The Daily Edge

Limited Vol In GBP As Brexit Vote On Hold

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

There has been limited volatility in the currency market as the much-awaited vote in the new Brexit withdrawal agreement bill never came to fruition on Saturday as a sufficient majority of MPs in the UK parliament supported the Letwin motion to withhold the approval of PM Johnson Brexit proposal. If one wonders why the Pound is still so stubboly high, having barely budged, the reason lies on what this motion achieves. It essentially acts as an insurance policy that takes the power away from the UK PM Johnson to trigger a no-deal exit, and we know by now that any developments that see the chances of a no-deal Brexit removed further, at its core, has been treated as a GBP positive. The vote on the new withdrawal bill is still planned to go ahead by Tuesday this week, even if Johnson does not enjoy the same leverage as he used to. The mess that will never end. As the G8 FX chart below exhibits, the volatility has been centered around the GBP as it deals with its own idiosyncratic Brexit drivers. The JPY and USD have also been on the move lately, although for what appears to be different reasons. The former has been the vehicle of choice to express the optimism that a no-deal Brexit will be averted, while the USD has been recently taken to the woodshed as the market factors in the increased chances of a Fed rate cut by Oct 31st, now standing at 91% chance after last Friday’s Fed Vice Chairman Clarida intervention, who erred on the dovish side before the official blackout period. The triumphant currencies so far, as China revives the groovy vibes around a meaningful US-China trade deal, include the Aussie and the Kiwi, while the EUR and CHF remain quite firm as well, as a byproduct of the constructive Brexit headlines. 

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.

GBP vol limited at the open: The Pound is trading on the weak side, even if the depreciation at the open of markets is well contained, after a sufficient majority of MPs in the UK parliament supported the Letwin motion to withhold the approval of PM Johnson Brexit proposal. The motion, which was voted in favor 322 vs 306, acts as an insurance policy to guarantee the inability of the UK PM to trigger a no-deal exit in case the new withdrawal agreement suffers unexpected delays due to legal requirements. The behavior in the Pound clearly suggests that the market also sees slimmer possibilities of a ‘no deal’ Brexit ever eventuating.  

UK PM sends Brexit delay letter against own will: What this means is that the UK PM was not able to proceed with the voting on the newly negotiated Brexit Withdrawal Agreement Bill. As a result, the UK PM Johnson has been forced to formally send the Brexit extension request letter to the EU, even if Johnson made it clear that this is done against his will as he doesn’t favour an extension.

Johnson no longer enjoys same leverage: The latest Letwin motion twist no longer gives the UK PM the leverage by threatening with a no-deal Brexit if he doesn’t collect enough votes. MPs now have the upper hand to seek amendments to the bill as well as a “confirmatory vote” to the deal.

Withdrawal agreement vote scheduled for Tuesday: The UK govement remains undeterred that a Brexit deal is still possible. Proof of that is that the Letwin motion has not altered the govement’s intention on the new withdrawal agreement vote, likely to go ahead by Tuesday this week, which means more meaningful Pound volatility awaits. “Notwithstanding the parliamentary shenanigans, we appear to have now the numbers to get this through,” Foreign Secretary Dominic Raab said Sunday.

EU set to grant a Brexit extension: The EU needs to formally approve an extension of the Brexit deadline, with some British media outlets reporting that the EU will grant the delay. The UK Times said the EU will grant a Brexit extension through to February 2020 if Boris Johnson is unable to get his deal past this week. The UK Times adds that “the delay would be fungible meaning that Britain could leave earlier, on the 1st or 15th of Nov, Dec or Jan, if his deal is ratified before the extension ends.” If the prime minister runs into serious trouble or MPs force a second referendum, “then countries led by Germany will push for a longer extension, possibly until June next year”, the UK Times said.

Fed’s Clarida errs on the dovish side: Fed’s Vice-Chairman Clarida hints at a possible rate cut this October as part of the last intervention by a Fed official before the blackout period. Fed’s Clarida said the US economy is in a good place but faces ‘evident risks’, emphasizing that monetary policy is ‘not on a preset course’ and decisions will be made ‘meeting by meeting’. Clarida sees inflation as ‘muted’. What tilted the balance towards the interpretation of his comments as dovish were the observation that “growth in H2 is somewhat slower than H1”, further detailing that “relative to July we have seen a downshift in overall growth”, which was probably the most telling sign the Fed is ready to ease further as soon as by the end of this month. The odds stand at 91% vs 84% pre-speech.

BOJ’s Kuroda supports mix of monetary easing: As Reuters reports, Bank of Japan Goveor Haruhiko Kuroda said on Sunday that “a mix of monetary easing, flexible fiscal spending and structural reforms to raise the country’s long-term growth potential could be effective in stimulating the economy.” Kuroda added that “we are equipped with unconventional tool kits, so there is no need to be too pessimistic about the effectiveness of monetary policy,” Kuroda told a seminar on long-term policy challenges.

China retains positive trade rhetoric: China Vice-Premier Liu He was cited in The South China Moing Post as saying that “China and the US made ‘concrete progress’ towards a trade war deal in Washington”, adding that both sides made enough improvements to build a foundation for the signing of a “phased deal.”

Canadian Federal election eyed: CAD traders should be aware of the Canadian Federal election results. The base case is for a minority govement. Both the liberals or Conservative  seem to endorse relatively similar monetary and fiscal policies, which means that the impact on the CAD may be rather limited. According to Scotia Bank, “evaluating potential market effects today could well be an altogether different kettle of fish than it was following past elections.” 

Recent Economic Indicators & Events Ahead

Source: Forexfactory

A Dive Into The FX Indices 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 EUR index continues to find the clearest imbalances of demand and supply at the extremes of the established range as well as the mid point of it (50% retracement) as was the case last Friday. As long as there is no clarity in the Brexit saga, it’s highly unlikely that the EUR index finds new drivers to break through these meaningful technical levels. That will change on Thursday though, when the ECB issues a new update on monetary policy, with expectations clearly anchored towards the retention of a dovish language and further rate cuts action.

The GBP index shows a consolidation profile as it heads into its 3rd day of balanced flows at still very elevated levels, which should be seen as a sign that the market is accepting the current valuations in response to the diminishing chances of a ‘no deal’ Brexit. The index will continue to be influenced by the Brexit headlines, hence its’ a swam for algos and short-term traders (the fast money) that can quickly adapt to the injection of ephemeral volatility on news.

The USD index has been on a one-way street as bets build up that the Fed will be cutting rates again by October 31st. The chances now stand at 91% after the dovish comments by Fed’s Clarida. That said, we’ve entered the ‘suicidal’ terrain whereby value to be a USD seller given the current over-extension of price looks like a very non-appealing proposition. Sooner rather than later, a meaningful retracement towards previous areas of support tued resistance is expected. The room for buyers to take advantage of the upside void is of nearly 0.5%.

The CAD index keeps heading lower into a pool of strong liquidity as the area refers to the origin of the demand after the latest sizzling hot Canadian jobs report from 2 weeks ago. Should the index retest this level, I am expecting a significant reaction as a point of great technical value. We’ve entered a juncture whereby the lower the index goes, the more value that exist to be a buyer in expectations that the index will be lifted up at these key areas of demand imbalances. Note, the impulsivity of the move up in the last 2 weeks vs the corrective patte on the way down? That has the signs written all over the wall that order flow structure is still constructive.

The NZD index keeps pressing against a level of hourly resistance, with an upside breakout to expose the most recent sequence of highs from two weeks ago, an area highlighted in red, which would coincide with a brief violation of a projected 100% measured move. In other words, if you are looking for the next area of value to sell Kiwis, that’s the one to be fixated in. The momentum in the Oceanic currency remains strong, with the positive headlines around the US-China Phased Deal likely to further support the addition of bids for an extension.

The AUD index shows a positive picture in the hourly in a market that has been dominated by the imbalance of demand flows ever since mid last week. Last Thursday’s upbeat jobs report in Australia has strengthened the near-term fundamentals of the Aussie as it allows the RBA room to delay further rate cuts, while the good vibes around the US-China trade deal retu. There is a clear level of resistance on the 6h chart that should represent the next supply imbalance.

The JPY index, after landing at its projected 100% measured move, has transitioned into balance flows dynamics awaiting new drivers. The tightness of the range on Friday does not clarify the next direction although those holding Yen short bags should be mindful that whenever these 100% measured moves are tested, the probabilities are that we may see a meaningful bounce back towards a previous support-tued-resistance, as it happened on Oct 16.

The CHF index is finding acceptance at a key level of resistance, with the market structure heading into this critical zone suspiciously bullish judging by the strong departure we had from the most recent lows, which has created a shift in flows with higher highs in the hourly. The fact that the baseline is crossing at the same resistance level adds to the confluence to be a seller off this level, although the constant pushes back up are not encouraging at this stage. The Swissy will be most likely driven by the Brexit headlines as a byproduct of the risk dynamics.

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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