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.
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The exuberant mood to buy the US Dollar post-Easter just keeps on going, reflected by the topside resolution in the DXY, where a close above the 97.60-70 key daily resistance has finally transpired. If we can find acceptance above this level on a weekly close, it could send shockwaves across the market as it would have negative repercussions for emerging markets at a time when the global growth recovery is still quite fragile even if China has shown signs of life even if very domestically localized. The Japanese Yen, while unable to keep up the rapid pace of appreciation by the USD, is nonetheless one of the top performers too alongside the Sterling. The EUR remains on the backfoot, finally re-imploding in what should be interpreted as a resumption of its bearish trend, with the close sub 1.12 technically damaging. The Canadian Dollar, on an equally weighted scale, ended up mixed despite weakness was obviously manifested against the USD, GBP, JPY. The worst performer by a country mile though was the Australian Dollar, hammered by the major miss on Wednesday’s Australian CPI readings as players now anticipate rate cuts by the RBA in coming months.
Narrative In Financial Markets
- The Australian CPI came lower-than-expected in Q1, which led to the market expecting increased chances of the RBA cutting rates in the foreseeable future. Aussie Q1 headline came at 0% vs 0.2% exp and 0.5% prior, while the y/y was 1.3% vs 1.5% exp and 1.8% prior. The RBA trimmed mean stood at 0.3% q/q vs 0.4% exp and 1.6% y/y vs 1.7% exp.
- In spite of the absence of US-related fundamental news, strong demand flows pushed the USD higher, with a very significant bullish technical breakout not only in the EUR/USD but also to its inverse twin the DXY, closing above the 97.60 resistance mark. The upside resolution should not be overlooked as it can finally stimulate the pick up in FX vol as technically speaking, the USD can now set sights on much more aggressive targets.
- The market has tued more decisively dovish towards both the RBA and the BOC in the last 24h, following a major Aus CPI miss and the removal of the BOC rate hike bias respectively. These developments reinforce the notion of the USD and JPY singled out as the best alteatives in the FX ugly contest. The USD fueled on its brighter growth outlook vs RoW, while the Japanese Yen continues to be the preferred destination on spurs of ‘risk-off’.
- The Bank of Canada abandoned its explicit tightening bias from the monetary statement while slashing the economic forecast citing slower global growth, sluggish housing and oil sectors. In the presser, the BOC Goveor Poloz refrain from a dovish script to instead sound slightly more upbeat, noting that the slowdown will prove temporary while attributing the removal of a rate hike bias to emphasize a more data-dependant stance.
- The US DOE released its weekly Oil inventory data, which saw an unexpected build-up of +5,479k vs 1,000k estimate. As a reminder, the prior day, the private API data showed a build up even greater at 6.9M barrels. The price of Crude Oil closed at $65.7 after a fall of -.32%.
- Core durable goods orders and unemployment claims in the US are the two key events in the calendar later today. As a reminder, today we get public holidays in Australia, New Zealand, and Italy. In Asian hours, the BOJ will release its latest monetary policy statement, with no expectations for a change in the policy guidance.
Recent Economic Indicators & Events Ahead
RORO (Risk On, Risk Off Conditions)
The breakout in the DXY is very significant, especially as it occurs without the backing of US yields, just as the S&P 500 is flirting with its all-time high. What are these dynamics telling us? First off, a point must be reiterated, and that is, for the DXY to finally close above the hugely relevant 97.60, it sets into motion a macro technical play that may take us towards the 99.50/100.00 level. Secondly, the USD has strengthened its dominance as the best alteative in an otherwise all dovish CBs environment. There were 2 central banks the market was not yet fully convinced they would ultimately tighten their screws by flirting with the idea of lower rates. However, after the disappointing Aus CPI and Canada’s Central Bank monetary policy outcome, the RBA and the BOC now join the ECB, RBNZ, BOJ, Fed in their dovish bias, while the BOE remains stuck in a dead road until a Brexit resolution. What this means, is that, if the market has got to accumulate a currency among any other, amid an environment of 0 monetary policy divergence and slower growth prospects as the drop in the US30y bond yield towards 1.9% reflects, that currency has got to be the USD. Besides, with a stock market in the US in rude health and the economy growing relatively strong vs other G10 countries, the rationale for the United States to keep attracting capital inflows makes it a genuinely appealing choice. The fact that the Japanese Yen index is holding relatively steady at a time of resurgence in US stocks, it can be understood as a play towards poorer growth prospects in the RoW, while the currency also acts as a source of demand due to the depressed fundamentals elsewhere.
Latest Key Technical Developments In G8 FX
Interested about downloading today’s key levels in the major pairs? Find the MT4 templates, updated daily, by clicking the link.
EUR/USD: More Downside Opens Up
The impulsive selloff in the exchange rate appears to have further room to go even if in the very short term the price has made it to its next 100% projection target at 1.1155. Note, the fact that such target, where market makers tend to be actively stepping in, has been violated, it implies that the fast money may continue to be interested piling into momentum trades amid the exuberant USD dynamics. If further selling transpires, 1.1120 is the next projected target ahead of the daily ADR at 1.1113 and the round number of 1.11. The market cycle is aggressively bearish, and a development that should be interpreted as structurally EUR/USD negative is the speed and magnitude of the bearish moves.
GBP/USD: Yet To Reach Its 100% Proj Target
The breakout of the previous low at 1.2915 allows for a new bearish 100% proj target of 1.2870. The bullishness in the DXY is out of question, especially on the break above 97.60-70 as seen. Throw into the mix the low interest to hold the Sterling on the Brexit uncertainty, and the path of least resistance continues to be for a bearish bias in the next 24h in line with the general USD strength theme. A descending trendline now guides the trend lower as yet another visual cue to refer to.
USD/JPY: Fresh Bullish Cycle Develops
The pair finds itself in a new bullish cycle that should draw interest from buyers to re-group and join the bid on a retest of the area between 112.00-112.05 ahead of a retest of the former range midpoint circa 111.85, where the ADR limit intersects on Thursday. It’s worth noting, however, that the exchange rate lacks sufficient value to justify such hefty levels at the moment, with the drop in the S&P 500 and US yields in the last 24h a clear negative for the pair. Overall, technicals underpin the exchange rate, fueled by a rampant USD, but the intermarket flows coming from US equities and yields should prevent the rally from finding enough committed buyers.
AUD/USD: Macro Support Hit, Bearish Bias
As calls for the RBA to further ease policy in coming months mount, on the back of the Aus CPI miss, so does the pressure by sellers to break the 70c. I must say that while the bearish bias is clear and supported by the whole spectrum of intermarket flows (Yuan, DXY, yield spread), the overextended bearish bar implies that the ris for a correction into 7025-30 exist. I am expecting the 7050 to be the line in the sand before an eventual resumption of the downtrend, aiming for a test of 70c.
- 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. 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