The US Dollar recovered some ground intraday but continues in a macro downtrend alongside the Japanese Yen as the overall 5-day cross assets performance is still characterized by ‘true risk on’.
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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, futures and options, in order to determine daily biases and assist one’s decisions on a regular basis. Feel free to follow Ivan on Twitter & Youtube.
The US Dollar recovered some ground intraday but continues in a macro downtrend alongside the Japanese Yen as overall cross assets performances indicate, still characterized by ‘true risk on’ conditions. The Pound continues on a tear while the Oceanic currencies were the worst performers even if the backdrop of risk appetite dynamics should result in decent interest to cap the downside as long as the mild deterioration in equity valuations is limited in nature. The Canadian Dollar is another currency that put on a fantastic performance on Wednesday in response to a sharp recovery in Oil prices. Trapped in a hiatus of low vol and a fairly neutral bias is the Euro as it navigates its lowest quarterly range since its existence.
Narratives in Financial Markets
India and Pakistan are engaged in heavy gunfire across the border in Kashmir as the hostilities between the 2 countries increase following a suicide bombing that killed. The NYT carries a comprehensive round-up of the latest developments this morning in Australia.
Canadian inflation came in line with expectations. No surprises, which means the BoC can still afford to stay sidelined without any type of pressure to act on policy.
As days go by, it’s becoming increasingly clear that no political party in the UK has the slightest interest to leave the EU without a deal. Therefore, the most sensible outcome and the one the Sterling has been pricing in by skyrocketing is a binary outcome in which Article 50 is extended or the UK celebrates a 2nd Brexit referendum.
In his testimony in front of a Senate Committee, the top US trade negotiator Mr. Lighthizer stated that the US is aiming for structural changes as part of a trade deal with China as opposed to just purchases. He sounded prudent by saying it’s still too early to predict an outcome. The politician added that a deal with China will be binding and enforceable.
Oil prices jumped after an unexpected build-up of inventories in the US. The recovery in prices follows the hardline stance comments by OPEC+, not planning to increase its current supply quotas despite the pressure via social media by US President Trump to cap the rise.
Fed’s Powell, in his 2nd day of testimony in front of a Senate Committee on Banking, said in a very explicit manner that “we are going to be in a position to stop run-off of balance sheet this year”. The outcome has already been fully priced in by the market judging by the muted reaction in equities and the USD after the headlines.
There is little doubt by now that the Australian housing market is causing major headwinds for the Australian economy (not reflected in labour so far) but it still argues that the RBA is going to be pressured to lower rates in the foreseeable future after the latest findings in the construction work done, which proved way weaker than expected in the second half of 2018.
Recent Economic Indicators & Events Ahead
RORO - Risk On Risk Off Conditions
Short-term flows have reverted back to an environment of USD fortitude while trade with a fairly neutral outlook as per the slope of the 25HMA, which captures the price movements in the last 24h. However, by stepping out to visualize what’s the dominant regime from a 5-day perspective by using the slope of the 125-HMA, nothing has changed yet, with uptrends in the equities and US yields alongside weakness in the US Dollar and Gold qualifying the environment as ‘true risk on’. The downward slope in the price of gold at a time when the USD has been also pressured strengthens the case of the macro ‘true risk on’ as capital seeks out riskier investment propositions.
Dashboard: Intermarket Flows & Technical Analysis
Analysis of Forex Majors
The EUR/USD market has entered a period of consolidation, with the price encapsulated between the 1.14 round number and the backtest of the top of the former range breakout circa 1.1360-65. The extremely limited fluctuation from Wednesday is an accurate reflection of a pair that is running its tightest quarterly volatility since the Euro debt back in 2019. It’s become very painful to trade this pair for swing/day traders, although intraday opportunities at the most granular levels will always remain available. The overall macro outlook still continues largely supportive as denoted by the market structure of recent weeks of painfully slow moves but still with higher highs and higher lows. Besides, the macro slope of the German vs the US bond yield spread in the 10-yr guides us higher. Keep following the 10-y yield spread for some diverging opportunities with price intraday as the macro and micro narrative has clearly strengthened the role of this historically top leading indicator with price.
The Pound continues on a tier and the strategy proving to be most effective to capitalize on this market is to look for ‘buy on dips’ during a period of intermarket flows’ alignment. The trend has been evolving in a fairly non-volatile and regular fashion with pullbacks quite shallow, which vindicate the strong buy-side flows behind a market with major demand imbalances still at play.
As I argued during Wednesday, with a USD/JPY overly extended to the downside at a time when the slope of the 5-DMA in the US30Y and SP500 still exhibited an upward momentum, any weakness presented a genuine buy-side opportunity. This thesis was conditioned to an intraday recovery in the likes of yields and the DXY, which is precisely what we saw, leading to an impulsive move. As the macro ‘true risk on’ backdrop stands, I imagine residual demand resides to keep pushing the market higher although it will be very much dependable on the constant fluctuation of DXY/US30Y/SP500.
From an intermarket view, the AUD appears to have received too harsh of a punishment judging by the 5-DMA upward slopes of the Yuan+DXY (both inverted) even if the AU-US bond yield spread exerts a slight downward pressure as negative fundamentals in Australia mount. We’ve entered a period of oversold conditions in the hourly, which only makes the case to find an imbalance of demand around these levels unless further setbacks are seen in correlated assets. Even if that’s the case, one would think the macro divergence alone limits the downside for now.
With the recent impulsive moves in both directions this week, the USD/CAD market is starting to establish a broad range between 1.3250 and 1.3130 approximately. The downward slopes in the 5DMA still offers enough justification for this market to resume its downtrend if we can get an extension lower on DXY and Oil. By the close of business in NY, the outlook for the pair looks bearish given the sharp turnaround in Oil and the broad DXY downtrend.
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