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.
As the price action in the AUD index illustrates, the market has navigated the first of a multiple of economic-derived tests this week in flying colors. The Chinese data dump was always going to serve as an opportunity to update the market on the state of China, an economy that alone engineered over 50% of the increase in money supply worldwide since the GFC. The market took a sigh of relief after leaing that the dragging trade war is yet to feed through into the Chinese economy in a manner that would worry Mr. Market as domestic-targeted growth policies keep economic activity afloat. The bullish breakouts in the AUD and NZD indices is a clear testament that the market is happy to follow the established trend once risks like Monday’s are out of the way, in those currencies where central banks have taken the gas off the accelerator when it comes to easing (RBA, RBNZ), at least temporarily. Meanwhile, currencies in which rate cuts appear much more imminent by the respective Central Banks (EUR, USD), are struggling to attract capital flows. Of importance will be today’s German Zew that will play an important role to potentially dictate the bias for the Euro as the ECB debates if room exists to hold back further QE until Sept. The same can be said about the US retail sales release in the North American session, as the Fed factors in all pros and cons to determine its aggressiveness in cutting rates by July 31st. Of course, the bullishness in the AUD and NZD also represent the positive risk sentiment as the S&P 500 validates another milestone by finding buyers above the 3k market, while a considerable exodus of bidders in US bonds since last week also underpins the trends. Meanwhile, the JPY, as its index indicates, it’s still trading in no man’s land even if the rise in stocks and bonds are in congruence with the argument of maintaining a constructive bearish outlook. The CAD, which has been by far the best performing currency in the last month, continues to pull back from its 100% projection target area, which was repeatedly outlined last week.
Narratives In Financial Markets
* The Information is gathered after scanning top publications including the FT, WSJ, Reuters, Bloomberg, ForexLive, Institutional Bank Research reports.
- China data dump on Monday received the blessing from market speculators to keep exerting upward pressure in the oceanic currency complex, which keeps outperforming in the G10 FX space with bullish breakouts in the respective currency indices.
- Bank analysts, after scanning through China’s economic data, seemed to have come to the conclusion (validated by price action), that numbers were generally on the positive side, with even a flare of WOW factor on the major upbeat in industrial production numbers, which for the month of June came at 6.3% y/y vs 5.2% exp, as well as retail sales, coming at 9.8% y/y vs 8.5% exp. China’s fixed assets investment was just marginally higher, while the official GDP data for Q2 stood at 6.2% y/y, bang on vs exp.
- The Chinese economic data allows market speculators to keep piling into China proxies such as the AUD, NZD on the basis that fiscal measures create a circuit breaker, with domestic-targeted growth via infrastructure and consumer spending, perceived now via data as a reduction of the near-term risks of a demand shock due to the trade war.
- Weakness in the USD continues to be a central theme. The narrative seems to have shifted back from a debate about a rate cut or not to now fully fixated by how much. The camp that defends the case for 50bps finds its arguments through the rationale the Fed is basing its easing policy about, which is not so much on the economic case but more about an obvious global growth slowdown, low inflation, that sooner or later will hit the US economy as business investment recedes.
- The run higher in the Aussie is underpinned by the bear steepening dynamics of its yield curve since last week, an admission by market forces that the appreciation in the currency is accompanied by bets of improved growth prospects. Last week’s news of the national bank’s regulator confirming the re-establishment of easier mortgage rules, alongside fiscal and monetary policy stimulus in play, soothed the bullish path.
- Paradoxically, the longer China’s economic indicators are sustained no flashing red flags, the longer the Chinese can hold back pressure to make a trade deal with the US, which has a negative effect in the sluggish outlook for global growth. However, the market is now betting on Central Banks to the rescue via either new easing cycles (Fed, ECB, BOE, …) These expectations, as long as no disturbed by data shocks that entail a late-cycle risk in major economies, are the overruling factors driving capital flows.
- The clearest example of a market that has so far been fed the right storyline to keep the pumping unperturbed is US stocks, where the Fed has reassured participants that equities remain an appropriate alteative as the path towards a potential multi-year easing cycle is likely to see its onset with a 25bp rate cut by the end of this month.
- The diminishing effects from Trump’s attempts to downplay China’s Q2 GDP data were largely ignored by the market. Trump has a clear agenda to pressure the Asian economic power to get a trade deal but the market is sticking with the objective data sets, which as of today, point towards China having bought more time, in the markets eye, to be patient and be undeterred to bend down in the major sticking points that prevent a deal.
- On one hand, evidence grows that the friction between the US and China is growing after China’s foreign ministry stated that it will sanction US firms involved in illegal Taiwan arms sales. On the other hand, US firms may get approval, in between 2 to 4 weeks, to restart sales to Huawei, according to an unnamed senior U.S. official, via Reuters. If the latter piece of news is confirmed, it may, at a marginal level, bring the parties one step (out of many) closer to a deal. Still, today is seen as elusive.
- In the game of thrones, ‘White House Edition’, NBC is reporting that commerce secretary, Wilbur Ross, may be removed from his post after census defeat, which involved adding a citizenship question to the 2020 census. The removal of a key actor in a topic as scrutinized as ‘commerce’ is a negative risk from a market confidence standpoint.
- The US July Empire Fed came strong at +4.3 vs +2.0 exp, which is an encouraging data piece that allows the index to recover from the worst levels since October 2016. When syncing USD price action to the data release, the influence was almost null.
- A series of comments since last week by US President Trump, Treasury Secretary Mnuchin, Fed’s Chain Powell, among others, have wreaked-havoc the valuations in Bitcoin and the majority of correlated Alt coins in the crypto space. The buzz surrounding next year’s launch of Facebook’s cryptocurrency (Libra) has taken a tu in the wrong direction as negatively connotated comments from policymakers are a clear waing sign that there will be a govement pushback and new regulatory scrutiny that may cause delays. The silver lining is the fact that a sitting US president cares enough about cryptocurrencies to make it into a public topic of interest via Twitter. It marks a symbolic milestone in the gradual acceptance of cryptos in the public conversation around money and policy.
Recent Economic Indicators & Events Ahead
The NZ CPI is the first economic indicator that will either reinforce or reverse the bullish trend in the NZD (update: came flat), which in the last few days has dethroned the CAD as the darling currency in FX. Next, the RBA will provide more detailed insights into its thinking process via the June minutes. Here, the attention will be in identifying new clues that may cement the temporary neutral outlook by the Central Bank after an aggressive 50bp rate cut action in the last 2 months. Germany’s ZEW economic sentiment is another key data point as a leading indicator of economic health in Europe’s largest economy. The ECB is walking a fine line, debating if the new stimulus program can be held back until most new forecasts and economic data points are out of the way. An upside surprise may provide the ECB extra room to keep the powder dry (EUR positive) till Sept. While a poor release can have the opposite effect, raising expectations that ECB’s Draghi will aim to over deliver on a rate cut by stepping ahead of the curve. Hence, the event is quite relevant. Similarly, today’s US retail sales have the potential to be a market mover, as the Fed, while having connected the dots to confirm the initiation of an ‘insurance rate cut’, to a certain extent, it will be how bad it gets from here on out that may tilt the balance towards a 25 or 50bp cut. Lastly, Fed’s Chair Powell is due to deliver a speech titled “Aspects of Monetary Policy in the Post-Crisis Era” at the French G7 Presidency 2019, in Paris. Powell has essentially cemented the case for a rate cut this month after last week’s appearance in the Senate, so it’s unlikely that his comments will carry new insights into the Fed’s policy thinking, so vol around the event should be limited.
A Dive Into The Charts (Technicals, Fundamentals, Intermarket)
EUR/USD: Range Trading With German ZEW As Next Catalyst
GBP/USD: Bearish Price Structure With Double Top Risk Event
USD/JPY: Bearish Technicals But Intermarket Flows Offer Buying Opportunities
AUD/USD: Bullish Trend Firms Up, Invigorated By China Data & Fed Outlook
- 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.
- 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