The Daily Edge is authored by Ivan Delgado, 10y Forex Trader veteran & Market Insights Commentator at Global Prime. Feel free to follow Ivan on Twitter & Youtube weekly show. The purpose of this content is to provide an assessment of the conditions, taking an in-depth look of market dynamics – fundamentals and technicals – determine daily biases and assist one’s trading decisions.
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The Australian Dollar is the top performer currency after the RBA kept its rate unchanged at 0.75% while hinting that the easing bias may no longer be warranted as the statement added the sentence that the recent policy cuts is supporting employment, income growth in Australia and a retu of inflation to the medium-term target range. The retu to inflation was the novel remark the market is now pricing in, which is a subtle form of saying they don’t see the need for more cuts. The USD has also shown signs of life again after suffering days of constant sell-side pressure on the back of the FOMC. The bullish outside day in the DXY is a testament of the renewed buying interest. The Canadian Dollar, as usual, has been piggybacking the move in the USD (exception to divergence is when fundamental play a bigger role as last week’s BOC bombshell). The Yen, which closed in NY surprisingly strong judging by the ‘risk on’ conditions in stocks and bond yields, has come under renewed sell-side pressure by value traders. The Swiss Franc is another currency that does not seem to justify the levels it trades at based on the punchy ‘risk on’ movements, but beware it’s not as clear cut to be traded on risk as the Yen is, since it tends to have a much bigger influence depending on the directional bias of the Euro much more often. The New Zealand Dollar traded excessively weak on Monday, in a move that looked fairly counter-intuitive judging by the NZ-China upgraded trade agreement news, presenting a good opportunity to pick bottom prices. Lastly, the Pound has been treading water as the Brexit saga enters a period of ‘low volatility’ ahead of next month’s UK general election (polls to dominate the proceedings).
The indices show the performance of a particular currency vs G8 FX. An educational video on how to interpret these indices can be found in the Global Prime’s Research section.
Narratives In Financial Markets
* The Information is gathered after scanning top publications including the FT, WSJ, Reuters, Bloomberg, ForexLive, Institutional Bank Research reports.
‘Risk on’ upgrade, bearish Yen: The recovery in US yields, alongside the ebullient mood in the equity market, has resulted in ‘true risk on’ conditions retuing, even if not reflected in the Japanese Yen . This divergence between the Yen and the risk dynamics offers a genuine opportunity to engage in buy-side business in the Yen crosses (sell Yens) at value areas (see charts below).
Aussie retail sales down: The Australian September retail sales came poor at +0.2% vs +0.4% expected, dragging the Aussie lower for the day, ahead of the RBA monetary policy decision (just released). The market had been holding no expectations of a rate cut by the RBA today (94% priced for a no change), with the short-term neutral stance reinforced by a recent speech by RBA Goveor Lowe, who reinforced the notion that the Central Bank can not take the foot off the gas pedal on its easing.
But the RBA looks like is done easing: The RBA decided to keep the cash target rate at 0.75%, as expected, leading to a strong rise in the Australian Dollar after an upgrade in the forward-guidance. In the final paragraph of the statement, the RBA added the following remark: “The easing of monetary policy since June is supporting employment and income growth in Australia and a retu of inflation to the medium-term target range.” The market has interpreted the comment as a hint that the easing bias may no longer be warranted. Even if the RBA did leave the door open to ease further if needed, they sound as if that would be conditional to exteal factors.
Positive macro news out of New Zealand: New Zealand has agreed to an upgraded free-trade agreement with China, which entails making exportS into China more cost efficient and easier to handle. The news is unambiguously a positive development for the NZD. According to RNZ news, “it is the highest level of commitment to environmental standards China has made in any free trade deal, and giving the vast majority of wood and paper trade to China preferential access over the next 10 years.”
China keeps pushing for a roll back of tariffs: According to Politico, China is pressing Trump to remove more tariffs ahead of trade deal signing. China aims for 15% tariffs imposed on Sept 1 to be removed in the trade deal. The push by China occurs “as Chinese President Xi Jinping considers a visit to the United States to sign a “phase one” trade deal, said three people familiar with inteal discussions.” For now, the overall sentiment in the market, best portrayed by equities, is to buy into the assumption that the Phase One trade deal is pretty much baked in the cake at this stage.
FT article adds credence to positivism on China trade: In a follow up article by the FT, it was revealed that the US is considering rolling back the Sept 1 Chinese tariffs to seal Phase One deal. The convergence of news adds credence to the case that the US is strongly thinking about it, and as a result, the AUD is flying. The story details that “Washington would likely something in retu, including beefed up provisions on the protection of intellectual property for US companies, greater certainty on the scale of Chinese purchases of US farm products, and a signing ceremony for the agreement on American soil.” While it’s been argued that the Phase One trade deal is largely priced in, the removal of previous tariffs is undoubtedly a genuinely positive event as it shows willingness to make deeper progress.
ECB Lagarde speech a non-event: Incoming ECB President Lagarde made her inaugural speech without making any mentions to monetary policy in her remarks. As the FT notes, citing Olivier Blanchard, who was chief economist at the IMF for four of Ms Lagarde’s eight years as managing director, “monetary policy is almost out of ammunition, but if the central banks say this too explicitly, the markets may freak out, so, Christine Lagarde has to do this delicate balancing act of saying there is more she can do, while insistently asking others, including fiscal policymakers, to help.” One can visit the following article by the FT on what Lagarde’s ECB will look like to gain deeper insights.
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Professional Insights Into FX Charts
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The first chart that came to my attention this moing is the AUD/JPY. Here, we can see what looks like a removal of liquidity by market forces towards the latest swing low where the market could find richer liquidity before taking prices back up. This scenario was strongly reinforced by the major divergence between the pair (highly sensitive to risk conditions) and the bullish dynamics in risk, as reflected by the black line (accounts for US30Y + SP500). Adding to the attractiveness of the trade is the fact that one could realistically protect the position via a line of support nearby, coupled with Friday’s POC, with the stop loss right undeeath the latter, while the profit target could be aiming for the most recent highs.
The strength in the USD this Monday has led to a fake out in NZD/USD, opening the doors for an opportunity to play short-sided bias on a retracement back up as longs got trapped. The dump of NZD inventory in exchange of USDs has taken out the order block causing the upside breakout, which means that any retest of the area offers the best pricing to anticipate follow through sell-side tendencies. The area intersects nicely with the 50% retrac, offering a very decent risk reward of 2.5:1, with stop moved to breakeven on a retest of the prior swing low.
The EUR/AUD run stops to the downside on Monday after breaking through a level where liquidity abounded judging by the multiple rejections. Once the initial sell-side bias cleared sufficient stops and abrupt move up caught traders wrong-sided. From there, as the chart below illustrates, the rest of the prior high where the sell-side pressure breaching into new lows initially originated from (order block area) acted as the key support for the bounce to follow its course higher into the target area.
- 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. 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.
- 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