The Daily Edge

Battered USD Awaits US NFP-Led Flows

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

Akin to the dominant flows in November, the first week of December is in many respects tantamount to what we saw last month, with the Sterling and the New Zealand Dollar the best performing currencies as a fundamental shift, driven by expectation of a landslide victory by the Tories in UK election and a re-pricing of interest rates by the RBNZ as the positive developments out of New Zealand keep piling in. The Canadian Dollar is another currency going through an interesting transition in order flow after the BOC downplayed the chances of rate cuts in the immediate future. The sell-side smart money sponsorship appears to have run its course as I explain in today’s CAD index analysis. By a country mile, the clear under-performer this week is the US Dollar as an explosive up move early in the week in the EUR/USD set the ball rolling. Recurrent readers of my daily edge report won’t be surprised of the USD fragility witnessed as this was one of the central scenarios as part of my weekly prognosis. In the next 24h, the US NFP will gather most of the headlines and will act as the next major mover for what appears to be an oversold USD index. The Japanese Yen ends as one of the worst performers as hopes remain of a removal of the Dec 15th tariffs to China next week, while the Euro, despite an inspiring start of the week, saw buy-side flows peter out. Lastly, the Swissy, which remains a currency hard for me to get my head around, with idiosyncratic factors such as SNB intervention playing out, had a solid run this week. 

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.

US NFP up next as key mover for the USD: The US Non-Farm Payrolls will command the market’s attention today. The expectations are for an increase in the headline number to 184K vs 128K last, with the unemployment rate unchanged at 3.6% vs 3.6% last and the average hourly eaings MoM at 0.3% vs 0.2% last, while eaings YoY are set for 3.0% vs 3.0% last.

CAD on fire post BOC, awaits Canadian jobs: On the back of the less dovish-than-expected outcome by the BOC on Wednesday, which has revitalized buy-side flows into the Canadian Dollar, traders will be eyeing another volatile day as a result of the Canadian Employment report. Unemployment is expected to remain unchanged at 5.5%, with the headline employment number bouncing to +10.0k vs -1.8k reading last month. On Thursday, the second-tier Canadian Ivey purchasing managers index for November came at a much higher reading of 60.0 vs 48.2 last month, adding further fuel to the CAD bull run.

US-China trade deal uncertain: US President Trump continues to sound quite cryptic on the outlook for a trade deal with China, stating talks are “moving along well”, but “we’ll have to see” regarding the December 15 tariffs. US treasury secretary Mnuchin, meanwhile, said US-China trade talks are on track but not bound to a specific deadline, also outlining that US Chinese deputy negotiators held a call on Wednesday and are actively working towards a trade deal.

Farm purchases key sticking point: As part of the daily round of speculation on the trade deal, the WSJ reported that US, China trade negotiations remain on track for a trade deal, but the two economic giants continue unable to resolve discrepancies over the quantity of farm purchases. Pres. Trump wants 40 to 50 billion. That number represents an enormous increase from $8.6 billion last year and China is reluctant. The report adds that the depth in the reduction in tariffs is yet to be determined.

Binary outcome next week: As a reminder, the next round of tariffs kick in Dec 15th, a Sunday, and unless there is a deal in place or Trump decides to suspend the implementation last minute, China will be taxed a further 15% tariffs on an additional $165 billion of China imports, which adds to the existing tariffs on $360 billion of Chinese goods. What this means is that next week, the binary outcome of keeping or removing the Dec 15th tariffs will keep the markets on tenterhooks.

RBNZ rate cuts priced out: Some clients asked me what the latest decision by the RBNZ means for the outlook on interest rates and financial stability overall. I’ll provide my take. First, as a reminder, the RBNZ announced new rules to enforce banks to increase capital ratios in 7 years: Large banks will have to hold 18% in total capital (and 16% in tier one capital) vs current 10.5% minim. Meanwhile, smaller banks will have to hold 14% in tier one capital. The NZD was given a boost early Thursday as a result. The crux of the matter here is that the RBNZ decision was more lenient than thought, implying less need for compensatory rate cuts.

OPEC’s official decision on Friday: The meeting by OPEC ended with no clarity yet as to whether or not output cuts will be extended until June. Chatter has it that the OPEC ministerial panel will indeed recommend output cuts until June, with some leakage noting OPEC deal is for cut of 500K bpd with Russia. It remains to be seen if deeper cuts to production will be enacted or instead the current production cuts will remain in place. The Saudi oil minister said OPEC will disclose news of the decision tomorrow, noting that “we cannot say we have an agreement until we meet non-OPEC member”, adding that “OPEC is in agreement”, even if not fleshing out details on what was agreed. The minister added “you will hear beautiful news tomorrow.”

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Recent Economic Indicators & Events Ahead

Source: Forexfactory

Professional Insights Into FX Charts

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 EUR index visited the bottom of its broad daily range in what I anticipated to be a buyers’ bastillion for emerging buy-side interest reinstated. Indeed, the market has seen a rejection from the support area as we await the outcome of the US NFP payrolls. A re-assessment of the technical conditions by Sunday once the vol storm is out of the way will provide a lot more clarity. Continue to be mindful of the symmetries the index is respecting, that is, the midpoint of the range and the bottom side, as that’s where EUR trades offered the best reward. Note, within this broad range, a tighter range period has now being formed as the yellow box outlines.

The GBP index found follow through demand as the currency is right in the midst of a mark up phase with trend following and momentum traders piling into longs ahead of the UK election on Dec 12. The move in the Pound is a bold statement by the smart money that they see the Conservatives getting a majority, hence paving the way to get the new Brexit deal into law. The target to the upside in the GBP index is the point of confluence pertaining to the 100% measured move and a horizontal resistance level, both coming at the same juncture.

The USD index, after being taken to the woodshed this week, it has finally reached its 100% measured move, an area where I’d expect the one-way street sell-side flows to start abating. The currency has traveled too fast, too quick without any type of retracement. Amid these oversold conditions, other than momentum traders, I doubt much interest will remain to see a further capitulation of the currency without first some type of rebound. That said, the US NFP represents a risk event that could take the currency in either direction, even if I hold the conviction that the risk of a larger move is to the upside given the magnitude of the fall seen.

The CAD index kept finding further bullish momentum until faced with the origin of its latest supply area, an occurrence tantamount to the behavior seen earlier in the week prior to the last sell-off seen in the index. But with the new reality being that the BOC has appeased the prospects of a rate cut, my view is that we are still going to be trading the CAD under an environment of a misplaced cheap valuation that should keep order flows skewed to the upside. Note, while the structure in the index remains bearish, the market grabbed lower liquidity where shorts were mitigated in what I see as the termination of the sell side campaign. Besides, it looks like this is a meaningful cyclical low as each leg down has carried lesser commitment – magnitude of the downside extension – than the previous (-1.65%, -1.45%, -1.10%).

The NZD index made another attempt to grab even more liquidity to the upside but note that the run ups are starting to fail at the area where one would expect longs to actively be taking profits after the prolonged rally seen in the currency. The price has surpassed the 100% proj target and is now testing an area previously sponsored by the smart money. What this means is that engaging in NZD longs at this level is a very dangerous proposition unless the time horizon of your trades is scalping in nature, aiming for 15-20 pips. Otherwise, the chances of rotating back down or entering a period of distribution to unload NZD long inventory is highly likely.

The AUD index looks quite fragile in its outlook, which puts the odds of the double bottom to be seized by market makers as the next logical target. Once the Aussie comes into contact with this critical pocket of liquidity available, it will be time to watch like a hawk what pans out. Will the market see follow through supply towards the double bottom in Aug-Sept, or will Aussie buyers show up for a reversal back to the midpoint of the broad daily range. In the grand scheme of things, this is the binary outcome to pay attention as that’s where the index is headed next.

The JPY index, on the back of the bearish outside continuation candle, found additional yet tepid in nature sell-side pressure as the flows abate ahead of the US NFP report. Nonetheless, technically, the structure in the index, which serves as a graphic depiction of the overall flows hitting the JPY currency, suggest a shift in risks towards further downside. Remember, the index finally closed beyond its lengthy daily range with the projected target coming at 0.82% lower, so we could be in for a few weeks of JPY weakness heading into year-end as mentioned yesterday.

The CHF index continues to trade in an unclear fashion, and the most recent price action, with a bullish outside candle off the lows met with a bearish outside candle 2 days later is the perfect graphical example of this messy outlook for the currency. I am personally staying away from forming any strong opinion on the Swissy as the overall flows stand. Trade with extra cautiousness if you are going to engage in this currency, making sure you crosscheck it against the weakest peers out there if you aim is to bank of CHF strength.

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% 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


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