The Daily Edge

China’s Central Bank Sets Friendlier Risk Tone

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.

Quick Take

The anticipated transition into calmer waters in financial markets as the PBOC relaxes its approach towards a weaker Yuan has so far played in favor of risk trades to be revitalized, as reflected by the weakness seen in funding currencies, especially the Euro and the Swissy, while the Yen keeps a more combative stance. The USD traded lower as US President Trump engaged in a series of tweets looking to jawbone the USD lower, leading to an unwinding of longs. In an environment of higher US stock valuations as the S&P 500 extends its impressive bounce, even if the bond markets are sending us the complete opposite signal, commodity currencies the likes of the AUD, NZD, CAD did better. On the flip side, both European currencies (EUR, GBP) went through similar poor performances as the chatter of elections in Italy and the UK gets some air time. 

The indices show the performance of a particular currency vs G8 FX. An educational article about how to build your own currency meter 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.

PBOC keeps risk dynamics in check: The last PBOC onshore yuan fixing kickstarted the risk recovery on Thursday after the setting was not as weak as expected based on market models, even if the fixing was the weakest for the CNY since 2008 just a tad above the 7.00 mark. In Friday’s fixing, the PBOC set the USD/ CNY reference rate at 7.0136, which is again, marginally firmer than models were projecting, thus it should still be a catalyst to stimulate risk trades one would think. 

RBA SoMP cements the notion of lower rates for longer: The Quarterly Statement on Monetary Policy (SoMP) by the RBA has barely affected the pricing of the AUD as it did not carry any new information the market didn’t know about. The RBA remains prepared to ease policy if needed, watching labour market closely. It solidified the notion that an extended period of low-interest rates should be expected. They also sounded a tad more optimistic on jobs by upgrading the unemployment forecast to 5.25% for both Dec 2019 and Dec 2020, sees 5% for Dec 2021.

China’s trade aids risk recovery: China’s trade balance for July helped to support risk trades during the last Asian session. It’s not a good sign to calm the waters to see the trade surplus with the US rising. In yuan terms, the headline number stood at 310.3 bn with a 10.3% y/y jump in exports the main highlight, while imports, which came at +0.4% y/y remained stagnant. In USD terms, the trade balance came at $45.06 bln, with imports diving -5.6% y/y, while exports ticked up +3.3% y/y.

RBNZ’s Orr repeats negative rates a possibility: After shocking the market with a 50bp rate cut, the Reserve Bank of New Zealand Goveor Orr, reiterated, this time in front of a parliament committee, that negative rates are a possibility. He elaborated further by noting that it is within errors of margin of forecasts to end up in a position where negative interest rates would be needed to stimulate the economy. Orr repeated that the US-China trade war issue has lingered too long, creating global economic uncertainty.

ECB’s economic outlook inspires no one: The ECB published its economic bulletin, in which it once again gave an admission of the gloomy outlook held by the ECB by noting that the prolonged uncertainty is dampening economic sentiment, especially in the manufacturing sector. The report added that the drop in Q2 global services output PMI raises risk of more broad-based deterioration in the global growth outlook. As a reflection of the depressed state of affairs, this week’s German industrial production output was another reminder of the headwinds faced by the engine of growth in Europe.

Italian election talks: The Euro came under pressure as Italy’s Deputy PM Salvini waed that it’s necessary to hold fresh elections on the grounds that there is no longer a majority to support the govement. The political uncertainty in Italy is nothing new, but headlines from the horses’ mouth won’t help. Salvini has a case to be more vocal as he’s been strengthening in the polls as it builds a stronger base of supporters on his anti-immigration populist message.

UK PM Johnson may consider a general election: There is also speculation, as reported by the Financial Times, that UK PM Boris Johnson may be mulling the prospects of a general election in the aftermath of the UK leaving the EU. If true, it would appear to be a strategy to prevent Parliament from rejecting a no-deal Brexit. This makes the chances of a no-confidence vote when parliament retus in Sept all the more likely, but during the August recess, with no counter-voices, the asymmetric downside risks in GBP remain.

Trump jawbones the USD, no respect for the Fed: US President Trump is starting to make more noise in the Forex market by attempting to jawbone lower the value of the US Dollar. In a series of tweets, Trump said: “One would think that I would be thrilled with our very strong dollar. I am not! The Fed’s high-interest rate level, in comparison to other countries, is keeping the dollar high, making it more difficult for our great manufacturers to compete on a level playing field. With substantial Fed Cuts (there is no inflation) and no quantitative tightening, the dollar will make it possible for our companies to win against any competition. We have the greatest companies…….in the world, there is nobody even close, but unfortunately the same cannot be said about our Federal Reserve.”

US to delay Huawei licenses as tit for tat continues: Bloomberg reported, citing unnamed sources, that the US is set to delay Huawei licenses for US companies to restart business with Huawei in response to China stopping crop buying. The tit for tat response is a clear manifestation of the palpable tensions between the two sides.

Fiscal stimulus chatter in Germany & China: News of potential fiscal stimulus by Germany and China are reverberating around the market. If confirmed, it might be one venue to put pressure on bond buyers at a time when the pool of negative-yielding bonds around the world has surpassed the $15 trillion mark. German lawmakers have hinted that they may violate their own rules for a balanced budget target as politicians mull an extra package to finance and tackle climate change. Meanwhile, there has also been reports of new stimulus measures by China to offset the effects of the trade war. If more meat on the bone in these two fronts, it should aid the recovery in risk.

Recent Economic Indicators & Events Ahead

Source: Forexfactory

A Dive Into The Charts

The anticipated slowdown of capital flocking into funding currencies (EUR, CHF, JPY) as the risk curve shows a temporary smile has indeed ensued. Out of the 3 low yielding FX alteatives, the Euro index was the most punished as it rejected off a critical confluence resistance zone coupled with the intersection of the 100% proj target. Throw into the mix the dovish ECB policy stance and the cheap price to own Euros had solid appeal. The USD index has not picked up the upside pace I’d have expected, partly due to the jawboning by Trump, which caused offers to pile in as the intervention rhetoric, while distant, makes a louder noise. The two commodity currencies (AUD, CAD) have put on the best performance, with some further room to correct towards its old support-tued-resistance in the case of the AUD index. The CAD index has already reached a critical level in the form of its 13-d ema baseline, so I won’t tu overly bullish on the current pricing offered unless a break and close above the baseline (watch for today’s Canadian jobs report). The only two currencies left include the NZD and GBP. I find it hard to be anything but bearish even if I recognize that both have reached low enough levels to make me think that a stabilization of its valuations may ensue. However, these two currencies are fundamentally some of the weakest following the overly dovish outcome by the RBNZ with more easing likely to come, while the GBP faces what I believe to still be asymmetric downside risks as hard-Brexit headlines are set to dominate until the UK parliament is back from its recess in September.

Let’s now delve into the charts that I personally find to be the most compelling to analyze. First off, the risk for an upside day in the AUD/CHF market has paid off so far. In this Twitter post, I explain in detail the rationale behind that made me tu bullish the market 24h ago.

But the upside in the Aussie has not only been centered around the CHF but rather buy-side flows have been broad-based, which happens in congruence with the across-the-board 100% proj targets reached in the majority of the AUD pairs, including the AUD equally-weighted index.

A market where I did wa about the confluence reaches was Oil. While I’ve been short and being a proponent to expect lower levels over the past week, to me, the area around 51.00 was the land in the sand where I’d expect a response, which is what we’ve seen. Whenever we find in the daily chart a confluence of horizontal levels + 100% proj, you must pay attention.

In the EUR/CAD, we’ve recently seen an incredible wholesale price up for grabs if you were nimble enough to set your orders. We had the overall market structure being bearish, a rapid rise towards the 100% proj target, paired with an epic 1.50 round number confluence. Any shorts off this level have paid off handsomely as the market trades 200p lower now.

I am not leaving the CAD just yet, as another trade potentially brewing, should Thursday’s low be broken, is the GBP/CAD. This is a trade that would fall under the category of a short-squeeze, which occurs when, in line with the dominant trend, there is a failure by buyers to rotate the price back up, which leads to the eventual take out of stops at the lows.

If you are looking for areas of confluences to trade off this Friday, NZD/USD offers a good one, as it’s currently retesting a broken double bottom at a mid-round number (0.6450). Besides, by drawing a 100% proj target, I suspect this is not yet a finished cycle until 0.6350 gets hit.

Lastly, two markets where the 100% proj target has been playing out beautifully as well include the USD/JPY and the USD/SEK. In the former, the initial rejection off the area has been followed by a retracement back down with decreasing volume, which still bodes well for bids to eventually overcome the downside pressure at such a critical area. Although much will depend also on the risk profile and whether or not the recovery can be sustained heading into next week.

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. 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