The Daily Edge

CHF Remains The Indisputable FX Darling

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

We find an analogous picture in terms of the top performing currency, with the Swiss Franc stealing the limelight once again. The remaining G8 FX complex, by and large, continues to show volatility shrinking by the day. Out of all the indices analyzed in this report, the only exception to display a weekly volatility above its monthly average is the Swiss Franc, the rest shows the dullest movement for quite some time, with even GBP stuck at an implied volatility that is the lowest since July 2019. In this environment, with equities in the US making marginal new record highs, and the US-China trade deal signing ceremony largely a non-event as no surprises emerged, the Yen continues being promoted as one of the preferred shorts, even if the easy gains playing short the currency, I believe, have already been made, especially considering the macro support it faces at an index level (more on the charts section). The Euro keeps gaining strength with the market now shifting its attention to today’s ECB Minutes, with the focus on the ECB’s framework review, set to start next week, and any potential adjustments to the inflation targets. A speech by ECB’s Lagarde at 10.30pm AED will also command the attention of the market. GBP continues to show stubboness to accept lower prices despite the soft data as of late (downbeat UK growth, UK inflation lowest in 3 years, BoE member more dovish), which is quite telling. Despite the resilience shown, the market is now pricing a 70{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} chance of a BoE rate cut on Jan 30th. The North American countries, despite marginal weakness on Wed, are nowhere near violating the evidence that keeps both the USD and CAD in an overall bullish path for the month. Lastly, the AUD and NZD struggled to find demand even if the low vol dynamics are supportive overall.

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-China officialize phase one trade deal, market impact limited: Details of the phase one deal were finally released after Trump and China’s Lui He signed the documents that formalize the temporary truce between the two powerful nations. The news had very little repercussions in terms of market action given the leaks and build up of expectations. The agreement will be effective 30 days after signing, with the deal calling for $200 billion in added Chinese purchases of US goods above 2017 levels. As part of the deal, the agreement prohibits misappropriation of trade secrets through electronic surveillance and requires forfeiture of machinery used to produce counterfeit goods. Lighthizer was optimistic by noting that “it is not the administrations intention to wait until after the Nov elections for phase two deal”, adding that “this is the only way for further tariff reductions is a phase two deal.” Remember, the outline of most purchases by China was leaked during yesterday, so the market reaction was limited.

Focus on implementing phase 1 deal before next phase: Liu He took the time to read a letter from President Xi, in which the leader expressed his hope that the US side will treat Chinese companies fairly and that China and the US can resolve differences, and find solutions based on dialogue. Xi showed willingness to stay in close touch with Trump, with both sides set to follow through on trade deal to achieve greater progress . It was also stated that China will strictly honor phase one agreement. As per the next step, focus is now on implementing phase 1 deal to create favourable conditions for the next phase.

UK inflation at its lowest level in 3 years, BoE rate cut around the coer? The soft UK December CPI, which came at +1.3{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} vs +1.5{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} y/y expected, a three-year low, with traders having to refer back to November 2016 to see a headline number this low. This has given the BoE even more reason to flex its muscle and justify a rate cut in coming months. The sub-components of the report also came quite poor. As a response, the Pound saw sell-side pressure pick up even if it managed to revert the move in its entirety later on. Pricing for a BoE rate cut at the upcoming BoE meeting stands near 70{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814}, up from 50{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} previously, and is fully priced by May from Sept.

Saunders reaffirms endorsement for lower rates: BOE’s Saunders gave a speech, noting that aggressive steps will be needed given the limited monetary policy space in existence. Saunders, who talked with no mincing, said that “the economic data justifies a rate cut” and that “it probably will be appropriate to maintain an expansionary monetary policy” with “possibly lower rates further in the future.” In terms of his projections, Saunders said “most likely outlook is a further period of subdued growth”, with his gloomy remarks not ending there, as he added that “economic growth is sluggish, spare capacity is rising, inflation is subdued,” while expecting that as Brexit uncertainty continues, “it may weigh further on the economy,”

German growth lowest in 6 years in 2019: Adding to the bitter flavour of headlines during the European moing, the German economy confirmed that the growth expansion through 2019 was the weakest in six years. The details revealed that the Manufacturing activity remains one of the main draggers. The report indicates that struggles remain in factory conditions and exports continue even if there is some early tentative evidence that may prelude to improved conditions in 2020.

US Beige Book paints a murky picture: The US Beige Book, prepared by the New York Fed with data collected on or before Jan 6, detailed that the US activity continued to expand modestly in the final 6 weeks of 2019, with several Districts noting the growing importance of online shopping. The near-term outlook remained modestly favorable across the nation as consumer spending continues to grow at a modest to moderate pace. With regards to headwinds caused by the trade war, the report notes that in many districts trade and tariff uncertainty continued to weigh on some businesses. As per wage growth, it was modest to moderate in most districts, while employment was steady to rising modestly. The Dallas and Richmond Districts noted above-average growth, while Philadelphia, St. Louis, and Kansas City reported sub-par growth.

Ruble taken to the woodshed as Russian govement resigns: The Russian ruble fell sharply to the tune of 0.5{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} vs the US Dollar after Prime Minister Medvedev announced that the Russian govement had submitted a resignation and that Putin will now be tasked in deciding the makeup of a new govement. Reports detailed that Putin is looking to carry out a nationwide vote to extend more power to parliament and the PM.

Second-tier economic data in North America disappoints: The economic data in the North American session, by and large, was on the negative side, with the US PPI coming at +0.1{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} vs +0.2{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} expected, in line with a soft US CPI the prior day. On the flip side, the US empire state manuf index ticked up but remember this is considered a low-tier event. Meanwhile, in Canada, existing home sales dropped by 0.9{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} vs +0.6{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} prior. The report on the plummeting of Canadian home sales revealed that while the headlines looks indeed very poor, listings are low and the market it’s tightening up again, which makes the data more volatile.

What’s on the economic calendar today? In terms of relevant economic indicators, traders attention will shift to the ECB Minutes, with focus likely on any new inputs with regards to the upcoming ECB’s framework review, set to start next week, and any potential adjustments to the inflation targets. A speech by ECB’s Lagarde at 10.30pm AED will also command the attention of the market. In the US, Philly Fed/Jobless Claims at 12.30pm AEDT will be due, alongside the most high-impact event of the day, which comes in the form of the US retail sales, at the same time 12.30pm AEDT.

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Recent Economic Indicators & Events Ahead

Source: Forexfactory

Insights Into FX Index 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. The idea of this analysis is to complement one’s daily bias by accounting for this holistic analysis.

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The EUR index keeps finding dip buyers after the upside resolution above its enhanced moving average (smart money tracker), with the tu of slope in the indicator confirming the dynamics were tuing more positive. Wednesday’s bullish bias came after the index found a base at the retest of its Monday’s demand imbalance departure. I must state that the compounded tick volume via the 13ma applied to the OBV does not shows the commitment by buy-side accounts that would suggest the run has further legs to go but at this point price action won’t agree. The volatility in the EUR-pair, as the last window indicates, stays depressed. January’s EUR seasonal patte, I won’t get tired of reiterating, averages over 0.5{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} in losses since 1982, which makes any sustainable rise in the value of the EUR this month a dubious scenario.

The GBP index shows very little net changes from 24h ago even if the currency keeps receiving disappointing news that makes the prospects of a BoE rate cut a near-term reality. On the heels of a rebound off a support line after tick volume tapering, the GBP has challenged late sellers but be wary of the rise having limited legs as the market structure retains a bearish formation, anchored by a bearish enhanced moving average tracking the smart money bias. Besides, the compounded volume pressure, with the 13ema applied to the OBV, still displays a bearish slope. Do not forget that GBP does not have the backing of seasonals during January.

The USD index, despite its Wednesday’s setback, it does not show sufficient sell-side commitment via tick volume to make me worried that this retracement is a meaningful one that may put the current bull run in complete jeopardy even if the overall market structure still disagrees with this view that I hold. However, my bullsh storyline is built upon solid grounds too. I’ve said for days that the cherry on top of the cake would be a breakout of the previous swing high (Dec 20, 2019), but for now what I see keeps me constructive. First off, the acceptance found above the smart money tracker (enhanced moving averages) tells me the market sees a higher valuation. Secondly, the breakout of the last static resistance came with a storm of buy-side volume, hinting buying on dips in case we see shallow pullbacks towards a retest of that area. Them we see the compounded tick volume trend also in bullish territory, and last but not least, if one month sees the USD buying accelerate based on seasonals, that is January.

The CAD index has little to add. I stand by my high conviction that this market is still displaying a clear path of least resistance towards the upside. This means strategies that engage in a buy on dips approach should do well, as already seen in the last 24h where the test of the 38.2{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} Fibonacci retracement saw a wave of buying pressure erupt. My base case is supported by all the key elements I tend to monitor on a daily basis, that is, I have the backing of the price structure, the acceptance above the prior resistance line and the smart money flows via the enhanced moving average pointing in the right direction. Besides, the aggregated tick volume supports the trend as it communicates buy-side commitment dominant, with the low volatile trend setting up the ideal conditions. The seasonals for the CAD are positive in January too.

The JPY index has come to a crossroads technically speaking as the index faces a macro level of support as depicted by the horizontal white line in the chart. This is a level of reference that dates back to March/April last year. While in the short-term the list of reasons to keep the bearish bias remains intact, with the price structure bearish and the risk sentiment adding pressure to the Yen as US equities keep printing record highs, if I had to bet in one single area where the JPY may attract buying out of the last month, this is it. But again, the conditions it faces short term for a meaningful rebound are poor, with the compounded tick volume slope (13ema to OBV) still pointing aggressively bearish. Remember, the seasonal patte for the Yen averages +0.25{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} in Jan since Jan ‘82, even if not playing out so far.

The AUD index by no means offers a clear cut bullish bias at this stage substantiate such premise as long as the midpoint of its macro range continues to act as resistance overhead. In my last analysis I mentioned that I personally see the Aussie poorly positioned to engage in long positions despite the hype around the China-US trade deal. I’d call this market neutral with no objective technical evidence to be too optimistic unless equilibrium is found above the range midpoint. While the smart money tracker loses some of its insight elements when trading within a range, it worth nonetheless noting that the slope is still pointing lower. The forex seasonal patte is positive to the tune of +0.54{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} in Jan since the early 1980s for the Aussie.

The NZD index has solidified the profile of a short-term range in the wider context of a bullish trend. As negative, the overall volume pressure as assessed by the 13ma off the OBV has shifted to bearish, while the enhanced moving averages tracking the smart money flows has also confirmed a bearish tu. The price structure, however, does not validate a bearish bias yet. The volatility to be trading NZD pairs has fallen below the usual monthly average now.

The CHF index may be on the cusp of curving out a more meaningful top, or at least, the area reached at an index level is as relevant as it gets for longs to seriously ponder closing positions. I state this premise on the basis of the price hitting its 100{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} proj target and stopping on its tracks right at that precise point. It’s starting to look like a market trading out of whack and sooner or later, especially with the positive swap offered to short CHF, it risks coming down.  It doesn’t mean the fast money won’t continue piling into this trend, but the forces driving the ongoing demand imbalance are likely to dry up at these key junctures (100{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} proj). As said, if you are a contrarian, value trader or deploy long-term strategies, this market may be fitting.

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 thi 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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