The Daily Edge

Oceanic Currencies Flourish, North Americans Wither

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. The purpose of this content is to provide an assessment of the market conditions. The report takes an in-depth look of market dynamics including fundamentals and technicals in order to determine daily biases and assist one’s trading decisions.

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Quick Take

The Oceanic currencies continue to be the darlings in FX as other Central Banks keep caving in by either lowering rates further (Fed) or flirting the possibility of it (BOC). The rise in the AUD and NZD must be contextualized in an environment conducive to ‘risk on’ conditions to thrive as the market has come to terms that the two most relevant tail risk in the macro space, that is, the US-China trade war, coupled with Brexit, can be both put to bed for a while. On the other side of the spectrum we find the CAD, absolutely annihilated by a surprisingly dovish outcome by the BOC as it initiates discussions to slash rates on an insurance basis amid ‘worsening global conditions”. The outcome of the FOMC has not been pretty for USD bulls, with a V-shaped tuaround to the initial hawkish interpretation of the Fed statement sinking the USD index towards new lows. Powell said in the presser that t would take a significant rise in inflation to shift the stance to raising rates, in other words, implying that the policy will be either on hold or lower. From there, the market had an immediate change of heart and it never looked back. The Japanese Yen remains under pressure amid new all time highs in the S&P 500. Meanwhile, the European currencies complex (EUR, CHF, GBP) also benefited from the post FOMC flows, even if the GBP was the clear laggard among the three. 

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.

The Fed cuts rates, initial message hawkish: The Fed cut the funds rate by 25bps as widely expected by the market, leading to an initial positive reaction in the USD as the statement didn’t reveal any new clues on further follow-up rate cuts, with the momentum in the USD extending as Powell talked up the economic outlook and made no admission that the rate will be adjusted again anytime soon.

FOMC statement supported USD buys: The FOMC statement replaced its previous pledge to “act as appropriate to sustain the expansion” to instead note that they are “monitoring the implications of incoming information for the economic outlook as it assesses the appropriate path of the target range for the federal funds rate”. This led to the appreciation of the USD in the early stages as the market started to price into the USD that the Fed won’t act further in its mid-cycle rate cutting adjustment.

USD tuaround on inflation remarks: However, a major reversal in the USD eventuated as the market interpreted as a dovish outcome the comments by Powell that it would take a significant rise in inflation to shift the stance to raising rates, in other words, implying that the policy will be either on hold or lower.

Fed hints rates on hold for now: During the presser, Fed Chair Powell nonetheless strengthened the case for rates to stay on hold for a protracted period. “We see the current stance of policy as likely to remain appropriate as long as incoming information about the economy remains broadly consistent with our outlook of moderate economic growth, a strong labor market, and inflation near our symmetric 2% objective. We believe monetary policy is in a good place to achieve these outcomes.”

BOC flirts with rate cut narrative: The CAD was taken to the woodshed after an off-the-cuff dovish commentary by the BOC, as Goveor Poloz said they had initiated discussions about the merits of lowering rates as an insurance move. While they kept the rates unchanged at 1.75%, it’s the unexpected dovish spin that had immediate ramifications to the CAD as bond yields in Canada dropped in response. The BOC also highlighted the “worsening global situation” as a major conce going forward.

APEC Summit canceled, US-China trade deal on track: Chile has canceled the APEC summit due to the social unrest in the country, but the China-US Phase One signature ceremony is still expected by mid November, with China offering Macau as an alteative location for Trump and Xi to formally ink the agreement. While the change of plans creates some logistical issues, the positive sentiment of the market remains unfazed as a US representative said the deal is expected to be signed “within the same time frame” and Treasury Secretary Mnuchin reassured the market that a deal is set to be signed in November.

US GDP Q3 beats estimates: The US Q3 advance GDP came stronger-than-expected at +1.9% vs +1.6% q/q annualized, with personal consumption at a solid +2.9% vs +2.6% expected, although the inflationary pressure continue to be nowhere to be found after the GDP price index stood at 1.7% vs 1.9% exp and the GDP deflator came at 1.6% vs 1.9% exp, which is the main reason for the upbeat GDP, but at the same time, reinforces the notion that the Fed has no case to raise rates in the future.

Packed agenda on Thursday: Today’s events include Australia’s building approvals and private sector credit numbers, which does not have the tendency to move the AUD much, meaning the momentum in the currency is unlikely to be disturbed by fundamentals. Then next up is the New Zealand business confidence and building permits updates, with the former likely to be a mover. Asia will be packed with events, as China’s official Manufacturing and Non-Manufacturing PMIs will be due out shortly after, ahead of the BoJ policy decision (no changed eyed), scheduled ahead of the Tokyo lunch time. As we move into the European session,inflationary readings out of Europe for the month of Oct and preliminary GDP data will guarantee solid volatility to hit the Euro ahead of the Canadian monthly GDP figures for August and September PCE deflator in the US.

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Recent Economic Indicators & Events Ahead

Source: Forexfactory

A Dive Into The FX Indices 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.

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The EUR index, if one follows my daily updates, would have been repeatedly waed that there really are only 3 major levels where a shift in behaviour is most likely. Understand the overall market structure in the EUR as derived by the collection of flows vs G8 FX, one can come to the realization that the market is anchored in an unambiguous distribution phase, and whenever that’s the case, there are only three key levels to act as most reliable, these being, the top/bottom edges and with some discretion, one can also consider the mid point of the range. As I type, the EUR is testing the topside where sell-side pressure should kick in.

The GBP index continues to trade encapsulated in a prolonged range, keeping the currency steady against the weakest links out there but not precisely thriving as the strengthening of other peers such as the EUR or Oceanic currencies worsens the technical outlook in pairs such as GBP/AUD or EUR/GBP as an example. This type of distribution phase makes the GBP hold a rather neutral tone, which is sufficiently strong to capitalize against the weakest currencies (CAD, USD, JPY). A breakout of the current range is needed for the GBP index to pick up in levels of volatility and set out its sights into new projected targets.

The USD index was rejected off a confluent level of resistance, setting out a violent tuout that so far has found no end in sight to the sell-side flows as the market re-adjusts its view towards the Fed policy stance. The fall in the USD index has been all about the aggressive drop in US yields as Powell ruled out rate hikes anytime soon unless inflation picks up (mirage?). The USD is about to test a prior low, coincidentally aligning with the 100% measured projection, which implies the risk of a rebound from here is a probable outcome even if one must be cautious on retaining a bullish USD view for longer than a few hours after Thursday’s price action.

The CAD index is by a country mile the worst performer after a surprise dovish spin by the BOC, leading to an epic fall as momentum-derived strategies exploit the bombshell, alongside the re-adjustment of position by longs caught wrong sided as this was not an outcome in the radar. The sheer amount of offers have overwhelmed buyers, and if one is looking to anticipate at what levels the CAD index may potentially stall at, the good news is that the market looks so out of whack now that I’d anticipate an additional 0.05 to 0.1% from Thursday’s close before profit-taking starts picking up and a pause in the trend occurs. Be aware, when Central Banks surprise the markets as the BOC did, this is not the time to be a hero as currency trends tend to last the longest whenever there is a CB-related shock as seen in the CAD market.

The NZD index stands on the opposite end compared to the CAD, with a punchy move in the aftermath of the FOMC extended into the early hours of Asia, allowing the Oceanic currency to break away from its temporary range and set its sight towards the most recent highs. The elongation of the NZD into the recent swing high would hit the first threshold at the 100% measured move + resistance level where market makers are likely to populate NZD vs G8 FX pairs with an increasing amount of offers, while longs would find it a good opportunity to take profits off the table. The overall outlook for the NZD is without a doubt bullish for Friday.

The AUD index has blown through its 100% measured move, indicating the clear risk of a follow-through continuation move despite the overextended nature of the market. As I reiterate over and over, unless you are a momentum or scalping trader, you have no business to be found in the Aussie unless we see a significant setback towards liquidity areas (green lines) where buy-side interest is set to re-emerge. Most of the bullish move should have been capitalized by buying at much lower prices and not at the current hefty levels the AUD trades at.

The JPY index remains technically compromised as it approaches a key level of support as part of the long-held distribution phase, with the risk of an eventual breakout looming near. Should it materialize, a move to the tune of 0.7% can be expected based on a 100% measured target. On the flip side, traders looking to engage in buy-side action are now provided with an excellent value level as the JPY has landed at an hourly horizontal support. The BOJ policy decision is just a few hours away, so be on high alert for a temporary spur of volatility to hit the market.

The CHF index rose until running out of juice slightly above the 100% measured move, as it faced a key level of horizontal resistance right overhead + the daily baseline. The outlook for the Swissy remains unclear, as the index continues to trade below the daily baseline, but even more importantly, the retracement occurs in the context of a successful rotation to the downside in the higher time frames. A break through the overhead resistance can open the doors for a fresh move projected to be around 0.2%, while a further retracement can see the index retest its prior support. Either way, awaiting for the CHF to interact at these levels offers best pricing opportunities.

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. 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.
  • 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


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