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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Demand towards the Aussie keeps on going, even if the struggle to break through USD 0.72c is real. The fact that the market failed to fill out resting offers just pips ahead of the round number in spite of a very strong Australian employment report not only reveals the macro relevance of the level but it also demonstrates how important it is to gauge Intermarket flows, as, by the time of the test, both the DXY and Yuan were moving in the opposite directions. When it comes to the New Zealand Dollar, as I elaborate in today’s report, it looks set to struggle vs G10 FX as negative news keep mounting (dovish RBNZ, poor NZ CPI). The bull flattening of its yield curve is a reflection of it. The Japanese Yen is a currency that faces a more benign outlook heading into Thursday, not based on technicals, but on the deterioration of risk flows. Meanwhile, the Euro has been able to maintain its fortitude, even if within the context of a compressed range against the Greenback. The Canadian Dollar was initially bolstered by a decent Canadian core CPI print, but null conviction to hold onto the gains followed in what has become a very erratic market to trade the USD/CAD. What to say of the Sterling? A paltry 35 pip range it’s all we could manage to contend with on UK CPI day. That’s the ultimate reflection of how Brexit and the low vol regime means for a historically volatile currency.
Narrative In Financial Markets
- As US stocks keep charging higher this year, the Nasdaq 100 makes a fresh record high but fails to sustain its gains. An analogous picture in other US benchmark indexes, including the S&P 500, unable to keep up the positive tone from earlier on the day, finishing slightly on the negative as the healthcare sector acts as the main dragger.
- In the last 24h, we’ve leaed that the phenomenon of global low inflation continues. The first evidence came out of a miss in the NZ CPI for Q1, which was followed by the UK inflation reading undershooting and a flat final EU CPI too. The only encouraging sign originated out of Canada, where core inflation saw a moderate uptick.
- The Chinese data dump invigorated the Aussie even if 0.72 remains a tough nut to crack, as expectations were slightly surpassed, as in the case of China’s Q1 GDP, which came at 1.4% (in-line) while the yearly reading stood at 6.4% vs 6.3% exp. The retail sales overshot estimates at 8.7% vs 8.4%, while Industrial production far exceeded expectations at 8.5% vs 5.9% y/y.
- According to the WSJ, there are tentative signs of preparations for a potential signing ceremony between US and Chinese Presides by late May or early June. Before that, a new round of trade talks is due on April 29, when US trade representative Lighthizer travels to Beijing, while China’s Vice Premier Liu He travels to Washington one week later. The absence of any market reaction to the headlines implies a deal has already been fully priced in.
- The Fed Beige Book report offered no significant new insights, with the language of ‘slight to moderate’ growth a replica of the same narrative used in previous reports.
- The US trade balance continues to move in the direction the Trump administration aims for after it printed a reduction in the deficit to -49.4bn vs -53.4b expected. This is the smallest trade deficit in almost 1 year due to an increase in aircraft exports and slower import growth.
- The German govement revised considerably down its economic growth forecast for 2019, even if the news had been well telegraphed by media outlets over previous weeks. The new estimate for growth in 2019 stands at just 0.5% vs 2.1% a year ago.
- The Australian jobs report showed a very solid reading, with the headline number beating expectations at 27.5k vs 15k exp, while the unemployment rate stood at 5%. The break down of the full time vs part time employment numbers carried even better news, as the former jumped by 48.3k, which is a very hefty level. Even the participation rate ticked up to 65.7% vs 65.6%.
Recent Economic Indicators & Events Ahead
RORO (Risk On, Risk Off Conditions)
From a microflows perspective, the bearish reversal day in the S&P 500, followed by a wave of buyers in US bonds, which has pushed the 30-year bond yield marginally below 3% again, implies the risk profile has tued ‘risk off’ in the very near term. In terms of the risk flows derived off currencies, our best barometer is our prop Japanese Yen index, which is start to apply further upward pressure against a level of daily resistance. The US Dollar index, and to a lesser extent the Yen index, has been extremely choppy as of late, with no particular bias developing off the H1 chart. Another red flag which communicates risk-seeking conditions are far from ideal is the spike towards 13.00 in the VIX (vol index for the S&P 500) or the aggressive sell-off in junk bonds as reflected by the HYG/IG ratio. The only encouraging signs can be found from the Copper/Gold ratio, in a firm uptrend, as is the case of Oil/Gold, both indicating the growth outlook has definitely improved. Further evidence that the reflation trade is back on as we gather mounting evidence that China’s economy is on the mend, is the fact that DM (developed markets) yield curves are exhibiting bear steepeners across the board, with the only exception being New Zealand, where the market is still not pricing growth but rate cuts there. In the rest of the economies outlined in the chart below, bear steepeners dominate, indicative of economies where inflation expectations start picking up due to higher growth prospects.
Latest Key Technical Developments In G8 FX
Interested about downloading today’s key levels in the major pairs? Find the MT4 templates, updated daily, by clicking the following link.
EUR/USD: Chopfest Still In Context Of Bullish Structure
The successful rotation on the EUR/USD exchange through the early stages of Wednesday offers opportunities to play longs off 1.1290-95, even if one must be mindful that right overhead the 1.13 is an area where supply will most likely abound as we are starting to see on multiple rejections. This is a market that still exhibits sufficient merit to be treated as a range between 1.1325-11280/90 within the broader context of a bullish narrative in terms of market structure. Unless the area of support at 1.1280 gets violated with equilibrium found below, the outlook remains constructive even if the chopfest that we are seeing in recent days above 1.1290 should reinforce selectiveness on trades.
USD/JPY: Well Defined Tight Range Around 112.00
The area of 112.00 should act as the midpoint of the current tight range from which the pair will pivot around. Watch for intraday control of the mentioned round number from where to initiate buy/sell-side campaigns aiming for the extremes of the range. In the context of a bullish trend, the building of value circa 112.00 is a positive development as it communicates acceptance. However, with the risk conditions tuing uglier on Wednesday, don’t be surprised if upside breakouts fail.
AUD/USD: Retesting Offers at 0.72c On Strong Aus Jobs
The Australian Dollar keeps receiving further positive news, this time in the form of very solid Australian job numbers. A strong headline print, full-time employment showing another blockbuster read, unemployment rate at 5%, a very solid report indeed that should assist the bulls have more goes towards the 72c. If the Aussie is unable to break the level by the end of business in NY today, that should be quite worrisome. If we look at intermarket flows through the DXY and Yuan, they remain restrictive of a 72c breakout as it stands. Yellow line below is one of the most critical value lines on the Aussie -> 1/(FX:USDCNH/6.7+TVC:DXY/96.9). Correl is very consistent and it suggest caution.
- 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