The Daily Edge

Nov 9: Order flow & structure favors USD buying

Authored by Ivan Delgado, Head of Market Research at Global Prime. The purpose of these institutional-level chart studies is to provide an assessment of the market conditions for the next 24h of trading in order to assist one’s decisions on a regular basis.

Fundamentals: Break down of market drivers + key releases

In the last 24h, we’ve seen a transition from a USD-centric weakness into a re-invigoration of USD strength. The outcome of the FOMC decision, with rates on hold at 2-2.25% as expected, offered no new insights. The market seems to have interpreted that as a signal that it’s going to be business as usual for the Fed, meaning no alterations to its tightening campaign, with a new rate hike by Dec eyed.

ECB’s President Mario Draghi spoke at the Irish parliament. His remarks were largely optimistic in nature, anticipating an end to net asset purchases by year-end while counting on the Eurozone growth to continue to expand. He subtly touched on the prospects of a potential rate hike by Q2/Q3 next year pushed out if the Eurozone fails to meet its economic growth projections. Overall, the speech was in line with the status quo he aims to maintain.

On the Brexit front, with the EU – Brexit summit due in a matter of weeks, likely on Nov 23-25, speculation on the next steps abound. The Times reported that a full withdrawal agreement could be published by Tuesday, while the Sun reported that UK PM May aims to gain extra time to seal a deal with Cabinet members. Any delay in a possible deal beyond the perceived timeline of late Nov would flare up jitters and uncertainty around Brexit.

Risk model: Order flow & structure in favor of the USD

The risk-weighted index is coming back down as a function of positive order flow in the USD and a lower correction in equities. The DXY index has broken above its descending trendline, carrying strong momentum behind as per the impulsiveness of the move. The extension has landed to its 100% fib projection based on the normal distribution dynamics of the volume profile. This may take us back down as longs take profits off the table. I’d argue that unless we make a new push higher with subsequent closes above 96.74, the market may still be at risk of confirming a range if 96.20 (the midpoint of the last up-cycle) gets validated. Nonetheless, the conviction back into the USD bandwagon is strong, that’s why my focus is now reverting to be more constructive and opting to mark a structure of USD strength as the main view, even if that will hinge on the ability of buyers to make another push up as stated above.

The move up in the DXY index is underpinned by the rise in US yields. Let alone the double bottom post US election day, buyers have re-grouped to show up at the 3.41% support, so we seem to be all set to transition into a new up-cycle to re-test the 3.46% resistance area, further anchoring the USD strength environment. With regards to equities, I am closely monitoring the 100% fib proj at 2,830.00 for an eventual top. If we don’t make it up there and instead the S&P 500 breaks below its ascending trendline and the level of support at 2,766.00, that’s a bad omen as the leg up would have fallen significantly shorter in magnitude vs its previous one. As the backdrop stands, equity performance continues to be absolutely key to determine whether or not risk will be supported. Follow through USD strength with falling equities is going to place JPY crosses under significant pressure, more so than if equities were to sell-off in an environment of USD weakness. The reason being is because USD strength acts as a drain to global liquidity

EUR/USD: Break sub 1.1350 allows retest of 1.13 key support

Cycles & Levels:We are just 24h away from the close of the weekly candle, and as of now, the bearish reversal formation is troublesome for the interest of buyers as the prospects build for an eventual re-test of 1.13 support even before making it to the midpoint of a projected 1.13-1.18 range at 1.1550 (not good news for longs). The sell-off in the daily is in line with the developing downcycle at play. On the hourly, where we can more clearly break down the latest dynamics, we’ve now reached a normal distribution projection, which happens to coincide with a confluent support level. We could see a rebound off this area even if as the order flow stands, it is not conducive of a substantial recovery at this stage.

Correlations & Volumes:There are more positives than negatives for the interest of sellers. Firstly, the candle has closed at the very lows of the day. Secondly, the POC is now trapped on the upside. Thirdly, there has been a slight downtick in German vs Italian yield spreads, not enough to justify a lower Euro given the recent recovery, but at the same time, the German vs US yield spread continues to make marginal new lows, which adds pressure as capital flows are drawn into the allure of the US as a destination paying higher retus for investors. The consolation for sellers is that the bearish candle does not carry a whole lot of volume, even if that gets overruled by the rest of the factors mentioned.

GBP/USD:Confluent support at 1.3040 edges closer

Cycles & Levels:The weekly formation is still range-bound and likely to be so until the Brexit conundrum clears up. The daily remains in a valid down-cycle, while on the hourly the up-cycle continues its course even if we’ve seen an intraday setback. Sellers must re-gain the 1.30 level to gain the upper hand, although it’s going to take a breach sub 1.2955 (previous swing low) to negate the current up-cycle. Watch the confluent area of support at 1.3040, where an imbalance of demand may occur in line with the active up-cycle.

Correlations & Volumes:The correlations on the Sterling continue to point to lower levels, both the DXY and the UK vs US yield spread, while the volume saw is quite average. In favor of the sellers is the candle close, which has seen barely any profit-taking.

USD/JPY: Target of 114.40-50near, major breakout ahead?

Cycles & Levels:The weekly chart remains in an active up-cycle and there is no reason to believe the market won’t be re-testing 114.40-50 at this stage. The same notion in the daily, with the price picking up momentum towards the mentioned target. On the hourly, we are now in a position to draw a new 100% fib proj target of 114.69. If this is the next destination for the pair, that would translate in greater prospects of a major breakout of weekly resistance level, which may see plenty of stops tripped above if further pushes seen.

Correlations & Volumes:As of now, the US vs JP yield spread supports higher levels, as does the current environment of USD strength, assuming equities stay underpinned. The daily candle is unambiguously bullish, with a very strong close. The POC got trapped lower at 113.67, making the buy on dips strategies even more appealing. Even if the volume was low on Thursday, we are not yet at a major decision point until 114.40-50, therefore one should read too much into it until the target is potentially reached.

AUD/USD: Rejection off the projected target at 0.73

Cycles & Levels:The weekly looks much more constructive for higher levels after breaking the 2018 descending trendline. On the daily, the price has reverted back down at the projected 100% fib target, which is also confluent with the 0.73 round number. The daily cycle is up nonetheless, but the maturity of the move suggests some downward pressure is possible, with the retest of a violated descending trendline the next focus. On the hourly, a double top and the breakout of the ascending trendline are signs that the market is shifting its attention towards lower levels. This has also caused the structure to start faltering, with an intraday down-cycle formed.

Correlations & Volumes:Thursday’s POC printed 0.7288, which means that any recovery back toward the level may offer an opportunity to engage in sell-side action with some tight stop above the 0.73 area. The correlations (gold, dxy, Chinese yuan, yield spread) are not negating the near-term follow-through selling dynamics. If anything, it justifies them.