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.
The 20ish pips ranges in the EUR/USD or AUD/USD should speak volumes of the absolute vegetable state of the forex market on Monday, with a flash news-led selloff in the Canadian Dollar on the back of a disappointing BoC business survey the only real move to take note of. The Pound was another currency that held relatively firm, breaking the 1.31 level against the US Dollar before liquidity dried up by the London close. As I elaborate in today’s report, whenever a strong movement in any asset class, the likes of what we saw in the Japanese Yen or other risk-sensitive assets such as the Aussie or stocks is followed by a day of consolidation, this is what we understand in institutional terms as an auction with acceptance of value. In other words, the ‘true risk on’ movements from Friday as optimism around China’s growth picks up is not being responded with rejections from what one could consider overdone levels. Instead, the market is finding equilibrium, which is encouraging for the build-up of further momentum or else you wouldn’t see 24h of buyers and sellers agreeing to exchange bids and offers at these lofty levels by 2019 standards (mainly on JPY terms).
Narrative In Financial Markets
- Extremely tight ranges in the currency market, with the exception of the CAD, knocked down by a poor BoC business survey, which has led to an increase on the pricing of a rate cut by the Canadian Central Bank by the end of 2019 (6bp of easing based on the OIS curve Dec 2019).
- The controversial Mueller report that looks into the meddling of Russia and its links to the Trump campaign will most likely be released on Thursday, according to Bloomberg.
- According to the US Treasury Secretary Mnuchin, there is more work to do with China, especially conceing the enforcement mechanisms that must be in place. Mnuchin added that the US-China negotiations are making a lot of progress.
- EU’s Malstrom notes that the potential retaliatory tariffs list against the US as to counteract the plans of the latter to impose $11bn worth or tariffs will be published on April 17th.
- In words of UK PM spokesman, there is no fixed end date on the ongoing talks with Labour in order to find a possible compromise that may unlock the current stalemate.
Recent Economic Indicators & Events Ahead
RORO (Risk On, Risk Off Conditions)
After the rampant movements in risk last Friday, the market has gone through a consolidation patte this Monday, which if you ask me, it’s a positive sign for risk as it communicates acceptance of the newly found lofty levels in the S&P 500 and to a lesser hefty-status but equally impressive is the near term bull run in yields, taking the US 30-year bond maturity yield as our reference. This prognosis of dominating risk appetite obtains further evidence via the suppressed levels on the Yen index, while the DXY continues to trade quite messy within a generally weaker macro trend as per the black slope, which looks at the 125HMA, hence accounting for 1–week worth of price data. The rest of supporting risk-sensitive asset classes such as Oil vs Gold or Copper vs Gold ratios continue to show benign conditions for the interest of risk-seeking strategies, and the same applies when analyzing the state of affairs in both the VIX (vol index in the S&P 500) and in credit markets via the ratio between junk bonds vs investment-grade bonds (HYG/IG). Overall, last Friday’s upthrust in risk followed by an acceptance near the recent highs, is a sign of persisting ‘true risk on’ in the markets, which should translate in further selling interest vs the USD and JPY, with the caveat of vulnerabilities arising in currencies hit by fundamentals such as the CAD on Monday.
Latest Key Technical Developments In G8 FX
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In today’s analysis, I am taking a step back from the most granular analysis and diving into the macro technicals, anticipating potential targets and the established directional biases and/or inflection points where a potential change of behavior by market participants may be seen.
The first chart that catches my attention is the resolution above 80.00 in the AUD/JPY. Based on market symmetries, it now allows us to draw a 100% proj target, which may play out over the next few weeks or months, with an ultimate target of 82.00-05. In terms of intermarket correlations, it is the upside pressure in the S&P 500 (orange line) that has been the main driving force in the exchange rate, coupled with positive news out of China. The key leading indicator that still contradicts such macro bullish move is the relatively suppressed levels of global yields (US30Y in green).
Another yen pair that is edging closer to a massive daily resistance level is USD/JPY. I am referring to 112.25-30, which represents the double bottom through last Nov-Dec of 2018. The rise in the S&P 500 (orange line), accompanied by a relatively well bid DXY(blue line) are the two positives arguing for a breakout, however, it is of major conce to see the pair heading into such a critical intersection without the backing of what’s arguably the number 1 leading indicator for the pair, that is, the 30-year US yields (green line). That said, the short-term inertia in the US30-year bond yield is there, even if it needs to be taken with a bucket of salt given the downtrend in global yields.
Another pair that is flirting with a major daily resistance level is the AUD/USD as buy-side pressure builds up against the 0.72 round number. This is an area where plenty of liquidity is likely to be found and because of it, a level that will most likely act as a magnet attracting buyers, who very well know they will enjoy a level very rich in orders to flip and close their buy-side campaigns if they so wish. The inertia, as per the slope of the 5-DMA on the S&P 500 (orange) and the Yuan+DXY (red) argue for a continuation of the bullish trend, for now, counteracting the negative outlook in the AU-US yield spread (blue). Any upside break could see the exchange rate target the next big level at 0.7270-75.
- 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