The Daily Edge

Aussie Flies After Aus Jobs Overwhelm Expectations

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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Quick Take

The Australian Dollar has attracted the most buy-side interest as we head into the European session after a huge beat in expectations in the Australian employment figures. The latest run up in the Aussie has now allowed the currency to overcome the British Pound in net gains this December, as the latter continues to suffer from the renewed uncertainty of a hard Brexit should UK PM Johnson keep the hard-line stance of exiting the EU (deal or not) by the end of Dec 2020. The currency that keeps showing the most consistent buy-side flows is the Kiwi as evidence mounts that the New Zealand economy has tued an important coer in its growth outlook, as reflected by the upbeat NZ Q3 GDP figures released just hours ago. This improvement in fundamentals has the market anticipating a prolonged neutral stance by the RBNZ. The Canadian Dollar is hands down the currency showing the best performance this week, and as readers of the Daily Edge can attest, this is a long play I’ve hinted based on cycle dynamics at an index level. The Swissy is surprisingly strong as we head into the last week of real trading before books are closed for the year, but with negative swaps and a ‘risk on’ appetite dominating, I personally can’t see the CHF sustaining these relatively lofty levels for too long before sellers step in. The Euro, meanwhile, is unable to get out of 2nd gear, and the bias is far from certain despite the patte of buying weakness has worked well this December. The German IFO, which came upbeat, should continue to support this buy on discount dynamics. Last but not least, the USD and JPY remain by far the most fragile currencies this month, and if one looks at the indices, both currencies are trading in lockstep in December. Remember, Dec tends to be the worst performing month for the Greenback due to tax incentives, while the Yen has fallen out of bed as the macro risks events (trade, brexit) have relaxed.

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.

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* The Information is gathered after scanning top publications including the FT, WSJ, Reuters, Bloomberg, ForexLive, Institutional Bank Research reports.

EUR dismisses German data: The familiar patte of a counter-intuitive move in the opposite direction of German fundamentals played out again on Wednesday, similarly to what we saw on the back of the German PMI disappointment. Traders must understand that the market will tend to front-run these events ahead of time based on the setting of expectations. This time, Germany’s December Ifo business climate index came at 96.3 vs 95.5 expected, the Current Assessment went from 98.8 from 98.0, while expectations rose to 93.8 from 93.0 expected.

Is Germany setting the stage for improved EUR fundamentals? The German IFO data plays into the view that the start of 2020 is setting up to be more encouraging for the outlook in Germany and the Eurozone overall, even if it needs more hard data to back up this trend. If the fundamentals in Germany provide further evidence that the economy is tuing the coer, this could definitely spur further demand for EUR-denominated assets as the ECB may, at the margin, sounds slightly more optimistic, even if we must be aware that policy settings variations will take a fair number of years. It’s a slow moving ship.

Canada’s CPI seals the deal for a neutral BOC into 2020: The inflation reading out of Canada came better-than-expected, and that was reflected in the steady demand flows hitting the currency ahead and during the event. The CPI details showed that the average of the three core measures edged up to 2.15{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} from 2.1{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814}, the highest since 2009, with improvements in the headline to 2.2{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814}, which had been expected. This data releases allows to cement the notion that the Bank of Canada will stay away from cutting rate, at the bare minimum, until a new Goveor takes over Poloz post when he retires mid-2020.

Inflation readings out of EU, UK uneventful: In the UK, the CPI was unchanged at 1.5{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814}, a marginal increase from the 1.4{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} expected, while the core reading remained steady at 1.7{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} in line with the market consensus. This limited deviation in the UK inflation barely budged the GBP, as the focus remains firmly in Brexit. In the Eurozone, the November final CPI stood at +1.0{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} vs +1.0{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} y/y prelim, while the core CPI came in at +1.3{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} vs +1.3{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} y/y prelim. The data out of Europe leaves no new insights.

SNB reminds the market no need to cut rates further: SNB’s Goveor Mr. Jordan, who has been dominating headlines, even if the content lacks meat in the bone, reiterated that “no further rate cuts are needed at the moment.” Jordan, nonetheless, said that “if there is a need to act, the SNB will deepen further negative rates”, while making a familiar point about the potential scenario in which the SNB tightens policy, which in his view, “would lead to a strong appreciation of the franc”, which is an undesirable outcome for the Swiss National Bank as it runs the risk, as Jordan puts it “to tu inflation negative and economic growth will slow down significantly as such.”

PBOC remains in easing mode as rate cut proves: In China, the PBOC implemented a rate cut to the 14-day reverse repos to 2.65{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} from 2.7{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814}, which is the first reduction in over 3 years, and follows the lowering of the 7-day rate in November, which also marked the first cut in over 4 years. According to Capital Economics, the move “is a sign that the PBOC remains in easing mode and may be just enough to convince banks to make another 5bp cut this Friday to the Loan Prime Rate (LPR), the benchmark upon which loans are now priced.” On Friday, the monthly prime rate setting will be announced.

Fed’s Williams sticks to the familiar script: There was nothing surprising in the comments by Fed’s Williams on CNBC, noting that he feels good about where the economy is going and expects inflation to move closer to the 2{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} target. He added that monetary policy is in a good place Remember, Fed’s Williams is the President of the NY Fed and acts as the role of Vice Chair right under Powell, hence his thinking process is closely monitored by market participants. He is also a permanent voter on the FOMC board.

Japan more optimistic on growth trajectory: The Japanese govement did upgrade its growth forecast for the next fiscal year. The modifications included a nominal GDP growth of 1.8{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} for fiscal year 2019 (1.7{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} previously), real GDP growth of 1.4{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} in fiscal year 2020 (1.2{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} previously) and nominal GDP growth of 2.1{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} for fiscal year 2020 (2.0{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} previously). The inflation projection was left unchanged.

Evidence mounts the NZ economy has tued a coer: The New Zealand Q3 GDP came improved at 0.7{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} q/q vs 0.5{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} expected, which led to a rise in the New Zealand Dollar as a result. Again, this positive deviation plays into the view that the NZ economy is tuing a coer and therefore should keep the RBNZ powder dry (no rate cuts).

Aussie jobs overwhelms, historical data gave a hint: The Australian jobs data came better-than-expected after the unemployment rate ticked lower to 5.2{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} vs. 5.3{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} expected and the employment Change jumped to +39.9K, way above the +15.0K expected, even if the prior reading in Oct was revised to -24.8K. The breakdown of full time vs part time employment comprised a change of +4.2K in the former and +35.7K in the latter. The participation rate was steady at 66.0{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} as expected.

This is the preview I posted ahead of the event in Global Prime Discord room:

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The EUR index retreated quite sharply from the highest level in weeks. The move tames down the outlook to neutral ahead of the holiday season. The single currency, technically speaking, remains in inconclusive range-bound conditions, with market makers at both ends of the distribution phase at an index level dominating the proceedings.

The GBP index, on the back of the impulsive gyration off the top, finds itself retesting the previous area of most relevant resistance (as per the number of interactions it had), which should be acting as a location where GBP buying activity picks up steam. I remain inclined to think that the currency trades low enough for buy side opportunities to be available soon.

The USD index remains in a downtrend and based on technicals, the most likely course of action is for the bearish cycle to remain in place, even if the tapering off volumes through the holiday season may easily result in a distribution period with no sufficient flows to set a disceible directional bias over the next 2 weeks. But if technicals are our main guide, then I believe the area where the USD trades at can attract once again the attention by sell-side accounts. The ultimate target I am fixated with in the index would be the double bottom from July.

The CAD index has, unquestionably, move into a bullish phase, which ironically makes the validation of a shift in market structure, the worst pricing to engage in CAD longs. Therefore, one must be patient for a retracement that would provide more value to be a buyer. This pullback is due soon as the elongated bar up carries relatively low aggregated tick volume. Remember, I’ve been endorsing the idea of a meaningful bottom found in the index as a base scenario, and fast forward to today, we can see this playing out as initially envisioned.

The JPY index has shown limited movements in the last 24h. The clear bearish trend remains intact. I will reiterate that as these levels, a reversal of the bias is not my main case, especially now that the US and China have agreed on a phase one trade deal. Selling the currency on rallies remains a sensible strategy against the full complex of G8 FX. The higher the market goes, the greater the opportunity to sell on strength in my opinion.

The AUD index, following the break of structure last week, is back trading in what I perceive to be a hot area to seek out long opportunities, with the technicals reinforced by the beat in Australian job figures, a risk event that cements the bullish directional bias. The patte in the daily chart, nonetheless, remains valid as a potential ‘RHS’ (Right Hand Shoulder) formation, which tends to offer a juicy risk reward to look for longs expecting the prior swing low to hold.

The NZD index has printed a bullish outside day, which further underscores the solid uptrend, graphically depicted by the higher highs and higher lows printed. The buy on dips mentality should prevail but note that the absence of volatility over the next few weeks may risk the market entering a distribution phase where a lot more head-fakes tend to occur, in other words, the trading environment may tu much choppier until the 2nd week of January.

The CHF index shows a similar patte to what we’ve seen in the CAD index, by which buyers have managed to step in to validate a shift in market structure from neutral to bullish. What this entails is that any pullback should attract more buying interest as per the recent ebbs and flows. However, notice that when the CHF trades this high, unless ‘true risk off’, it does deliver some great opportunities to engage in short-side action as a pick of choice to fund carry trades.

Important Footnotes

  • 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
  • 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{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} projection resides in the symmetry and harmonic relationships of market cycles. By drawing a 100{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} 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{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} Fibonacci Projection


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