We had an uninspiring day of price action in the forex arena on Monday, with most of the US-China trade-led vol concentrated in the equity market. It is precisely in stocks where we are seeing the first technical cracks again, as IT shares implode the high stakes gamble decision by the US to ban Chinese-based Huawei and ZTE Corp from any dealings with US telecoms.
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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. Feel free to follow Ivan on Twitter& Youtube. Make sure you join our discord room if you'd like to interact with Ivan and other like-minded traders. Also, find out why Global Prime is the highest rated broker at Forex Peace Army.
We had an uninspiring day of price action in the forex arena on Monday, with most of the US-China trade-led vol concentrated in the equity market. It is precisely in stocks where we are seeing the first technical cracks again as the risk profile worsens, with IT shares suffering the consequences from the high stakes gamble decision by the US to ban Chinese-based Huawei and ZTE Corp from any dealings with US telecoms. Surprisingly, the Japanese Yen has failed to attract sufficient demand, in a 'puzzling' move that I explore in today's report. The Aussie got off to a great week after the positive Australian election news, as the sitting coalition government retained power. However, the RBA Governor Lowe speech today, highlighting the possibility of a rate cut at the June meeting, has thrown cold water on the positive AUD outlook as it gives back most of this week's gains. With regards to the USD, there was a significant absence of flows coming through the books, with a speech by Fed's Powell failing to spice things up. Same applies to the CAD, as the USD/CAD comatose trading manifested. Last but not least, the appeal towards the European currencies, especially the Sterling, remains subdued, as the Brexit process stays 'stuck' following the failure of the cross-party talks between the Conservatives and Labour. The next Brexit divorce agreement vote is due in early June.
Narratives In Financial Markets
* The Information is gathered after scanning top publications including the FT, WSJ, Reuters, Bloomberg, ForexLive, Institutional Bank Research reports.
Equities in the US and Europe start the week on the backfoot, mainly led by IT shares, as investors’ unrest grows following the high stakes gamble decision by the US to ban dealings with China-based Huawei and ZTE Corporation by US telecoms.
There continues to be further mounting evidence that the tit for tat trade rhetoric is quickly transitioning into a full-blown trade war. Comments by a Chinese envoy to the EU, saying that “Chinese companies’ legitimate rights and interests are being undermined” and that “necessary response” will have to occur, is yet the latest hint that a protracted delay before, a trade agreement ensues, which sounds quite elusive at this stage.
Most of the volatility was concentrated in the equity market, with the Forex arena going through a low key affair as the suppressed vol regime expands amid the lack of incentives to diversify as the overall risk profile stays ‘on hold’ and Central Banks keep sync dovishness.
We had a major test for the AUD this morning. First off, the RBA minutes provided initial insights on the controversial decision to keep the RBA policy ‘status quo’ even as their inflation mandate slips off. The verdict by the market was that the RBA is ready to cut rates if the labor market doesn't show further improvements. Most importantly, and what represented the nail on the coffin for the AUD today, was the RBA Governor Lowe speech in Sydney about the Economic Outlook and Monetary Policy. Lowe clearly stated that the case for lower rates is 'on' and that June is a lively meeting where a cut will be considered, strengthening the easing bias commitment.
Fed’s Powell speech, just a few minutes ago, has come and gone without any major market response, as the focus is currently fixated in hints to potential rate cuts. An easing by the Fed later this year is an outcome priced in by bond vigilantes, and the case further boosted by the eruption of the tit for tat US-China trade dispute, which should undermine growth prospects.
Saudi Energy Minister Khalid Al-Falih has vowed for the OPEC + coalition to “stay the course” when it comes to its production cut plans. Expected limits in supply were the key driver for Oil on Monday, which showed volatile yet overall bullish price action.
Geopolitical tensions between the US and Iran seem to be escalating, judging by the rhetoric. On Monday, South Carolina Senator Lindsey Graham said that National Security Advisor Bolton has warned him of worsening tensions with Iran, claiming that Iran-sponsored actors have gone through a campaign of boycotting and attacking pipelines and ships to create threat streams against American interest in Iraq and other neighboring nations.
According to Goldman Sachs Economics Research, the victory in the general election by Australia’s sitting PM Morrison is a significant surprise, as manifested by the AUD bullish price action, if one considers that the Coalition Government had been consistently behind in the polls. The bank’s Economics Team notes that “while we assess the result to have minimal near-term implications for the current slightly positive stance of fiscal policy, it does present a moderate boost to corporate sentiment and a more meaningful one to sentiment in the housing sector.”
The Research Team at Morgan Stanley holds the view that “without a cross-party agreement, we do not expect the Brexit deal to pass”, due for a vote again in early June. The bank adds that “with parliament gridlocked, we expect a political process to resolve Brexit, pointing to a more binary outcome.” GBP remains under pressure.
Recent Economic Indicators & Events Ahead
RORO (Risk On, Risk Off Conditions)
The disconnect between the pricing of the JPY, using our prop index as a reference, and that of equities and to a certain extent fixed income, continues. It shows a rare disparity unlikely to last. Personally, with the tit for tat US-China punitive tariffs, Huawei’s restriction/ban from dealings with the US, and the war of words sounding increasingly provocative and retaliatory in nature, it continues to enhance the prospects of a protracted trade war at a rapid pace. On the back of such uneasiness, it looks as though the S&P 500 has started to frontrun the bearish sentiment by breaking into a new cycle low, which has been confirmed after the break and hold sub May 17 low at 2,850.00, a move that has also been vindicated by the bullish price action in the VIX. The micro slope has also turned negative, which only reinforces the bearish bias. In the meantime, fixed-income, with the US 30y our best gauge to evaluate the overall risk profile as it relates to global yields, remains on a ‘holding pattern’ by extending its 2.80%-2.85% range for a 4th day in a row. Personally, I find it really hard to see much impetus to the upside eventuating with the US-China trade issue escalating.
As per the currency flows, the DXY has maintained its hefty levels, which is far from being the ideal scenario if one expects the risk profile to be on the mend. The most puzzling move so far, one that keeps defying logic, which suggests it has its hours numbered unless ‘risk on’ is re-ignited, is the depreciation in the Japanese Yen. Believe it or not, hence my ‘puzzling’ expression, with a more than dubious risk dynamics, the Yen index displays its most bearish profile ever since the onset of the month-long Yen risk rally on April 15th. This reveals two key takeaways. Firstly, short-term traders should be on the watch to exploit long opportunities in the Yen on the basis of a poor risk environment. Secondly, it tells us that the supply interest on the Yen has been very strong from a more macro perspective, which does make sense as our equally-weighted Yen index reached its 100% target projection move from a weekly perspective, as shown below.
When it comes to Chinese assets, we want to pay attention to the Shanghai Composite, which remains pressure on the back of the Huawei ban, but most importantly, we still want to understand what’s happening in the Yuan valuation front. The bullish trend in the USD/CNH remains firmly in place, even if some of the short-term momentum has been lost as authorities in China pledge to defend the 7.00 handle, which is definitely the level the market is watching for. According to the Economics Team at Nordea, the move towards 6.91% may represent a concrete attempt by China to allow the countering of 10% tariffs on Chinese export goods. However, more worrisome should be if China aims to weaponize the Yuan as a tool to counter-attack the US for its 25% tariff hike. If that’s the case, 7.91 would be the next target, which is a scenario the team at Nordea assigns low probabilities given that, as stated yesterday by the Economics Team at Nordea, “a move through 7.00 would make Chinese assets suffer massively as would the growth momentum in Asia."
Latest Key Developments In FX (Technicals, Fundamentals, Intermarket)
EUR/USD: Flows Consolidate Limited by Friday's POC
GBP/USD: Friday's POC Location To Reinstate Shorts
USD/JPY: Bullish Structure As Yen Defies Risk Profile
AUD/USD: Finds Higher Value, RBA Lowe To Determine Next Bias
USD/CAD: Directionless Flows, CAD Benefited By Trade News
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