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.
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There is a clear winner as the week gets underway, and that’s the Aussie, boosted by the friendly outcome of the Australian national election, where the incumbent coalition govement won with what appears to be a parliamentary majority. On the other side of the spectrum, we find the Yen, losing value even as the US-China trade rhetoric worsens, which is why the current hefty levels in JPY crosses look quite rich if one accounts for such an unsettling backdrop. Another commodity-linked currency, as the AUD, recently enjoying a lift is the Loonie (CAD), as the US agreed to lift the steel and aluminum tariffs as part of the US-Mexico-Canada trade agreement. The USD performance, partly driven by the consistent selling on the heavily traded European currencies, especially the Euro, continues to show no signs of abating. The overall risk profile in financial markets has relaxed quite a bit even if judging by the levels the Chinese Yuan trades at, the fundamental backing to justify such a recovery in risk is dubious at best.
Narratives In Financial Markets
* The Information is gathered after scanning top publications including the FT, WSJ, Reuters, Bloomberg, ForexLive, Institutional Bank Research reports.
- The Australian Dollar has found strong bids in pre-market Intermarket trading after the incumbent coalition govement was proclaimed as the winner of the Australian national election by a sufficient margin not only to defy the odds of the polls (recurrent patte these days) but to likely enjoy an outright majority (76 seats needed).
- AUD traders await a crucial public intervention by RBA Goveor Lowe, due to speak at lunchtime Australian local time on Tuesday, on the prospects of the economy and policy. The RBA minutes from the latest policy decision will also be released tomorrow Australian moing time to shed further light on the RBA thinking process.
- China has reinforced its stance on the current trade talks impasse, by noting via its state-sponsored economic daily blog on Wechat, that “we can’t see the US has any substantial sincerity in pushing forward trade talks. Rather, it is expanding extreme pressure.” China has laid out three conditions to make progress in the trade front, including the removal of the existing trade tariffs, a realistic purchase plan, and a balanced text as part of the agreement.
- Despite US President Trump announced a 180-day delay in the auto tariff hikes to EU, Japan last Friday, the US Commerce Department has determined that auto imports represent a threat to national security. Counter-balancing the news, the Trump administration has decided to dial down the tensions with its neighboring countries by lifting the steel and aluminum tariffs on Mexico and Canada, which should allow Congress to ratify the trilateral trade agreement.
- US prelim UoM consumer confidence, published last Friday, posted its highest level in over 15 years, which is yet another testament that the prospects by consumers to spend in the real economy are extraordinarily strong, as the labor market remains overly tight.
- Plans are in the making for the UK parliament to vote, once again, on a Withdrawal Amendment Bill during the week of June 3rd, Meanwhile, UK PM May has stated that she hopes her new improved set of measures as part of the divorce agreement wins new support. The Sterling price action, very bearish the last 2 weeks, has been manifesting the continuous uncertainty that surrounds the Brexit process, with no clarity gained in the last month.
- US President Trump has ramped up his rhetoric against Iran, noting that “if Iran wants to fight, that will be the official end of Iran. Never threaten the US again.” The market does not perceive this geopolitical risk to escalate further from here, which is why markets are not responding.
- Keep close attention to USD/CNH, as it remains the center of the financial universe. If the 7.00 handle gives in, it will send a very dire signal for the risk profile. It’s worth noting though, there have been indications that the PBOC (China’s Central Bank) has started to manipulate the exchange rate via its fixing and intervention to ease the Yuan pressure a tad. As Nordea notes, a move through 7.00 “would make Chinese assets suffer massively as would the growth momentum in Asia.”
Recent Economic Indicators & Events Ahead
RORO (Risk On, Risk Off Conditions)
The strong depreciation in the Yen index looks set to be limited in nature if one judges the soggy price action seen in equities and bonds in the last 24h. For the Yen to sustain its current losses and risk to substantially improve, a lot more work needs to be done in reverting back to bullish micro slopes in both the S&P 500 and the US 30y bond yields.
It’s quite rare to witness the JPY index move into bearish territory from a micro perspective, yet both equities and bonds trade in a rather suppressed manner by failing to extend last Thursday’s gains. Something’s got to give, and judging by the market disparities, it’s the Yen that looks out of whack here.
Meanwhile, the DXY ascent continues at a slow but steady pace, printing 5 days of gains in a row. The poor performance in Chinese equities, using the Shanghai Composite as a reference, alongside the hefty levels in the USD/CNH, will do little to soothe the nerves of investors.
Overall, the RORO model is far from offering reassuring metrics that the ‘risk on’ profile is set to expand much further. This view is also anchored by the notion that the latest rhetoric in the US-China trade front has, if anything, has taken a tu for the worse, with China re-considering what’s the point of having more talks near term.
Latest Key Developments In FX (Technicals, Fundamentals, Intermarket)
EUR/USD: Bears Dominant Force, Watch Compression At The Lows
GBP/USD: Consistent Selling Respecting the 25HMA
USD/JPY: Set To Reach An Interim Top Intraday
AUD/USD: Emboldened by Aus election outcome, clear target overhead
- 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