Posted on: 17 Apr, 2019
The Aussie seems to have no rival this April, as further evidence of green shoots in China, led to a new wave of buy-side pressure on the Oceanic currency. Each setback it had in the last 24h, be it via Tuesday's dovish RBA minutes or a quick round trip on lower NZ CPI...
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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 in order to determine daily biases and assist one’s decisions on a regular basis. Feel free to follow Ivan on Twitter & Youtube.
The Aussie seems to have no rival this April, as further evidence of green shoots in China, led to a new wave of buy-side pressure on the Oceanic currency. Each setback it had in the last 24h, be it via Tuesday's dovish RBA minutes or a quick round trip on lower NZ CPI, has been met with incessant buying interest, which speaks loud and clear of the current bullish outlook, mainly anchored by the growth rebound story currently underway in China. It's neighboring currency, the Kiwi, didn't enjoy the same fortunes, as the miss in the NZ CPI adds further strains to the Kiwi as the NZ Central Bank finds yet another argument to eventually cut rates. In a similar misery, in terms of drawing short-term buying interest, is the Sterling, under sellers' siege as UK Labour Leader Corbyn finds no compromise with UK PM May on a Customs Union as part of amending May's Brexit deal. Looks like the extension of 6 months will give us now a time to trade the Sterling under much more contained vol. The one currency that still follows, to a certain distance, the Aussie's stellar performance this April, is the Euro even if it's starting to struggle above the USD 1.13 mark. Lastly, the USD and the JPY, have enjoyed a bit of a respite as stocks failed to sustain gains in the US (positive JPY) and US yields kept rising (positive USD). However, with China's optimism governing price action, the JPY and to a lesser extend the USD, may continue to struggle finding enough interest to avoid further depreciation short term.
The rapid descent from a new year high on the S&P 500, led by a number of earning report misses as in the case of Bank of America, has caused pockets of renewed demand in ‘risk-off’ currencies the likes of the US Dollar and the Japanese Yen to re-emerge. Be wary that the rise in the latter may not find much sustainability, as it happens under a context of rising global yields, with the US 30y our gauge, now testing a massive psychological level at the 3% mark. Additionally, further signs of improving Chinese data has led to equities in the far east taking a positive lead, with China at the forefront, that may extend into European and US markets.
By looking at other crosscurrents in industrial assets such as the ratio of Oil vs Gold or Copper vs Gold, both saw spikes due to the aggressive selloff in gold, which is a reflection of a market diversifying further away from the perceived safety of the precious metal at a time when US yields are on the rise in a clear bet towards additional positive news out of China, and as a ripple effect, into other global economies. Even if we look at the VIX (vol index), it hovers around the 12.00 handle, which means the implied volatility expected in stocks is very low by the no so distant standards. Credit markets in the US are perhaps the one asset class telegraphing like no other that the level of optimism to keep a bid on risk should remain fairly elevated as the HYG/IG (junk bonds vs investment grade bonds) stands.
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The USD was sold across the board, alongside the Japanese Yen, in the Asian session. This has led to the EUR/USD exchange rate retaking the 1.13 handle after a strong rebound of a highlighted H4 horizontal support area (in orange). An area rich in liquidity around 1.1315 (Tuesday’s high) is now under siege, ahead of further liquidity pockets just a few pips ahead. It won’t be, however, until the 1.1325 area is potentially tested again, that’s where the real battle to take control of the next H4 level will take place. The inertia for today should be a USD under pressure as risk on flows resume.
However, no currency has been re-invigorated to the extent that the Aussie has, fully recovering the NZ CPI-induced selloff in early Asia, only to rebound by its ADR full extension of 55 pips. What this means is that the rise in the AUD/USD has now landed the exchange rate at the macro level of 0.72c, an area where one would expect a major cluster of offers as the level also coincides with a daily resistance level where price failed in the last two interactions, coupled with today’s ADR limit. That said, the Chinese positive growth story should continue to keep the bid tone in the Aussie intraday, even if one must apply its own rationale to realize that the expected extension today has already been reached at the 0.72c. Note, the latest spike allows us to draw a new bullish trendline.
After 2 days of consolidation, the rate has filled out sellers’ offers above the 112.10 resistance, even if at the first pass the breakout has failed, taking the price back into its range midpoint. The environment remains supportive of further upward pressure as the risk appetite stands. The weakness in the DXY, judging by the renewed strength in the EUR/USD, should be compensated by rising US yields, especially if combined with a resumption of the rally in equities. It’s important to note that any setback sees two important areas of horizontal support at 111.80-90. The real macro battle in the exchange rate comes on a test of the daily resistance at 112.25-30.
A pair attracting a lot of attention today, even if the vast of the potential extension has already occurred, is the NZD/USD. It got knocked down to grab plenty of liquidity below a level of support off the daily chart as highlighted in a red line. From there, assisted by China’s data, buyers have stepped in to initiate an intraday bullish move that may very well take us to revisit the 0.6740-50 vicinity, which is an area of resistance both on the H4 and the hourly as depicted by the blue/orange lines.
The Sterling has been under pressure as negative Brexit headlines weighed on the currency, in what ended up being a one-way street slide towards an area of important liquidity at 1.3030-35. Even if the ‘risk on’ mood is constructive for the interest of the pair, it hasn’t seen much of a rebound in Asia, which speaks loud and clear of the negative sentiment after Corbyn’s headlines. Granted, the level where the Pound is currently finding demand from starts to be very attractive if you believe on the rotational nature of the pair until a new Brexit breakthrough occurs, which may be weeks away given the 6 month extension conceded by the EU. The range 1.3120-1.30 should cover the short-term eventualities, hence trading away from these levels makes technical and fundamental sense.
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