The Daily Edge

Funding Currencies Reign, Aussie Succumbs

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

The Australian Dollar is by far worst performer as the week comes to an end with the market realizing that the big miss in the Australian employment report, alongside soft economic activity in China and struggles to seal the US-China trade deal, is a setback for the RBA to remain on hold as the odds of another rate cut soar by early next year. In stark contrast, the Yen and the Swiss Fran keep attracting the most buy-side flows as the macro picture remains supportive with weekly demand levels in control.  The decline in global yields in the last 24h as the US and China hit a snag in the prospects for a quick resolution of the trade truce has fueled further demand for these funding currencies. The Pound continues to trade at a steady pace as longs build up after the sentiment-driven spike after Farrage’s Brexit party decision not to contend Conservatives-controlled seats led to a re-pricing of the UK election outcome in favor of the Tories. The New Zealand Dollar, after the RBNZ shocker, has lost a tad its mojo dragged by a combination of downside pressure in the Aussie, the RBNZ leaving the doors wide open for further easing early next year and the US-China hitting an impasse in the trade negotiations. Lastly, the Euro and the Canadian Dollar, have been notoriously underperforming this week, even if the Euro appears to be carving out a bottom as I explain in today’s chart section.

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.

AUD caught on a negative loop: The Aussie has been caught up in a bearish storm as negative news for the interest of longs keep cascading through. The depreciation accelerated on the back of disappointing jobs numbers in Australia (big miss by any measure), followed by softer than expected activity data from China (retail sales, fixed asset inv and industrial production). To make matters worse, the US-China Phase One trade negotiations remain stuck in an impasse.

RBA rate cut odds soar: As a result of the heightened risks of a fall back in Australia’s growth prospects as higher unemployment equals less consumer spending, the implied probability of a further 0.25% cut to the RBA rate by February 2020 has gone up considerable to just over 70% vs 50% pre-release.

US-China trade truce news not encouraging: The latest we’ve leat as part of the US-China Phase One trade deal saga, with negotiations ongoing but stuck in a cul-de-sac road, is that the Financial Times now reports that the US and China are struggling to compete of phase 1 deal to hold their trade war as senior officials still jostling over intellectual property provisions, agricultural purchases and tariff roadblocks. The FT adds that “Trump officials are frustrated that China has not offered enough concessions to justify a reduction in US tariffs on Chinese goods.” The article notes the action by China to delay the truce are “jeopardizing the chances that a final agreement could be reached in coming days.”

China lifts the ban on US poultry meat imports: In what should be some silver lining as part of the US-China trade saga, China has officially lifted the ban on US poultry meat imports, an agreement that had been pre-announced as part of the truce currently negotiated but now officialized. It could be interpreted as a positive sign that the trade talks are progressing in the right direction, hence China ready to offer further gestures of goodwill, but in the grand scheme of things, this is minuscule compared to the high-stake issues still unresolved such as tariffs or the US’ demand for agricultural purchases.

Germany avoids technical recession: The German economy managed to avoid a technical recession by printing a marginal gain in its Q3 GDP print on Thursday, even if the numbers are not precisely hot per se. The 0.1% gain offers two takeaways. Firstly, the manufacturing recession is not yet intoxicating other sectors of the economy as badly as feared. Secondly, Germany may hold any hasty decision on fiscal stimulus and allow things to improve as prospects for a rebound in Q4 growth remain.

Fed’s Powell brings nothing new to the table: Fed’s Powell took the stage for a second day in a row, updating a committee about the state of the US economy with the end result in terms of the impact to markets being a fall in US yields. The culprit of the move seems to be as a combination of renewed pessimism that a quick resolution in the US-China trade deal may not happen, alongside the comfort zone the Fed appears to be not to keep easing in the foreseeable future despite the risk that exist. Powell said “there is nothing in today’s economy that is booming,” adding that “the US economy offers a sustainable picture”, and that “we are very committed to Fed’s twin goals.”

Stocks & bond yields go different ways: The appreciation in the Japanese Yen and the Swiss Franc is congruent with a deterioration in the level oF global yields as safe-haven bids retu to the fixed-income market amid the lack of sufficient evidence that the US and China will resolve its trade difference for a phase one truce in a timely manner. The stock market, meanwhile, continues to move to the tune of its own drums, rebounding towards its record highs once again as per the performance of the S&P 500.

Mexico cuts its rate as anticipated: The Mexican central bank cut its oveight rate to 7.5% from 7.75% as expected. There were 2 members that did vote for a 50 basis point cut. The growth forecast for 2019, 2020 was adjusted lower than previously forecast, while reiterating prudent monetary position.

US/China trade teams keeps working on a deal: According to US-China trade insider FOXBusiness’ corresponder Lawrence, “there has been another deputy level trade talk between US/China trade teams today, with talks progressing as both sides try to get something done that can be put on paper.” The poor data out of China earlier today, with some of the data points such as retail sales at its lowest level since 2013 makes a deal for China as important to address the weakness in the economy as for the US.

NZ data, RBNZ rate call keeps NZD in demand: Earlier this Friday moing in Asia, the New Zealand dollar saw renewed demand after better PMI data as the BusinessNZ manufacturing PMI for October came at 52.6 vs 48.4. On the flip side, the Reserve Bank of New Zealand Goveor Orr reiterated that “interest rates need to remain low for a long time”, which is an old comment the market has already discounted.

US data eyed: US retail sales will be the last relevant event to take place before the end of business for the week, with a rebound in activity expected after the negative headlines in September. There are other 2nd-tier events, including industrial production which is seen falling by 0.4% for the second month in a row or the empire state manuf index.

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Recent Economic Indicators & Events Ahead

Source: Forexfactory

Professional Insights Into FX Charts

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Earlier this month, I explained to the audience of my LIVE show, why I believe the EUR/USD appears to be facing upside risks in the coming months. My reasoning is based on a combination of order flow, price action and market structure. Today, I want to elaborate further on this, sticking my neck out to the view that the pair could be in a bullish cycle to build up from here.

Firstly, as a reminder, in the show titled “ The Power Of The Monthly”, I noted that ever since the GFC of 2008, the EUR/USD shows a clear tendency to revert its flows whenever an outside candle is printed. This is what happened in Oct and why I believe that this formation, which if you think about it, is the market inducing early sellers to take the wrong side of the market before what eventually tus out to be a major reversal in flows, is a bullish signal.

Now, what we’ve seen up to this point is a retracement in the lower time frames within the context of this bullish outside candle in the monthly. If you look at the price action on the lead up to the penetration of 1.10 that we saw yesterday, what do you notice?

This patte is often referred to as a ‘compression’. Shorts are starting to re-distribute orders by closing positions on breakout of new lows, which causes failure to see follow-through as the closing of sell positions results in buy orders triggered. Besides, macro longs aiming for minimal slippage tend to engage as these breaks into new lows too. 

Whenever we see this patte, if followed by a breakout of the market structure (in this case to the upside), as what we’ve seen, it communicates that the market has reached a potential inflection point… If we then marry this price patte with the higher timeframe context of a bullish outside monthly candle, alongside the trigger point occurring at a very psychological level as 1.10 is, the preponderance of technical evidence hints there are risks of a tuaround in fortunes.

Next, I want to bring to the reader’s attention something that I touched on yesterday’s LIVE show. I am referring to the ability we have as traders to gauge the macro flows by identifying levels of supply or demand at an index level. If we step back to the weekly, the JPY, CHF, CAD indices have all given us in recent times some tremendous opportunities to anticipate a potential shift in order flows based on the retests of these areas of imbalance. Judge by yourself. 

If you want to keep gaining insights, make sure to join my next YT live streaming.

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.
  • 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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