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.
Not a whole lot of price action to be inspired with on Monday, with a speech to be delivered by Fed Chair Powell as part of the opening remarks at an event hosted by the Federal Reserve Bank of Boston, potentially the aperitif of what’s to come as the week gets busier. If Tuesday tus out to be a non-event, vol seekers hope that the man at the helm of the Fed himself gets more concrete and shed further light on the current Fed stance on its monetary policy outlook by Wednesday, when Powell is due to testify on the Semiannual Monetary Policy Report before the House Financial Services Committee. Until then, as the tepid moves in the currency market reflect and very low tick volume also attests, we have to contend with compressed ranges. In the short-term, the hegemony of the USD as the central thematic is back in vogue on the heels of an impressive US NFP payrolls last Friday. Regardless of how stellar the 224k print was, trade war-related ramification on demand shocks, oversupply of stocks, weaker economic activity, alongside the dramatic fall in inflation expectations globally, and wage gains in the US stagnant, it leads the market to still hold, as the Fedwatch CME tool suggests, an unshakable conviction that the Fed will deliver a 25bp rate cut by July 31st. By looking at the lay of the land in the currency indexes below, we can see the EUR having reached key support where constant rejections have ensued in the last week. The USD has regained its baseline (13ema) even if the overall market structure is still macro bearish while below a descending trendline. The Yen remains in a bearish path but low volumes warrant caution as the direction sees no committed flows for now. The NZD, out of all the currencies, is probably the best positioned technically speaking, as AUD struggles at key resistance and the CAD, while still defying gravity, it has reached a major macro target (100% proj target) and I see the risk for a retracement even if the last word will come from Wed’s BOC policy meeting. Lastly, the CHF finds itself at critical support with volume taper not boding well for a breakout so far.
Narratives In Financial Markets
* The Information is gathered after scanning top publications including the FT, WSJ, Reuters, Bloomberg, ForexLive, Institutional Bank Research reports.
- It’s been a rather stable day in forex markets, as the market awaits for the big events later on this week, including tentative US-China face-to-face meetings, Powell’s testimony on monetary policy in front of a Senate Committee, the Fed minutes, BoC meeting, UK growth data, EU and US inflation, and more central bankers speaking.
- Market participants remain convinced to their view that the FOMC will cut by at least 25bps at their July meeting despite the US NFP came strong with wage gains subdued. Today, Powell is a risk for vol to pick up as is due to deliver opening remarks at an event hosted by the Fed of Boston. Audience questions will be expected.
- Deutsche Bank announced plans for restructuring its business to avoid an implosion with 18k jobs to be cut, as well as the decision by the bank to exit equity sales and trading, while it will retain a “focused” equity capital markets operation and “resize” its fixed-income operations. As part of its core business vision, it intends to focus on financing, advisory, fixed income, and currencies. To get further insights, read this thread.
- While comments by BOJ Gov Kuroda have become a sideshow, the Central Banker reiterated that it will maintain easing for as long as needed to hit stable 2% inflation, adding that the BOJ will keep short-, long-term rates at current very low levels at least through spring 2020. The Yen will continue to behave as a function of risk and liquidity.
- Australia’s national banks’ regulator has approved to ease mortgage rules, which is set to contribute in stimulating the economy via a reinvigoration of Australia’s weak property market as lenders can now use lower buffers for mortgage stress tests in loan assessments (home buyers to borrow more). If one throws into the mix tax stimulus provided by the Morrison govement and the back-to-back rate cuts, the likelihood for the RBA to take the foot off the easing pedal for a few months is on the rise.
- In a weekend piece by the Financial Times, it revealed, according to the latest nowcasts for the UK that activity growth in the economy is already negative and is predicted that gross domestic product growth in both 2019 Q3 and Q4 will be below zero. The decline in UK yields has accelerated as the market anticipates the BOE to tu more dovish in light of the plummeting in economic activity, as the next Brexit deadline of Oct 31 nears.
- The South China Moing Post notes that there is no trade deal on the horizon with the US. The lack of commitment, to save face to their parties, and not giving up on the key sticking points, are all too familiar problems still limiting any significant progress.
- Inflation expectations are fast accelerating due to the oversupply of stocks to avoid demand shocks due to trade escalation, resulting in consumer prices to head lower. What’s more, until recent times, the multi-year highs in the USD has only exacerbated the disinflationary pressures by reducing the ability to get financing in trading, which leads to a devoid in funding capacity, hence deleveraging strategies are more active.
- The performance in US equities has remained poor on the back of last Friday’s strong US payrolls number. Of note is the not so subtle peculiarity that a pool of over $13 trillion in negative-yielding bonds globally with flatter yield curves (low growth prospects), makes the market ever so desperate in its craving for higher-yielding assets the likes of equities or some Asian currencies.
- It’s a fine line market participants attempt to walk through, as the assumption is that central banks are coming to the rescue in a big wave of further easing, keeping the distorted negative correlation between economic data and financial assets. The more reassurance of a slowdown that exists, the more the market inflates financial assets by expecting a bigger bang (easing policies) by Central Banks in order to avoid the risk of protracted recessions.
- The decision by Turkish President Erdogan to fire Turkey’s central bank chief Murat Cetinkaya over the weekend has resulted in the value of the Lira to plummet. The CBRT deputy goveor, Murat Uysal, has been named as the replacement.
- ECB’s Coeure, in line with the dovish guidance from most ECB members, reinforced the case that the central bank could restart QE if needed by stating that accommodative policies are needed more than ever even if the ECB is near the exhaustion point on its expansionary policy tools. Unlike the FOMC, the market does not expect an ECB cut in July even if the Goveing Council may decide to change its forward guidance on rates to explicitly hint at the possibility of rate cuts in July, to be enacted in September.
- The Eurozone July Sentix investor confidence dropped to -5.8 vs 0.1 expected, making the headline number post its weakest level since November 2014 with a very dark outlook towards the economic growth in Germany as one of the main worries in the survey.
Recent Economic Indicators & Events Ahead
A Dive Into Developments In FX (Technicals, Fundamentals, Intermarket)
EUR/USD: Faces Key Support Area, Momentum Clearly Bearish
GBP/USD: Volume Taper Into Macro Support
AUD/USD: Range Settles In, Awaiting New Clues
USD/JPY: Breakout & Close Above Key Resistance
USD/CAD: Macro Proj Target Hit, Range In Lower Timeframes
- 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 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 hinges 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