The Daily Edge

Low Vol Forex Amid a Highly Data-Dependent Environment

The Daily Digest is authored by Ivan Delgado, Head of Market Research at Global Prime. The purpose of this content is to provide an assessment of the market conditions for the next 24h of trading, factoring in fundamentals, technicals, inter-market and options, in order to assist one’s decisions on a regular basis. Feel free to follow me on Twitter.

Report Summary — Dec 14, 2018

The ECB meeting is out of the way. We’ve gained further clarity on several fronts. Arguably, the most critical is that Draghi has logically caved in by downgrading both growth and inflation, even if transitory effects are still the culprits behind the CB reasoning, hence, keeping the Euro downside limited.

Also, Draghi may potentially be setting up the stage for a push further out on forward-guidance, based on the wording used in his press conference, especially when he mentioned that ‘the balance of risks is moving to the downside’. Does that mean no rate hikes til Q4 2019? We shall see based on…

… the word of the day, “DATA DEPENDENCY”!

… and the one I’ve picked for today’s title as it does embody the lay of the land like no other in the low vol FX market. We are going through a ‘cul-de-sac’ road with the majority of central banks in standby mode, awaiting fresh signals via economic indicators. However, is not only the ECB, but the rest of Central Banks are also, too, keeping all the options on the table. Wherever you look at, it’s the same picture (ECB, Fed, BoE, BoC, BoJ, RBA, RBNZ…), they are all awaiting further data to determine the next moves in policy.

I like how Carsten Brzeski, Chief Economist at ING Germany puts it in his latest thoughts, noting that “the ECB has stopped the autopilot and has retued to monetary policy by sight.” Hopefully, and judging by the significant increase in 1-week impl vol (read options section), the market is now betting that next week’s FOMC will be a lively event, even if it just means short spurs of volatility but with potential substance to threaten the confined late ’18 ranges in G4 FX vs USD. The Fed, as the yield curve stands, is arguably the Central Bank facing the highest stakes to properly communicate its forward guidance heading into 2019. Dot plot projections will be key.

Back to where it matters, which is today’s key takeaways from scanning the markets. By now, I’ve probably reiterated enough times my overall bullish stance on buying cheap EUR/USD. If not, check out my latest ruinations through yesterday’s YT video, where I touch on all the aspects.

After the ECB, my view has not been swayed in the slightest. I continue to stay away from trading GBP, and this is a stance with no expiry date in sight judging by the Brexit mess. The Yen should find its lowest point around the 114.00 resistance based on macro valuation, 25d RRs + ahead of the FOMC. The Aussie is also trapped in a range, portraying as no other the lack of FX vol, even if we were given a treat last week, after the severe supply imbalances that ended up with a bearish outside week as RBA rate cut calls mount.

As part of my risk-model, I still don’t see signs of risk aversion retuing. I am getting no cues either through the last 24h changes in global yield curves, junk bonds or the options market. As per my trades currently open, I continue to hold longs CAD, USD vs JPY. Monitoring shorts EUR/JPY too.

And… today’s tweet shoutout + quote of the day goes to Anthony Crudele, a Futures Trader, Investor, and Host of the Podcast Futures Radio. I just love when traders such as Anthony go the extra mile spreading value to help other fellow practitioners in the industry. That’s also camaraderie, and not just the pinned tweet on Anthony’s feed, a must watch to shed some tears…

Market Drivers

  • The ECB policy meeting, judging by the compressed vol in the EUR, was a low key affair, which made the ON implied vol look quite generous, to be honest. The day’s range ended up being barely 60p, which reinforces to clear tendencies. Firstly, there is simply no interest for EUR/USD traders to break outside the old too familiar range. Secondly, ECB’s President Draghi watched his clinical precision his narrative to limit volatility in the Euro.
  • We ended up with an ECB that left rates unchanged as expected, a confirmation of the formal end to its QE program (no more bonds to buy!), while reiterating that the benchmark rates will remain at present levels through the summer of 2019. The statement also clarifies that they intend to reinvest in full its bond maturities, for an extended period of time past the date when they start raising rates.
  • During the Q&A, we saw a Draghi a tad more pessimistic over the outlook for inflation in 2019 even if he kept the narrative as weighted by transitory elements. The ECB also cut the growth forecasts for 2018 and 2019, while noting that the balance of risks is moving to the downside, and it was that last comment that sparked the selling of Euro before an eventual recovery.
  • China continues to make good on its pledge to strengthens its trade relationship with the US, with Bloomberg reporting that the country is set to buy more soybeans. The market is coming to the realization that China does seem to have a genuine interest to stay committed on the 90-day trade truce, in hopes that the US can ease its retaliatory stance.
  • The new budget proposal by Italy’s PM Conte, in which the deficit target was revised down to near 2%, has set into motion further selling of Italian bonds, resulting in the highest German vs Italian yield spread since Sept 27 at 270bp and a positive for the Euro. The renewed source of conce and new spread to monitor should be the German vs French 10-year.
  • There have been reports that the Eurozone and the UK may potentially come to a compromise of a backstop declaration with a legal force.
  • The rejection by US Democrats to fund Trump’s wall makes it increasingly likely that the US govement will go into shutdown phase from Dec 21. The scenes between US Trump and Democrats Pelosi/Schumer earlier this week at the Oval office portray and are a clear testament of the deep divide that exists on how to go about protecting the borders.
  • The SNB left its sight deposit interest rate unchanged at -0.75%, lowering their inflation forecast for 2019 and 2020, with the rest of the narrative a familiar one. They continue to highlight that the CHF remains overvalued.


  • With the exception of the ECB and the SNB, the batch of economic indicators on Thursday was really thin, with barely any event of note. In Australia, inflation expectations ticked up towards the 4% mark, which appears to be significantly overblown considering the poor Aus GDP reading in Q3, with consumption faltering amid housing headwinds.
  • The final nov m/m inflation readings out of France and Germany were unchanged at -0.2% and 0.1% respectively.
  • In the US, the unemployment claims came higher than expected, which is further evidence of the tightness of the labor market in the US despite no signs of inflation. The import prices saw the latest monthly drop since mid-2016, primarily led by lower Oil, as reported by the BLS.

Events Ahead

  • In Asia, China is out with a raft of economic indicators. Overall, the data is expected to come higher than expected, even if in the grand scheme of things, it is clear that China is an economy in slowdown mode, and likely having to resort to further fiscal stimulus. Next week’s China’s annual meeting will set the pillars for the next policy action heading into 2019.
  • An interesting set of indicators to measure the health of the European economy will be revealed this Friday. Overall, there are no major changes in expectations. The outcomes will play a role in the outlook for the Euro, as this is data the ECB always factors in.
  • Leading up to the US retail sales, traders may be presented with an opportunity to buy USD should the currency trade at elevated prices. The reasoning is that the market tends to discount these events ahead of time, and since today’s data has been called to be much weaker than the prior month, there is an argument to be made to sell expensive USDs.

Risk Model

On Thursday, the risk-weighted index was underpinned by a further drop in US bonds, as depicted below by the US 30-yr bond as a bellwether. Note, the pullback obeys my bearish stance in US bonds short-term, as noted in my previous report. The minor changes in the DXY and the SP500, both treading water, led to the compressive nature of the RWI range.

Access the chart via Tradingview

Let’s now start to take cues out of risk-sensitive assets to understand the balance of risk. Junk bonds have ticked up ever so slightly, while the market is still paying up expensive vol via the VIX at 20.65. Looking at global yield curves, the tendencies continue to be towards a steepening relief rally, as reflected by the German, US or Japanese curves in the chart above. This should give us a positive jump start for risk conditions to extend into Friday, as it communicates the market is betting on an improved outlook for growth and inflation or else we’d see the curve flattening.

The impression that I get from the get-go when breaking down the assets that make up the risk-weighted index is that trading interest, as reflected by the tepid ranges, is low. The DXY is stuck in the midpoint of its daily range. The S&P 500 continues to make attempts to the upside yet lack of convictions keeps resulting in late day pullbacks with topside tails on the daily. The US 30-yr bond has come down lower in the last 4 days, but the volume is just paltry, which suggests most of the run we are seeing is led by a removal of liquidity ahead of next week’s crucial FOMC meeting.

Overall, my view is that the supportive risk conditions, underpinned by a more constructive stance in the US-Sino relationship, may continue to extend into the Friday. This week’s trend in risk has clearly been to the upside, and with no price action evidence to change my opinion, I believe that the path of least resistance short term continues to be to the upside. The low vol seen in the last 24h is positive for risk, as it’s the fact that yield curves remain on a short-term steepening phase.

Forex Majors

EUR/USD — Compressed Range, Buy Weakness

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On the basis of higher yield spreads between Germany/US and Germany/Italy, my line of thinking to endorse long Euros on weakness can only be strengthened. Overall, the ECB meeting has represented no major changes in the outlook for the Euro judging by where yields trade at. If we look at the daily chart, the pair ended marginally lower on Thursday, but with valuations moving higher, and weaker expectations for US retail sales heading into Friday, the case to engage in buying weakness is there.

Notice, for the last 3 weeks, the pair has been incapable of closing beyond its 1.13–14 range, which tells you all you need to know about the indecision to unravel the current puzzle. After this period of compression, it’s my view that the market will eventually break higher, barring an FOMC shocker.

The three-hourly liquidity areas drawn below is where I’d expect today’s buying to pay off the highest retus for the likes of Euro buyers. In this hourly chart, as represented via black lines, the conditions have now tued into a range-bound market following the double rejection off 1.1390 and the retest of the midpoint from the last previous swing low. Remember, any breakout of 1.13 should be an extra bonus to play long the pair.

GBP/USD — Low Volume Into Resistance

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The Sterling is heading back to retest a level of key support tued resistance amid a tapering of volume, which makes the prospects of further rises doubtful at best. By the close of business in New York, the UK vs US 5-yr yield spread has recovered further while the DXY relative strength is an element that caps further upside as solid demand for Dollars still expected overall. In the hourly, we can clearly see how the pair has entered a new period of higher consolidation between 1.262080. Note, any topside breakout may see a head fake as a huge supply imbalance exist overhead. On the downside, it appears as though the void area is clearer if we were to see a 2620 resolution.

USD/JPY — Intraday Bullish, Macro Offers Lie bove

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The near-term bullish view in the pair continues to materialize, with solid demand found in yesterday’s Asian pullback as risk appetite remained underpinned. For now, the pair continues to be driven by micro technical forces, up to the next major target at 114.00, where the disparity in macro valuations between the pricing of the pair and its bond yield spread/risk-weighted index, should put a cap to the rally. Note, in the hourly we’ve completed 3 legs up, which is a stage where the risks of a reversal in the intraday trend certainly increase. Besides, with lower expectations for today’s US retail sales, makes you wonder how much further upside exists up to the release of the event. A key determiner will also be the mood in risk, which in my view, should remain anchored, hence probably keeping the pair within familiar ranges. If one factors in that today is Friday, which tends to be a thinner day in terms of volumes, the case for a low key affair may ensue.

AUD/USD — Remains In Range-Bound Conditions

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It’s certainly been a low key affair trading the Aussie this week, with volatility largely suppressed as traders must contend to trade a paltry range of 0.7180–0.7240. In the last 24h, with risk appetite upticking, the pressure had to be exerted to the topside of the range, and that’s what we saw, although the failure to find acceptance above puts into question the buy-side conviction. For now, it’s not all lost for buyers, which continue to make higher highs and higher lows on the hourly, while the pair continues to trade above the range’s midpoint of 7210. That said, the failure to break higher is worrisome and may shift the focus back to the downside if 7120 gives.

Options Market

A very soggy activity in forex options, with the only two currencies to highlight the European ones. The Euro adjustments in options positioning were tweaked slightly bullish, judging by the increase in ‘in the money’ calls, which came combined with a nearly 2:1 jump in ‘out of the money’ puts.

In the British Pound, what I denote is a much interest to transact OTM puts at the 1.25 strike, suggesting that the market might perceive the level as an increasingly appealing downside protection in light of the options the UK is left in the Brexit saga, which includes pulling the Article 50 to remain in the EU, a potential second referendum (these first 2 options Pound positive) or a hard Brexit (Pound negative).

*It is common practice by institutions to use OM Calls or Puts for hedging purposes, as the cost of buying Calls or Puts out of the money are way cheaper than IM Calls/Puts (it acts as an ‘insurance’ against their desired direction). If we see strong activity in OM Calls, that generally means the market is looking to go directionally short and are using these cheap calls out of the money (at a higher level than current prices) as protection should the underlying asset class tu against their favored directional bias (short). On the contrary, if we see strong IM Calls activity, that means institutions are in a hurry to buy the asset for what they perceive could be a directional move brewing.

Find below today’s 1W implied vs historical volatility ratios. What’s interesting about today’s stats is that option players must already account for the volatility out of next week’s key FOMC. I’ve selected with a red arrow the market where we are finding the greatest imbalance between imp/hist. In a nutshell, these are the markets most exposed to suffer breakout of key levels, either up/down, as the market is going to be heading into the event short vega (vol), making them increasingly slippy.

* If implied vol is below historical vol, represented by a ratio < 1% in the table above, the market tends to seek equilibrium by being long vega (volatility) via the buying of options. This is when gamma scalping is most present to keep positions delta neutral, which tends to result in markets more trappy/rotational. On the contrary, if implied vol is above historical vol, represented by a ratio > 1%, we are faced with a market that carries more unlimited risks given the increased activity to sell expensive volatility (puts), hence why it tends to result in a more directional market profile when breaks occur. The sellers of puts must hedge their risk by selling on bearish breakouts and vice versa.

Bonus Insights- What Am I Trading?

As I made abundantly clear, I am a looking to be a buyer of Euro vs US Dollar on weakness. I am also holding a long position on CAD/JPY with the reasoning behind my trade found here. Besides, I’ve been rising an intraday long on USD/JPY off 113.17, in expectations of a rotation higher.

Before you ask, the answer is yes, I am happy trading counter to my macro views, and the USD/JPY is a clear example of that, where I hold a firm macro view, but I also recognize the short-term bullish opportunity. Especially after the massive bullish outside day on Monday, which suggested the market had made up its mind to reject lower levels, which has been backed up by the pick up in risk ever since. A market seeking higher liquidity pockets was my expectation. Both yen shorts now risk free.

I am also paying attention to topside failures in EUR/JPY in line with lower yield spreads and a risk environment far from promoting large breakouts in risk. I can’t find any other trades on the radar after scanning through the charts, so won’t force-fit it, especially on this narrow FX vol context.

Banks Intelligence Gathering

Morgan Stanley provides a great visual representation of the split they expect at the helm of the BoE when they meet next week amid the Brexit uncertainty. According to the European Economics Tea, with elevated uncertainty over Brexit and an endgame slowdown, a unanimous hold is a no-brainer.

In line with my confessed bullish view on the EUR/USD, find below the take by Brent Donnelly, Spot FX Trader at HSBC, who outlines the divergence between EUR/USD and the Italian premium as a key factor that should provide support to the shared currency. I’d personally make the case that France has now become the new Italy with its yield spread ballooning vs the German one. Overall, glad to see others are picking up on the current value disparities in this market macro wise.

Carsten Brzeski, Chief Economist ING Germany, shares his views, making the analogy that ECB’s President Draghi, with the end of net quantitative easing by year-end, also ends him being in autopilot mode. “Now the central bank is fully back to being data dependent”, Carsten notes.

Today’s Twitter Shoutout

Anthony Crudele is a Futures Trader, Investor, and Host of the Podcast Futures Radio. Anthony interviews traders from all walks of life. A trader dedicated to sharing valuable insights via interviews with other phenomenal traders. As I mention in today’s summary, that’s also camaraderie, and not just the pinned tweet on his feed, which is a must-watch.

Quote of the Day

“As a trader, I’ve leaed that I not only needed an edge in my strategy, but I needed an edge about myself. Many solely work on their strategy edge while they lack working on their personal edge. To me being a trader is more than just focusing on the technicals or fundamentals”

Anthony Crudele.

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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 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.
  • 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