As the market goes through a moderate round of deleveraging, the Japanese Yen, recently disjointed from RORO dynamics amid an overstretched cheap valuation, finally put on a decent recovery, one that I had personally been endorsing judging by the depressing risk mood.
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As the market goes through a moderate round of deleveraging, the Japanese Yen, recently disjointed from RORO dynamics amid an overstretched cheap valuation, finally put on a decent recovery, one that I had personally been endorsing judging by the rather depressing risk mood present. The USD continues to attract steady flows as trade uncertainties have forced a re-allocation of capital away from emerging market exporters, making its way back into the United States. The Sterling, once again, has been the least favored currency, as the market prices in an imminent resignation of UK PM May and almost null chances of her Brexit Withdrawal Agreement passing its 4th vote through Parliament in early June. Another currency overwhelmed by a late day supply imbalance is the Canadian Dollar, initially boosted on the back of upbeat Canadian retail sales, only to revert all its gains and then some as the Oil price collapsed amid the shocking build-up of Crude and Gasoline inventories. Sandwiched in between we find the Euro, the Aussie, and the Kiwi, even if the Oceanic currencies are the most vulnerable, both suffering from renewed macro tendencies as the market anticipates further easing in Aus/NZ.
Narratives In Financial Markets
* The Information is gathered after scanning top publications including the FT, WSJ, Reuters, Bloomberg, ForexLive, Institutional Bank Research reports.
The FOMC minutes reassure market participants that the Federal Reserve is not yet considering to lower its interest rates in the near term. In the statement, the word ‘patience’ was again emphasized and warranted as they suspect the decline in inflationary pressure is likely a transitory event.
It’s important to note that the FOMC minutes pre-date the partial collapse in trade talks between the US and China, which is why the minutes may misrepresent the current new thinking from the Fed, as the global outlook could rapidly deteriorate if frictions remain where they are or rise further, which is a clear risk.
US President Trump states that there will be no infrastructure deal as the political drama with the Democrats takes a turn for the worse. House Speaker Pelosi said that “Trump is not above the law, and that we believe Trump is involved in a cover-up”, while Democrats discuss the very low probability scenario of an impeachment.
The Oil price was hammered following a surprising build up in the EIA inventory stats, showing a 4.74mln barrels increase in crude inventories, which is over 3 times the expectations. To make it worse, gasoline inventories also jumped to 3.72mln barrels vs 850k expected.
The Sterling was the biggest mover, losing further value as rumors mount that Theresa May has her days numbered as British Prime Minister amid the near-zero chance of her Brexit Withdrawal Agreement (WA) being approved by parliament, due for a vote in early June.
The 1922 committee of Conservative backbenchers will convey on Friday in what’s thought to be a meeting partially intended to alter rules that will allow for an early leadership contest, given that under the standing rules, May cannot be challenged until December.
China’s Foreign Minister Wang Yi kept the confrontational rhetoric against the US as a way of showing China’s determination not to be bullied by Trump, noting some in the US are trying to hinder China’s development process, adding that pressure on Huawei is pure economic bullying and that no unequal agreement on trade will pass.
Bloomberg reports that the US is reportedly weighing the prospects of blacklisting up to five Chinese surveillance firms on the basis that the technology could be employed for espionage. As long as the US keeps targeting Chinese techs, any US-China deal is an illusion.
Canadian retail sales came much better-than-expected at 1.1% and 1.7% (core retail sales) vs 0.8% estimates in both, leading to a sudden mark-up in the price of the CAD.
Recent Economic Indicators & Events Ahead
RORO (Risk On, Risk Off Conditions)
The overall risk sentiment took a turn for the worse on Wednesday, with the suppression in global yields the main culprit behind the strengthening of the Japanese Yen. The US 30y bond yield, as usual, is our global barometers to assess the allure towards fixed-income, and there we see that both the micro and macro slopes (25 & 125HMA) are pointing lower, which is not a good omen for risk dynamics.
In the equity market, with the US-China trade frictions on the increase, I find it fully justified that stocks, especially the IT sector, are finding it hard to build upon Tuesday's recent gains. The hourly structure in the S&P 500 remains bearish as per lower lows and lower highs, which is a bad omen technically speaking. On a slightly positive note, the VIX has been muted sub 15.00 at the range lows, while junk bonds are still finding some residual demand even if the price action is far from conclusive.
Interestingly, the DXY continues to show stubbornly high demand flows as it becomes evident, as Morgan Stanley’s Research Team notes, that “trade uncertainties have shifted capital flows away from EM exporters and into the US.” Remember, either in ‘risk on’ or ‘risk off’ scenarios, the USD has been performing in a very steady manner, suggesting that all else being equal, it remains the place investors are resorting to as safe-haven.
With regards to the USD/CNH, the equilibrium found above 6.93, where a balance area worth over 300 pips has formed, is a clear sign that the market is betting, for now, on a protracted trade standoff between the US and China, something that if following the social media and news rhetoric, appears to be in congruence.
Overall, the environment in risk is such that I am inclined to think that we are on the cusp of another round of 'risk off' this Thursday, one that should keep the USD and the JPY well supported, while keeping commodity-linked currencies under pressure. Notice, AUD, and NZD are also suffering from the pricing of further easing, which makes the prospects of exploiting Oceanic currency weakness via USD or JPY an interesting proposition if further 'risk off' swings eventuate.
Latest Key Developments In FX (Technicals, Fundamentals, Intermarket)
EUR/USD: Range Expansion W/ Sell Side Vol Pressure
GBP/USD: Early Signs Of Potential Buy Side Accumulation?
USD/JPY: Buy Side Structure Still Valid
AUD/USD: Risk To The Downside W/ Well Defined Targets
USD/CAD: Symmetrical Areas Of Interest Respected
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
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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