buyers to fill out today’s ample gap in Asia before a 2nd leg was found is a testament of how fluid the situation has become. Despite the ADR limit for the day has been hit, the relevance of today’s news that a US-China trade deal might not happen after all has the potential to see far greater vol, which is why the next sellers’ target at 110.00-110.10 still stands as a realistic prospect today. Technically, the major barrier to break on the way up can be found at 110.70-75, which happens to be the violated 200% proj target measured from the range breakout last Friday. As the market dynamics stand, and even with the moves so overstretched, the downside is certainly the path of least resistance as long as the risk profile, which can be monitored through the formula in the 2nd window, remains bearish.

AUD/USD: Acceptance Sub 0.70 On Trump’s Incendiary Tweets

Asia flows were quick to adjust the pricing of the Aussie back sub 0.70 as fears of a major setback on the US-China trade talks took effect. The Aussie is hyper sensitive to any fundamental news emerging out of China, therefore tends to pretty much be pegged to the fluctuations in the Chinese Yuan in many occasions as the best way to internationally express one’s view on China. Today’s selloff in the Yuan, sharpest fall since Aug ‘15, has been a major burden leading to the unfilled wide gap at the open. The moment that news broke out of the Chinese mulling not to attend this week’s trade talks in Washington, a 2nd leg transpired, revisiting the proj 50% target, which must be utilized as our first level of reference to find a level of activeness by market makers given the ample 0.7025-0.6985 extension used to measure the first symmetrical target. With the value line, which accounts for the Chinese Yuan + DXY, deeply on the red, it’s hard to expect strong flows making it back into the Australian Dollar unless China tries to calm the waters. The next 100% proj target can be found at 0.6945-50, level where the next cluster of bids is expected to be concentrated, as market makers, contrarian traders and profit takers step in, conditioned to vol moves.

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. The weekly cycles are highlighted in red, blue refers to the daily, while the black lines represent the hourly cycles. 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

 

[IvanGlobalPrime]

There is no doubt that the fluid state of affairs in the US-China trade negotiations after Trump’s aggressive tactics is casting a long shadow in financial markets. But before diving into this new potential conundrum for markets, today’s RBA monetary policy decision, has caused quite a spike in the Aussie after the policy rate was left unchanged at 1.50%.


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.

Quick Take

There is no doubt that the fluid state of affairs in the US-China trade negotiations after Trump’s aggressive tactics is casting a long shadow in financial markets, one that is leading to a major re-evaluation of capital allocations as reflected by the punchy jump in vol on Monday. But before I dive into this new potential conundrum for markets, today’s RBA monetary policy decision, has caused quite a spike in the Aussie after the policy rate was left unchanged at 1.50% amid split market expectations of circa 50% chances of a cut today. The status quo by the RBA acts as a positive near-term input for the Aussie, even if the ability to sustain today's gains must be reconciled with the new chapter we’ve entered in the US-China trade negotiations. The depreciation of the CNH towards 6.80 after breaking a multi-month stable range is a red flag that poses the following question: Are we really at the end of proceedings of a US-China trade deal or is the market preparing for a new beginning characterized by a break away from the trade truce? If the latter, it will likely lead to a potential new regime of a lower Yuan valuation to offset the increase in tariffs and with it, higher vol in FX. But this scenario still comes with some big IFs, so we should for now, keep monitoring the news. Acting as a circuit breaker is the positive development that China’s trade representatives are still headed to Washington this week to resume the trade talks with their US counterparts as the threat of tariffs hangs over if they don’t agree to the US demands of not re-negotiating laws of IP and proprietary technology. In terms of currency performance, the Japanese Yen has been the major beneficiary of the shift in risk flows, while the USD trades steady even if its performance on the face of ‘true risk off’ is underwhelming, and to make matters worse, the analysis of USD pairs is not painting a great picture either.

Dominant Narrative In Financial Markets

Trump’s off-the-cuff drastic change in language towards China has sent shockwaves across financial markets and without a doubt, is the theme all valuations in asset classes depend on now. In retrospect after 24h of price discovery, US markets bought into the idea that such threats by Trump are part of his own tactics of negotiation, whereby he aims to add pressure to China by doubling down his aggressive approach in order to get the desired trade deal conditions.

The market was always well aware that Trump’s tweets to hike China’s exported products and services to 25% on $200bn this Friday were a calculated gamble that may have backfired if the China trade delegation had decided to cancel this week’s trip to Washington for a resumption of the trade talks. However, the confirmation that China is set to attend the meetings, including the attendance of the top trade negotiator Liu He has definitely acted as a temporary circuit breaker. This news led to a temporary punchy recovery by US equities, leading to a significant pullback in the VIX to 15 from levels as high as 19.00 in the last Asian session, when the market went into panic mode.

The situation remains very fluid nonetheless, as reflected by the sharp leg down that has followed the retracement in US equities at the close of business in New York, which has come hand in hand with another boost towards the Yen. The deterioration in risk post-US market hours comes after a media briefing by US Secretary Mnuchin and trade representative Lighthizer, which left no doubt that the US is serious about hiking tariffs on Chinese imports this Friday.

Friday’s threat about the US imposing a hike in tariffs to China is as real as it gets. It has the market obviously worried, which is why this is an important period of re-assessing capital allocations as the US makes clear that it isn’t willing to renegotiate any previous points in the agreement as China intended, especially in laws aimed at ending the enforcement of US companies when it comes to sharing proprietary technologies and other intellectual properties.

Trump has let the cat out of the bag by expressing his discontent towards the tricks China intends to play as part of the trade negotiations. The sizeable moves from Monday have now changed the market perceptions on an outcome that the market thought was all but done and dusted. The disconnect between last week's talk-up of positive developments on a trade deal with China by the US and muted price action was a communication that the event had been pretty much fully discounted.

Whenever that’s the case, the market sees the event as no longer a driver (fully priced). Therefore, we are left with little options in which US-China trade headlines can move the needle in any significant manner by promoting a boost in vol again. The public upset by Trump signifies a 180-degree change from expectations, which makes uncertainty go haywire as fears of a no deal or at least a significant delay in proceedings is an event the market was not prepared for.

Whether or not the US and China continue to exasperate markets and financial conditions get tighter, in other words, we see a resumption of ‘true risk off’ dynamics, is going to be a balanced act of calculating the pros and cons by both ends. In the end, no side wins by not inking an eventual agreement. However, these hiccups we are experiencing this late in the negotiations phase were truly unexpected and the reason the markets have had to re-adjust.

By scanning through some of the trade-related reports from China, the prospects of breaking away from the current trade truce appear to be an event some factions of the Chinese ruling-party might consider bearable. If one takes a look at the USD/CNH, up about 0.8% after breaking its Feb-April range, there is definitely a message being sent here: The market is in a high alert mode that a no-deal scenario can transpire, increasing CNH outflows. If one takes a look at the Shenzhen or the Shanghai Composite, down a whopping 7.4% and 5.1% respectively on Monday, that’s again, quite a telling story about how a no deal is a scenario no longer ruled out.

Shifting gears, the RBA left rates unchanged at 1.5%, and even if this time the playbook indicated a close call of 50:50 in everyone’s playbook following the deterioration in Australia’s CPI, the Central Bank has decided to still remain on hold while it matures its easing bias. With the Australian elections in 2 weeks time, and with the emphasis still very much on the stubbornly firm labor market, the RBA is still giving themselves some extra room even if not acting in the near future amid lower inflation prints may undermine their credibility as part of the mandate is to maintain stability in prices. Rather than being opportunistic in inflicting further pain on the AUD, the RBA continues to apply its usual thoughtful wait, even if economists are starting to question why the Central Bank is so slow in making what seems to be an inevitable easing move. This Friday’s SoMP (Statement on Monetary Policy) will shed a light in what’s expected to be a downgrade in inflation, growth and tentatively unemployment.

Recent Economic Indicators & Events Ahead

Source: Forexfactory

RORO (Risk On, Risk Off Conditions)

The risk conditions have clearly permuted into ‘true risk off’ after the Trump tweets shocker of the weekend. Both the micro and macro trends in US equities and the US bonds, as reflected via the slopes of the 25-HMA and 125-HMA, indicate that the deleveraging process is ongoing. Surprisingly, the weakness in risky assets is yet to be translated into a stronger USD, which it may partly have to do with the unwinding of carry trades, which results in bailing long USD positions, hence creating selling pressure across the board in the immediate aftermath of such a punchy move in the VIX towards 19.00, The days of ultra-low vol FX may be behind us, especially if the USD/CNH keeps its steady pace north, which is going to be very much dependable on an eventual trade agreement. The strong rally in the Japanese Yen, nonetheless, is yet further evidence that one cannot be complacent betting for a further recovery in risk, at least, that’s not the message the market is sending us. The lead European markets can obtain from the performance in China after the massive plunges yesterday alongside the reaction of Japanese markets today, back after the Golden long-week, will be key.

Latest Key Developments In FX Majors
EUR/USD: Balanced Flows Keeps Range Intact

The exchange rate has been confined in a narrow box, with clear symmetrical patterns to be drawn in helping us identify the key levels of interest heading into Tuesday. To start off, be aware that within the range, the Euro is finding a firmer footing, with a marginally higher high printed, which has been followed by a retest and rejection of Monday’s PoC after a sequence of volume tapering. Also notice, the accumulation of volume activity ever since the US NFP release last Friday is notoriously bullish as the thick orange OBV lines reflect. The positive dynamics in the Euro hinge on the ability of the currency to break and accept above 1.12-1205, in which case 1.1220-25 will be targeted in alignment with the 50% proj target ahead of the 100% proj at 1.1235. On the way down, if the bullish structure within the range is disrupted by sellers regaining Monday’s PoC, then 1.1175-80 will come into focus, with a break lower exposing the first sellers’ target at 1.1163 ahead of 1.1150.

GBP/USD: Renewed Buy-Side Campaign Underway

Following the stellar impulsive run in the Sterling off 1.30 post the US NFP, the market went through a period of a corrective move in nature, which stopped on its tracks at the confluence level of 1.2985, which aligns with the 50% fib retracement + horizontal line. The volume profile has seen most of the volume activity concentrated around the 1.3080 level, in the context of a bullish structure, hence why I see this consolidation as an opportunity for an accumulation of further longs. What this means is that a re-take of 1.31 would give us the signal that suggest buyers are back in control as the short-term sellside dynamics fail to keep up amid the violation of the bearish structure. Furthermore, the re-take of 1.31 round number in Asia coincides with buyers leaving the 25-HMA behind, while the OBV indicator, which gives us an idea of volume pressure, turns north too above its micro average line. The upside resolution through 1.31 is reinforced by the volume setup, whereby the latest attempt to explore lower levels occurred in very low volume activity, only to be followed by buy volume spike. Overall, the pair is setting up for a resumption of the uptrend, which if the thesis holds true, is likely to create opportunities to play momentum trades in line with the main bullish trend.

USD/JPY: Sellers In Control Of the Trend

Indications in early Asia suggest the intraday chart is controlled by sell-side accounts, with the evidence in price action mounting as the re-opening of the Nikkei shows negative momentum, allowing sellers to retake the 25-HMA. This deterioration in sentiment has also been translated in the value line accounting for the S&P 500 futures and US bond yields finding a new leg lower, alongside a lower DXY, which justifies the bearish bias based on intermarket flows. When looking at the volume profile, the accumulation of volume on the topside has been followed by a successful swing down in price, which reinforces the notion of trapping late buyers on the exchange rate. When analyzing the aggregated volume via the OBV indicator, we can clearly see the tick activity has shifted towards the downside, which indicates sellers are applying greater pressure. As part of this context, where the OBV is below its 25-HMA, we’ve also witnessed an M formation in volume, which tends to lead towards a retest of lower levels. Overall, the market looks poised to find follow-through sell-side interest for a retest of 110.50-60 ahead of more aggressive targets into the 110.30 and 110.00 round number.

AUD/USD: RBA-Led Spike En Route To 0.7050-60

The explosion in the Aussie on the back of an RBA hold has taken the exchange rate into the 0.7050 after breaking through the 100% proj target of 0.7030. What this means is that the next target buyers will aim for can be found between 0.7055-60, which is the 200% proj target and multiple highs through late April. The strong volume activity has seen the OBV transition into firmly positive territory, with the first 30m candle print post the RBA setting the bullish bias for the rest of the day, even if one must be aware that with the US-China trade relationships as a clear risk factor and with the ADR limit surpassed, the scope for further upside this Tuesday should stay rather limited beyond 0.7060. Any setbacks on the exchange rate should see most demand concentrated between 0.7025-30 ahead of 0.7000-05, which if all else equal, can genuinely represent solid short-term buy-side opportunities.

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. The weekly cycles are highlighted in red, blue refers to the daily, while the black lines represent the hourly cycles. 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

 

[IvanGlobalPrime]

Find my latest market thoughts

Market Sentiment On A Knife Edge

The Yen has had no rival this week as the deleveraging in financial markets continues to follow its course at a rapid pace. The psyche of the market has clearly permuted from Trump's tweet just a premeditated tactic to real fears of a no deal or at least a prolonged delay in an eventual agreement.


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.

Quick Take

The Yen has had no rival this week as the deleveraging in financial markets continues to follow its course at a rapid pace. The psyche of the market has clearly permuted from Trump's tweet just a premeditated tactic to real fears of a no deal or at least a prolonged delay in an eventual agreement. The sizeable loss of value in Chinese equities or the steady depreciation in the Chinese Yuan are bad augurs for a market filled with renewed uncertainty over the outlook for global growth if the US hikes tariffs to 25% on $200bn of Chinese imported goods by this Friday. In the meantime, on the other side of the spectrum, we find the Kiwi, battered by a surprise 25 bp rate cut by the RBNZ, and the Sterling, pressured as optimism around a Conservative-Labour agreement on Brexit fades away. The USD is another currency that despite the usual promotion of buy-side flows on the back of a pick up in risk aversion, the unwinding of carry trades as the VIX flies above 20.00 is proving to be a major hindrance to attract enough demand. The Aussie is finding demand, spurred by the decision of the RBA to maintain rates unchanged and failing to express a stronger easing bias yesterday; the currency is still faced with the China trade issues, which put pressure on the Yuan, but short-term, the adjustment higher in the AUD is also a fundamental play predicated on the RBA inaction.

Narratives In Financial Markets

* This Information is gathered after scanning top publications including the FT, WSJ/Dow Jones, Reuters, Bloomberg, Institutional Bank Research reports.

• ‘True risk off’ extends as manifested via the price dynamics in a range of asset classes, including the VIX spiking through 20.00, the S&P 500 and US yields getting hammered and the Yen bought up across the board as US-China trade fears intensify.
• Even if the attendance by top Chinese trade negotiator and Vice Premier Liu He as part of this week’s talks on trade was confirmed by the Chinese Commerce Ministry, the immediate rise in US tariffs to China on $200bn of Chinese imports by 12:01 on Friday keeps spooking the market. Unless China backpedals its reneging stance to renegotiate changing IP and proprietary technology laws, which is the reason infuriating Trump, the stage has been set up for an ugly end should both countries part ways without a deal. A lot to re-price if the case.
• The re-ignition of the market concerns about a blow up in the US-China trade deal came late on Monday US time standards, when Mnuchin and Lighthizer doubled down on their rhetoric towards China, leaving no doubt that Trump’s tweets were not a bluff.
• To make matters worse, China-state owned Xinhua, reported just a few hours ago that the US approach to trade talks is 'regrettable' and that if the US retaliates with further hikes in tariffs, China is not afraid to fight and will do so if necessary. They regret the way Trump has so far managed the standing issues.
• Market sources are reporting that in anticipation of Friday’s tariffs hike by the Trump administration, China is also preparing to hit back with retaliatory tariffs. The next 48h will be absolutely critical to shed some light with volatility set to stay high with a VIX circa 20.00.
• Judging by the performance of Chinese equities, where the Shanghai Composite remains near its trend lows, coupled with a new intraday leg higher in the USD/CNH to retest 6.80, the hints are far from encouraging with the price behavior suggesting investors pessimism reigns.
• The pre-conditions for G10 FX volatility to pick up considerably from here include Central Bank divergence (not yet in place) and risk-off in equities. According to Morgan Stanley, the movements seen so far in G10 spot FX have been relatively small based on a 20% VIX index, hence central bank divergence is also required for a large and broad pick-up in FX volatility.
• The Australian Dollar fails to sustain its RBA-induced gains after the Central Bank left its rates unchanged at 1.5% and surprisingly not flexing its muscle on the easing outlook. As a consequence, we’ve seen a punchy movement in the front end of the Aussie curve, up by 8bp. Friday’s SoMP by the RBA has tremendous relevance as we’ll get an update on CPI, GDP, jobs, with the consensus pointing towards a downgrade in inflation and growth.
• GBP is struggling to regain momentum as the optimism towards a Conservative-Labour agreement on the Brexit divorce deal iis quickly fading away. According to Bloomberg, the progress in the negotiations have hit an impasse with no easy way out, citing people familiar with the matter. UK PM May is set to face lawmakers in Parliament today.
• In news that should be fundamentally bearish for the price of Oil, RIA reported that Iran and the EU are edging closer to a deal that will allow the former to sell Oil. If the agreement materializes, the US may see it as a provocation, and reinforce fears of US tariffs on EU cars.
• The RBNZ, against most of the expectations placed for today, cut its benchmark rate by 25bp to 1.5% after the Committee announced that consensus of a lower OCR was appropriate, justified by headwinds in spending, growth (both domestic and global) employment.

Recent Economic Indicators & Events Ahead

Source: Forexfactory

RORO (Risk On, Risk Off Conditions)

The risk conditions have gone from bad to worse, as portrayed by the dominance of the Japanese Yen and to a much lesser extent the DXY, lagging far behind as carry trade strategies unwind fast. In terms of the composition of today's risk profile, we remain deep in a ‘true risk off’ arena, not only characterized by bearish micro and macro trends in equities and yields, as per the slopes of the 25 and 125-HMAs, but the structures have turned unambiguously bearish as new legs lower are found.

In such a rapid pace of deleveraging, one of the dominant strategies in FX amid low vol had been to fund trades via EUR, JPY, CHF and put the money to work on high-yielding currencies the likes of some exotic currencies or the USD, which pays a relatively handsome 2.5%. As market conditions tighten with vol flying high, these positions are forced to be unwound as investors cash out, which leads to DXY selling pressure. This effect is somewhat counterbalanced by the appeal of the currency as a safe-haven.

When analyzing the Chinese markets as a barometer of where we stand in the US-China trade negotiations, the augurs are firmly on the negative side as reflected by the consolidation at the lows in the Shanghai Comp and the acceptance of USD/CNH around the 6.8 handle. These two markets are ruling out a friendly resolution in the trade talks short-term. The chart below shows the USD/CNH risk reversals, where CNY bearish expectations have shifted for up to 3 months. Shifting gears to the VIX and junk bonds, the uncertainty is clearly reflected in these asset classes too, with a spike towards 22.00 in the VIX, highest since Jan 22, coupled with a plummeting of high-yielding corp bonds.

Latest Key Developments In G10 FX

As volume picks up and the diversification of capital flows spreads out into the currency market this Wednesday, the Japanese Yen is without a doubt the currency promoting the punchiest movements. On the flip side, short the GBP or the NZD, the former a trade just developing after the RBNZ rate cut, have paid handsomely.

Surprising news indeed by the RBNZ just hit the screens, after the Central Bank cut rates by 25bp to 1.5%, leading to a sharp selloff in the NZD, immediately marked down by over 75p. From a fundamental and technical perspective, while short NZD/USD looks attractive, long AUD/NZD as the readjustment of policy expectations plays out or short NZD/JPY as risk off anchors the yen look set to be interesting propositions on Wednesday. A significant number of opportunities are set to be available intraday.

As the chart below shows, short GBP/JPY has been a stellar trade as the Sterling attracts fresh selling interest on the back of fading hopes of a Conservative-Labor Brexit agreement. The diverging FX flows have led to a sizeable 145 pips extension after a relentless selling that started early in the European session and is yet to abate. The build-up of volume at the very lows of the day circa 144.00 after a double distribution down is a reminder that plenty of bids have come through the books to accept as the new equilibrium these lows. To the question, can the momentum extend, the accumulation of volume depicted by the 25-HMA micro trend in thick orange applied to the OBV (On Balance Volume) shows a pronounced bearish slope, which suggests the risk of the bearish bias to extent. Additionally, both the micro trend via the slope of the UK-JP yield spread in thick blue line and the risk line in thick black line endorse shorts.

Another market that looks poised to stay pressure, conditioned to US-China trade headlines, is the exchange rate that reflects the valuation of US Dollars vs Japanese Yens. Not only the volume profile has printed a triple distribution down with the POC trapped on the topside, but the micro trend via the slope of the OBV in orange think line manifests the build-up of selling pressure is still intact. Furthermore, the DXY micro trend is rolling over towards the bearish side at a time when the micro trend in the market risk profile, as depicted by the black thick line, is firmly bearish. That’s always going to be the most toxic combination that contrarian longs can face. Besides, the micro trend derived from price action sees the 25-HMA with congruence, which is further confirmation. We really need to see a major turnaround in sentiment emanating from upcoming US-China trade talks for the exchange rate to show some signs of life again, otherwise, a crack at 110.00 is imminent.

Shifting gears to the Euro, the recovery above the 25-HMA derived off price action, alongside the bullish micro-trend in the OBV (build-up of buy-side volume pressure), is a sign that the tide is turning steadily against the US Dollar heading into Wednesday. The exchange rate has managed to find a new leg up as weak-handed players have shifted to be the sellers. The volume profile printed on Tuesday is a warning signal as, despite the bearish run, sellers failed to close below the POC. Under this environment, low volume taps followed by new initiated buying looks set to be a dominant strategy, subject to the OBV and the price maintaining the correct bullish structures and slopes. The next target rich in liquidity should be found at 1.12-1205 just overhead, followed by 1.1220-25.

Another currency that is set up to exploit the potential weakness in the USD, especially after the strong adjustment in the front end of the Australian yield curve, up 8bp, is the AUD. The market is still in a transition to re-adjust the AUD valuation on the premise that the RBA did shy away from expressing a stronger easing bias, something the market had anticipated. The recovery of the exchange rate through the 25-HMA is about to get the backing of a turn in the micro trend in the OBV, which essentially gives us an indication of buy/sell volume pressure. If one combines these positive developments with a higher value line as depicted by the inversion of USDCNH and DXY, paired with a positive price structure and the POC trapped underneath the close, it suggests a buy-side bias.

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. The weekly cycles are highlighted in red, blue refers to the daily, while the black lines represent the hourly cycles. 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

 

[IvanGlobalPrime]

Find my latest market thoughts

What To Expect From The US-China Trade Talks?

There is a huge bump in the road that must be overcome by both the US and China’s trade representative this week, after the discontent by the Trump administration over China looking to backtrack on the majority of conditions pre-agreed as part of the grand trade deal being negotiated.

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.

In the world of finance, a strategic plan of engagement dependable on anticipation of scenarios helps you to become more responsive, in other words, you know what type of movements could be expected vs reactive, which is more about acting without preparation on what the potential repercussions of a particular event would be. Scenario planning is in large part of an adaptation and generalization of classic methods used by military intelligence that have morphed into models of preparation to trade financial markets. In this report, I will analyze and deconstruct the potential scenario that can be expected in this week’s crucial US-China trade talks.

Background

There is a huge bump in the road that must be overcome by both the US and China’s trade representative this week, following the discontent by the Trump administration over China looking to backtrack on the majority of conditions pre-agreed as part of the grand trade deal being negotiated.
The modifications in many of the agreed aspects of a deal led President Trump to tweet of an imminent hike in tariffs to 25% on $200bn by this Friday unless China makes good its end of the deal by reverting back to the US demands. These include changes of domestic laws that will look to mitigate familiar issues orchestrated by the Chinese, including the steal of U.S. intellectual property and trade secrets, forced proprietary technology transfers, exchange rate advantage via a manipulated Yuan.

Secretary of the Treasury Mnuchin and top trade representative Lighthizer have reaffirmed the hard-line stance by the Trump administration to enact the planned hiking in tariffs to China’s imports this coming Friday, further exasperating markets, which have been in a state of ‘true risk off’. There was no mention of Trump’s retaliation with regards to yet another increase in tariffs of 25% on other Chinese imports of USD325bn, which Trump has mentioned via Twitter to add further pressure onto China.

Trump’s drastic change of rhetoric towards China seems to reflect his re-ignited optimism in the US growth path, a marked improvement in financial conditions and broad-based bipartisan endorsement to keep a firm hand on the Chinese. However, at the same time, a similar dynamic seems to be playing out in China, where there has been evidence of green shoots again in the economy, which gives the government of President’s Xi further room to toughen up their stance on the trade talks.

By reading news outlets based in Mainland China ever since the incendiary tweets by Trump over the weekend, the views have been largely defiant. The toughest language came from the People’s Daily’s WeChat account on Tuesday: “Things we think are advantageous for us, we will do it even without anyone asking” adding that “Things that are unfavorable to us, no matter how you ask, we will not take any step back. Do not even think about it”.

Similarly, the tone by US President Trump via Twitter remains confrontational, far from setting up the stage for a conducive and respectful resumption of the negotiations with the Chinese. Trump tweeted: “China has just informed us that they (Vice-Premier) are now coming to the U.S. to make a deal. We’ll see, but I am very happy with over $100 Billion a year in Tariffs filling U.S coffers… great for the U.S., not great for China”.

There is a sense that both countries are walking a very tight rope as the US demands it’s time for China to commit to reforms amid the refusal to accept verbal assurances. However, as the South China Morning Post reports, “China is reluctant to make further structural reforms, with some government advisers in Beijing holding the belief it would be better to accept higher tariffs than make ‘suicidal’ changes to country’s economic model.”

The Chinese trade representatives convoy arrives in Washington this Thursday for what’s set to be some very crucial talks. The aim is for both sides to bridge the current impasse and find a temporary compromise that prevents the enactment of further tariffs on Friday. There are multiple scenarios to prepare for, which is what I will deconstruct in the next section of this preview. From the most risk-friendly to the worst risk-averse, each outcome is expected to spur specific price dynamics.

We’ve reached a point in the negotiations where the art of brinkmanship, that is, not showing weakness to your opponent is going to be critical. Will Trump be willing to hikes tariffs and risk a meltdown in equities and a slide in ratings ahead of the 2020 re-election campaign? Is Trump willing to accept this pain? Late last year he wasn’t, which led to the temporary trade truce that further anchored the equity rally we've seen this year. How about China, how confident are they to weather a slowdown in the economy through more stimulus without a trade deal? The assessment of what side has got more to lose will be cardinal.

NOTE: I will not be spending much time in a scenario that I find it, at this stage, simply irreconcilable. I am referring to an outcome where the US and China put all their differences on the backburner and work around the clock so that by the end of the week, the anticipation is that a deal is done and dusted. This scenario, which may have sounded realistic last week, would be drastically irrational and completely incongruent based on all the rhetoric we’ve heard from both sides this week. I wish I was wrong, which would then translate in a quick erasement of all the losses experienced this week in equities and some more (lower Yen), but I cannot envision it.

RESUMPTION OF NEGOTIATIONS, SLIGHT DELAY

A conceivable scenario, even if not the base case, is that by the end of talks today, we get a sense that the pre-existing timeline of a deal, which was supposed to be just a matter of weeks, is met. What this would imply is that the US and China can leave behind their differences and all of a sudden agree on most of the aspects currently outstanding. This would be then reflected via positive headlines where both parties agree to finalize what’s already a verbal deal in coming weeks. Trump would then put on hold the increase in tariffs that come into effect this Friday. Before last weekend’s pivot by Trump, one would have thought this was a plausible scenario, but the new tactic by Trump to intimidate his opponent has definitely caused a spin in the perception by the Chinese, who will not accept to be humiliated as will prove a sign of weakness.

An immediate deal would essentially make one side be seen as the weakest, expose their credibility as they will have to back down in a considerable number of factors they currently stand against. Even if I assign slim chances, if this event were to occur, I believe it would be China that reverses its positioning. In terms of the influence, it’d have in markets, expect major ‘true risk on’ swings, with the Australian Dollar and the Yuan the currencies most in demand, while the Japanese Yen would suffer an enormous amount of selling pressure. The USD is not expected to go through a round of selling as aggressive as the Yen even if it should still suffer against the likes of the Canadian Dollar or the Kiwi. This environment should bring back stability in the volatility regime, which would then promote the USD as a vehicle to play carry trades. In terms of equities and bonds, the former would spike taking aim at closing this weekend’s downside gap, while bonds would be under strong supply.

RESUMPTION OF NEGOTIATIONS, LONG DELAY

I really believe that the damage has been done, judging by the rhetoric used by the US. That's why this is my central scenario. At a rally in Florida just minutes ago, Trump treated the markets with yet another hint that China is to blame by riddling with the trade agreement draft. Trump said: "By the way, you see the tariffs we're doing? Because they broke the deal. They broke the deal. So they're flying in, the vice premier tomorrow is flying in — a good man — but they broke the deal. They can't do that, so they'll be paying." Trump added that the United States "won't back down until China stops cheating our workers and stealing our jobs."

China argues they believed the US was ready to make concessions. We’ve quickly shifted into a ’game of chicken’ with no clear end in sight, that’s how I see it. It’s become a chess game with no party wanting to lose face and credibility back at home, but at the same time, they are aware that these are high stake decisions with enormous ramifications for financial markets. So, we might end up with a situation in which both countries recognize the need for an eventual deal at a future tentative date, even though not enough progress is made to avoid the hike in tariffs. Trump may opt to only partially increase tariffs, be more selective on the products applied so that it is not seen as a punishment as harsh as initially planned. Regardless, the Chinese would be forced to implement a proportionate retaliatory response with immediate effect too.

The doors for a potential deal, however, will be left partially opened as both sides refuse to completely rule out, knowing well that the announcement about the cancelation of future talk would wreak havoc the markets. So, in this scenario, a soft tariff hike (less than the extra 15pp expected) with an admission that both sides are still ready to continue the negotiations upon further consultations with their own parties, would still cause markets to interpret the news as a negative input as the symbolic action of raising tariffs is seen as a really problematic outcome leading to potentially months of delays before a deal.

The bearish movements in the Australian Dollar or Chinese Yuan would be quite sizeable the moment the market picks up on this idea that no deal is to come anytime soon and tariff hikes will be enacted. The amount of volatility is likely to be conditioned by the percentage hike in tariffs and to what degree/extent an eventual deal will have to be delayed. The expectation of a delay beyond June/July will test the nerves of the market, while the lack of details about the timeline on when both sides will come back to the drawing table will definitely have the worst implication for risk assets.

WALK AWAY WITHOUT A DEAL

While I wouldn’t be placing that high odds for this outcome to materialize as the logic that to me stands the most sense is that both sides recognize the high stakes if talks breakdown. However, if Trump goes ahead with the intent to impose the full extent of the 25% increase in tariffs, it will not only follow an immediate retaliation of the same proportional measures by China, but it may lead to a re-assessment of the pros and cons, in which the final conclusion is that the former outweighs. It may snowball quite rapidly from the moment one side gives enough indications that they’ve reached unaddressable differences. The US would likely impose further tariffs on USD325bn of imports, and things could get quite ugly from here.

This would be a major gamble by both sides in hopes that their respective economies will be able to weather the storm of what is likely to be a severe increase in the headwinds and a significant downgrade in the global growth outlook. This scenario would send shockwaves across the market, with the VIX index likely to fly into the 30-35 vicinity, the S&P 500 retracing a decent chunk of this years’ advancement, while the Aussie and the Yuan would be decimated, the former trading sub 0.69 most likely to establish a new trend regime sub 0.70c while the USD/CNH will likely be used as an active tool to gain back competitiveness by breaking 7.00.