The Daily Edge

Liquidity Set To Retu After Long Weekend

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 market is set to come back to life after the respective holidays in the UK and the US. Currency movements have been quite subdued, with the Sterling and to a lesser extent the Euro, finding minimal extra stimulus on the back of the fragmented election results out of Europe. The risk dynamics remain quite suppressive, an environment that tends to benefit the likes of the Japanese Yen, while flows into the USD remain largely limited as the market comes to terms about the risk of a US economic slowdown on recent poor data. 

Narratives In Financial Markets

* The Information is gathered after scanning top publications including the FT, WSJ, Reuters, Bloomberg, ForexLive, Institutional Bank Research reports.

  • Most currencies treaded water due to the dry up of liquidity with both the US and the UK off on public holidays. Normal liquidity set to retu today, which should lead to increased ranges.
  • The European Commission is considering to apply disciplinary procedures to Italy should the country breach its debt rules by making tax cuts, a mandate PM Salvini has pledged to respect.
  • The Sterling was the weakest currency on Monday, weighted by the split in the EU votes, which has raised the prospects for conservative leadership candidates to endorse a hard Brexit, while the Labour party is more likely to seek out a cleaner mandate through a 2nd referendum.
  • As Morgan Stanley notes: “Greater EU political fragmentation could mean a more difficult balancing act among the various mainstream groups. But they’re set to retain a good majority, despite unconventional parties gaining some seats. The markets are likely to watch the implications for national politics and the process of allocation of top EU jobs.”
  • The selloff in German bunds communicates residual risk-off flows, with the divisive EU election results the culprit. Uncertain consequences for the political landscape, including who will fill the positions as Presidents of the EU Commission, the Eurogroup, and the ECB.
  • The WSJ reports that Iranian Crude buyers have jumped ship, noting that just one month after Trump tightened its ban on Iranian Oil sales, Iran’s direct buyers have all but vanished, according to traders and executives in the Islamic Republic. It seems that China, India, Turkey, South Korea, and Japan, have decided to step away.
  • The economic calendar is light again this Tuesday, with consumer confidence out of the European Union and the United States the only data of some significance for the price to react to.

Recent Economic Indicators & Events Ahead

Source: Forexfactory

RORO (Risk On, Risk Off Conditions)

Risk-averse dynamics have prevailed as we transition away from a slow Monday. The retracement in the S&P 500 after Trump’s attempts to talk up equities on Friday is still very corrective in nature amid a clear bearish context as per momentum and structure metrics. When it comes to the other heavyweight to evaluate risk dynamics, the US 30y bond yield has pushed slightly lower again, and as I reported during yesterday’s report, the latest round of selling pressure on yields comes as “the market discounts a more dire outlook for global growth, with tentative evidence that it is starting to feed through sectors of the US economy after the soft data in manuf & goods orders.”

In the currency front, the high balance area found by the equally-weighted Japanese Yen index is clear communication that the environment is risk unfriendly. As I stated yesterday, there are 2 key takeaway from the elevated Yen levels and the subdued USD valuation since last week. Firstly, we are in a highly uncertain period with deleveraging dynamics dominant as the Yen pricing indicates. Secondly, the major performance disparity between the JPY and the USD indicates that the market is assigning significantly higher chances of a slowdown in the US economy, as reflected by the slide in US yields and the DXY in tandem (USD weakness across the board). 

Also, I reiterate not to misread the retracement in the USD/CNH as a sign of RMB strength (higher chances of a trade deal). If you assess the RMB vs G10 FX, flows still communicate no bets on an eventual US-China trade deal.

Overall, with the US-China trade dispute intensifying, Brexit uncertainty peaking, and an EU parliament more fragmented than ever before, the fundamentals are unlikely to underpin risk. Against such backdrop, prevailing risk-off dynamics should continue to be prevalent.

Latest Key Developments In FX (Technicals, Fundamentals, Intermarket)

EUR/USD: Structure Remains Favorable 

GBP/USD: POC Keeps Acting As Bouncing Area

USD/JPY: Bearish Outlook Stays Intact

AUD/USD: Bullish Structure Continues Undeterred 

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. 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 in 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