The Daily Edge

Brace For A Busy Vol Week

Date: 3/18/19

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.

Currency Strength Meter

The USD, JPY, and the CAD have been the main laggards in the last 24h. On the flip side, the GBP, AUD, NZD keep attracting solid bids, leading to demand imbalances even if the environment remains extremely dicey ahead of crucial pending developments such as Brexit or the US-China trade negotiations. The Euro is sandwiched in the middle, with the currency largely conditioned to Brexit developments and Wed’s FOMC to find its next catalyst in either direction.

Key Narratives in Financial Markets

  • UK PM May fails to gather enough support from the DUP over the weekend. If she can get the DUP on board, the chances of the Brexit divorce bill going through parliament would increase. Only 3 days left before Thursday’s crucial EU Summit on Brexit, where an extension of Article 50 is highly likely amid the lack of alteatives.
  • Mixed US economic reports last Friday. When it comes to industrial production, it barely grew at 0.1% for the month of February, while the NY Fed’s Manuf index also imploded with a 3.7 print vs 10.1 expected. Capacity utilization also came on the soft side at 78.2% vs 78.5% exp. On a brighter note, the prelim UoM consumer sentiment stood at 97.8 vs 95.5, with the JOLTS jobs opening coming also stronger at 7.50M vs 7.27M as the labor market remains strong.
  • Traders should buckle up for increased volatility from mid this week, as not only we get Thursday’s Brexit Summit amid the dicey situation but Wednesday’s FOMC meeting is also expected to bring about a decent dose of volatility as the focus shifts towards slower growth in the US and globally, alongside clues that reinforce the renewed neutral to dovish stance.
  • On the US-China trade negotiations, a topic that has been put on the backbuer of traders’ minds as the headlines activity decreases at a time when Brexit takes absolute centerstage, further reports suggested that much more progress must be done before a potential “signing ceremony” between both US and China’s Presidents, not expected before mid-April.
  • We are back to the inflammatory language from North Korea towards the US, as the leader of the latter refers to the US as taking a ‘gangster-like’ approach. The immediate thoughts crossing traders’ minds should be that any denuclearization, for now, is dead in the water.

Recent Economic Indicators & Events Ahead

Source: Forexfactory

RORO – Risk On Risk Off Conditions

From a micro perspective, which is really what matters amind the dicey state of affairs in Brexit and with Central Banks meeting this week, we are faced with a ‘USD weakness’ environment in a context of rising equities, which keeps promoting the ‘risk on’ environment. Even if we should not place as much weight given the unpredictability of the events unfolding this week, the macro backdrop, comprised of the weekly trends, is also reflective of weak USD dynamics amid rising equities.

As our model explains, “when the usd and us30 yr bond yield both move lower, clues must be obtained via the sp500 and potentially gold to determine risk. If the sp500 moves lower, the risk environment remains not friendly overall. However, under this context, the usd weakness, indirectly, eases pressure on EMs and may keep the likes of the aussie or kiwi underpinned vs euro, gbp, cad, barring fundamental news affecting the flows in the oceanic currencies.”

Dashboard: Intermarket Flows & Technical Analysis

Summary: Intermarket Flows & Technical Analysis

EUR/USD: Range-Bound Conditions Awaiting Brexit News

  • The Euro is set to piggyback the Sterling this week, as the Brexit plot thickens. Whatever volatility and directions emerge in the GBP, it should be replicated in smaller scale in the EUR.
  • A rather confined 40 pip range to contend with at the start of the week, so involvement at the extremes of the trading range is best suited to aim for max risk reward prospects.
  • As the German vs US bond yield spread stands, with micro and macro slopes pointing up, the path of least resistance should continue to be to the upside from a value perspective.

GBP/USD: Brace For Another Week Of Brexit-Led Vol

  • The barrage of inconclusive Brexit headlines has been translated into a very choppy price action in the last 2 days, as algos and traders await for the next catalyst.
  • Sporadic episodes of vol here and there, as seen last week, are expected ahead of the major Brexit Summit on Thursday, when vol will continue to be on the rise.
  • Market structure, technicals and fundamentals continue to be all in alignment for a resumption of the bullish trend, as the table above indicates through the assignment of arrows.
  • It’s especially notable the bullish stepping formation in the UK-US bond yield spread, which has served as a key leading indicator. The micro/macro bearish trend in the DXY only reinforces that any GBP positive news can see a move magnified given the overall USD fragility.

USD/JPY: Constructive Bullish Structure But Intermarket Bearish

  • Technicals saw a marked improvement last week, after the key breakout through 111.40 led to a new bullish cycle which stopped on its tracks at the 100% proj target.
  • As intermarket stands, with the DXY and US 30Y showing a downward trajectory, the market is unlikely to gather much buy-side support, even if deep dip buying still justified on rampant equities. Until the FOMC, a rotational market looks increasingly likely.
  • A cluster of bids can be clearly anticipated between 111.30-40, a confluence of horizontal support with the highest accumulation of volume from last week.

AUD/USD: Applying Pressure Against 71 cents

  • The Aussie keeps finding buyers and with good reason as intermarket has tued clearly bullish, not only from a micro standpoint but also from a macro (weekly) tendency basis.
  • The RBA minutes on Tuesday and the Australian jobs report on Thursday are the key events to inject volatility into the Aussie this week. Throw the FOMC in the US into the mix. Vol eyed.
  • Other than the market structure, which is more range-bound in nature, the rest of technicals and intermarket indicator, suggest finding cheap prices to buy at discount.
  • The clearest area to engage in buy-side opportunities at this stage is found at 0.7050, the midpoint of the range circa 0.7070 or alteatively a break and retest of 0.71.

USD/CAD: Established A Range, Mixed Intermarket

  • Despite general USD weakness, flows towards the Loonie have been even more depressed, allowing the exchange rate to create an hourly bullish structure…
  • However, given the tepid extension above the previous swing high at 1.3345, the market runs the clear risk of establishing in a 1.3290-1.3350 range.
  • There is a significant number of hurdles on the way up as reflected by the multiple horizontal levels of resistance created on the way down as the macro trend remains clearly down.

Gold: All Indications Point to Higher Prices

  • By taking a look at today’s outlook table, one of the markets best positioned to exploit the USD weakness is Gold, especially if equities find greater selling pressure.
  • Even with rising equities, the combination of bearish trends in the DXY alongside short-dated US yields, is enough to still perceive value by engaging in buy-side opportunities at key levels.
  • Talking of key levels, keep monitoring the horizontal lines drawn in the chart below, as each and every interaction has represented a key decision point with the usual spring effect.
  • The close of business in NY at the highest of the day, coupled with the overall structure bullish ever since the bottom found at 1,280k strengthens the case to stay constructive.

Important Footnotes

  • 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