The Daily Edge

NCoV Hits AUD Hard As BoE Fuels GBP

The Daily Edge is authored by Ivan Delgado, 10y Forex Trader veteran & Market Insights Commentator at Global Prime. Feel free to follow Ivan on Twitter & Youtube weekly show. The purpose of this content is to provide an assessment of the conditions, taking an in-depth look of market dynamics – fundamentals and technicals – determine daily biases and assist one’s trading decisions.

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Quick Take

With the WHO finally declaring the coronavirus (NCoV) a public health emergency alongside news that the US travel advisory just raised the alert level to its highest by advising nationals not to travel to China, the market, understandably, remains on shaky grounds. Note, I am firmly convinced, as I exposed in yesterday’s Youtube livestream, that the NCoV will remain the number one driver for at least another week or two. As a visual reflection, the chart below depicts the performance of G8 FX ever since the coronavirus (NCoV) news broke out. By now, it’s become visibly obvious what currencies have been affected the most. The Yen, the Swissy and the US Dollar, in this order, are unequivocally the main beneficiaries, while the Aussie and the Kiwi have been hit the hardest as the Chinese growth story is about to face some very bleak times in Q1 and Q2, and as a consequence, the market has been rapid to factor that in via the depreciation of the Oceanic currencies as ‘proxies’ for China. The Canadian Dollar, weighted by the prospects of lower rates in Canada and the recent slide in Oil prices as the NCoV also takes its toll on the projected consumption of the black gold. A currency fueled by its own idiosyncratic driver is the Pound, immune to the NCoV fuss, to instead be marked aggressively higher in the last 24h by a less dovish BoE after a 0.75{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} rate hold with a 7-2 split. Sandwiched in between, we find the Euro, which had an impressive run on Thursday, with further tentative evidence of a recovery in the Eurozone economic data to blame.

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.

Pound flies after no BOE dovishness: The Pound rallied strongly after the BoE monetary decision left rates unchanged at 0.75{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814}, with the following policy statement more hawkish than expected, especially the forward guidance. As part of the January policy statement, it was revealed that “further ahead, if the economy recovers broadly in line with the MPC’s latest projections, some modest tightening of policy may be needed to maintain inflation sustainably at the target.” The key takeaway after the statement and Caey’s presser is the evolution of inflation and the hard UK economic data. Therefore, the GBP will continue to trade more sensitive to fundamentals with Brexit on the background. Importantly, the votes split in the BOE committee will also be monitored closely, even if judging by the 7-2 from Thursday, few are convinced.

EUR’s impressive run carries on: To understand the rise in the EUR, one may find it valuable to go through the material I cover on market symmetries, a precursor to shifts in order flows. With the EUR/USD reaching a 100{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} measured move, I was on guard for some EUR appreciation, even if it took me by surprise the magnitude of it. Further tentative evidence of a recovery in the Eurozone economic data may be to blame too, after some slightly better than expected readings in the Economic and Industrial Confidence in the January EU Commission surveys, followed by a small dip in the unemployment rate to 7.4{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} from 7.5{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} expected. The Eurozone CPI (and Q4 GDP) figures will be closely monitored today after the pick up in German HICP.

Risk-off prevalent, FX sees textbook moves: Even if the falls in the US equities and US bond yields were largely contained notwithstanding the virus woes, the movements in FX obeyed to a more predictable patte, with the Aussie and Kiwi succumbing to the lingering conces of the virus outbreak, while the Yen and especially the Franc, fared really well.

US Q4 GDP a tad firmer aided by soft inflation: The US Q4 advance GDP came at +2.1{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} vs +2.0{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} expected, even if it was largely shrugged off by the market as the focus remains anchored on the coronavirus. By diving into the details, the main takeaway was the soft inflation numbers were soft, which led to an increase in the GDP headline even if the nominal GDP was far from encouraging. This data point is water under the bridge for the market and hardly will have any influence in the price discovery going forward.

The WHO declares NCoV public health emergency: The World Health Organization declared the coronavirus a public health emergency with the panel almost unanimously in agreement, even if they have continued to praise the work done by China to contain the spreading of the disease. The chief of the WHO went as far as to say that “I’ve never seen this type of mobilization being executed in China in my life.” They outlined that the greatest conce is the potential for the virus to spread to countries with weaker health systems. The constructive rhetoric continued during the press conference as the chief of the WHO said “the measures that China is taking will ‘reverse the tide.”

Isolated episodes of coronavirus in the US still popping up: A couple of headlines related to the coronavirus led to further suppression of risk, with the Aussie hit, again, the hardest. Firstly, the CDC announced the first person-to-person spread of the coronavirus in the US, specifically from a Chicago patient that traveled from Wuhan. Secondly, the CDC also waed that it is not possible to detect the coronavirus before symptoms emerge, which makes the prospects of identifying and containing the outbreak a harder task.

The US issues waing not to travel to China: The US travel advisory has waed national not go to China. The waing is a level 4 advisory, which is the highest possible. According to the US State Dept, nationals must not travel to China due to the novel coronavirus first identified in Wuhan, China. Those currently in China should consider departing using commercial means.

Coronavirus takes toll on China’s economy: An example of the toll the coronavirus is taking on the Chinese economy, is the fact that a blue chip company such as IKEA, has decided to close all their stores in China, with over 14,000 people employed told to be in paid leaves. It is no wonder that the market is anticipating some very bleak prospects for China’s growth, and the potential spillover into the global economy.

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Recent Economic Indicators & Events Ahead

Source: Forexfactory

Insights Into FX Index 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 idea of this analysis is to complement one’s daily bias by accounting for this holistic analysis.

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The EUR index keeps defying the bearish technical reads by appreciating beyond the scale of magnitude I thought possible. That said, the risk of a move lower from the relatively elevated levels is still the base case judging by the two fundamental pillars of my analysis, that is, price structure and the accompanying smart money tracker. Besides, the market is now inside the origin of the last and most obvious supply imbalance. It’s still going to take significant upar pressure to shift the stance to anything other than bearish off the daily chart. This bearish case is still supported by the fact that the down-cycle dynamics are still at play until the 100{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} proj.

The GBP index exploded higher and all the signs point to further appreciation in the currency. As I’ve pointed out, the currency remains rather isolated from the coronavirus saga, and its main driver continues to be the BOE policy outlook, which has tued out to be quite supportive for the interest of Pound bulls after the 7-2 split vote to keep rates unchanged on Thursday. The price structure, smart money tracker, coupled with price action (bullish outside day) are all screaming that this market should continue to travel north until the projected symmetrical target (100{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} measured move) is met, roughly 0.8{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} of topside potential from here.

The USD index continues to struggle at the 100{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} proj target, a level that has predictably led to a pause in the buy-side flows in the currency. There is also the added caveat of a key resistance overhead, which should act as another technical impediment to see further gains. The risk of a setback towards lower levels is a scenario I am starting to anticipate but be aware, there is still little evidence backing up my case, therefore, be aware that such contrarian view would be against the strongest trend we’ve seen this January, so be nimble. As outlined yesterday, where we stand in the USD is more a heads up for those holding USD long exposure that perhaps is time to start considering being more aggressive in your take-profit considerations.

The CAD index has found the follow through continuation that I had envisioned if we were to respect the technical signals via the price structure and moving averages. This renewed selling pressure comes after a retest of the backside of its broken range last week, which keeps my base case an extension towards a retest of the equal lows seen last week. It’s also hard to be bullish on the CAD with the downward pressure seen in Oil and risk-off dominant. Besides, the BOC is between a rock and a hard place and may potentially lower rates soon, which is a scenario the market has been building a case for since the last meeting.

The JPY index has challenged higher levels above a key resistance but by the end of NY, it failed to close above, hence the failure to accept the gains is worrisome for buyers. The risk-off patch the market is going through is undeniably creating pockets of demand imbalance in favor of the Yen at regular intervals as the coronavirus acts as a huge source of uncertainty for the market. I still find trading the Yen from the long side a very dangerous proposition given the substantial gains it’s printed but technicals are really on the verge of an important breakout. The net balance is that the Yen remains a market in buy-side mode but levels are far from attractive. If we finally see equilibrium above the early Jan high, a new bullish landscape may evolve.

The AUD index is in free-fall and so far has not respected the technical supports on the way down in the form of a horizontal line or a 100{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} proj target. When that’s the case, it clearly reflects a market in panic mode as amid the coronavirus and the ramifications for China’s GDP. I remain of the view that the Aussie is reaching a climactic selling stage, a juncture where maintaining short-exposure becomes quite risky unless you are scalping for quick profits. Is there further downside potential in the Aussie? You bet, there certainly might be. But ask yourself, how much of a premium are you willing to pay to gain short exposure? At these levels, it’s a very bad deal to be loading up AUD short if my technically-educated opinion counts at all.

The NZD index, as in the case of the AUD index, has reached a level in the chart where a pause of the sell-side pressure is a real possibility as Thursday’s sell-off looks awfully overextended and most importantly, the price has landed at a macro support where a cluster of bids is likely to be encountered. Therefore, I no longer hold the same conviction for a rebound in the NZD to be considered an opportunity to sell on strength, at least it’s not so clear cut given where we’re at. That said, the overall risk-off dynamics dominating markets are not aiding the currency.

The CHF index has broken its consolidation phase by accepting level outside its familiar perimeters, hence validating the premise for further buy-side momentum. This newly adopted stance is backed up by the price structure, the smart money tracker and the macro trend. The Swissy has proven to be a very strong currency in January, regardless of the risk conditions, which is a strong statement of intention by market players about the path of least resistance.

Important Footnotes

  • Market structure: 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
  • 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
  • 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{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} projection resides in the symmetry and harmonic relationships of market cycles. By drawing a 100{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} 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{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} Fibonacci Projection


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