The Daily Edge

FX Vol Flat-Lined Ahead Of Risk Events

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Market Summary

It’s been a snooze fest in the FX market, indicative of the high-stakes events around the coer. This degree of tranquility is typically the precursor of a looming storm, which as a reminder, will come courtesy of the FOMC on Wednesday, the ECB policy meeting and UK general election on Thursday, and ahead of the decision on Chinese tariffs by Sunday Dec 15.


Quick Take

The currency market is in a holding patte ahead of the abounding barrage of risk events late this week, which will start with the FOMC on Wednesday, the ECB policy meeting and UK general election on Thursday, ahead of the decision on Chinese tariffs by Sunday Dec 15. The ebbs and flows into trading currency has, therefore, understanbly receded significantly. If one is to play positions this week, be quite strategic as this tranquility is leading up to an injection in vol. As I’ve detailed in the last report, the Central Bank events are likely to act as an idiosyncratic factor mainly influencing flows into individual currencies, even the UK general election may see volatility largely contained within the walls of GBP-related pairs. It’s going to be the decision by Trump to either enact or suspend tariffs on China, with the deadline this coming Sunday, that may see the most impact in financial markets as a whole, as this has been, without a doubt, the overarching theme that the market has been most sensible to, and crunch time is looming fast. As the chart below shows, the movements in FX have been rather tepid, with the GBP and NZD still maintain its advantage when accounting for last week’s performance, while the USD, CAD and EUR, in this order, remain the least favored this Dec. Sandwiched in between we find the JPY, CHF and AUD, as we await more conclusive price action.

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.

Where do we stand in the Chinese tariffs? In the US-China trade saga, the headlines that have been dripping in have been inconclusive, even if the US Agriculture Secretary said the next tranche of tariffs to China may be suspended, noting that “we have a deadline coming up on Dec. 15 for another tranche of tariffs, I do not believe those will be implemented and I think we may see some backing away.” Secretary Purdue added that “there’s got to be some movement on their part to encourage him not to do that and hopefully the signal that they sent over soy and pork reduction might be that signal in that way”. There was a recognition that such decision is on President Trump’s courtyard.

Vol in markets has been on the rise: Despite the low volatile and soggy movements experienced in FX this Monday, be reminded, as Morgan Stanley notes, that in the grand scheme of things, vol in financial markets is starting to creep back up quite noticeably. As the Strategy team at the bank details, “realized rate volatility has retued to the elevated levels of early November, while realized equity volatility in both the US and Europe has risen to two-month highs. Even FX volatility, which has notably lagged other assets, has ticked up – though to a less substantive degree.”

Data trends divergence = higher vol: Morgan Stanley argues that to sustain this volatility we need data trends continuing to diverge. As the team notes: “Divergence is a recipe for volatility, and we are starting to see signs of the data trends diverging. Global data continue to show signs of stabilization. More than half of global manufacturing PMIs ticked up in November, including in China where both manufacturing PMIs have rebounded. Trade activity is also showing signs of bottoming while global credit growth is rising at the fastest pace in three years.”

Recent data supports global growth stabilization: Even if the data was sparse and low-tier on Monday, the economic releases play into the view of global growth starting to stabilise. First off, the Japanese Q3 GDP edged up to 0.4% q/q after a considerable revision from an initially reported 0.1% q/q, with stronger business investment the key factor in this rise. In the Eurozone, the Sentix investor sentiment surprised with a move up to +0.7 in December, which may hint at a more robust German ZEW survey on Tuesday. The German Trade Balance also printed a better reading at €20.6bn after a 1.2% m/m increase in exports, while in New Zealand, following the positive trend in fundamentals, manufacturing production came upbeats. All this data, as NAB notes, shows “signs that stabilisation is starting to emerge in coers of the global economy.”

Tories well ahead in the polls: The latest UK election surveys have reinforced the idea that Boris Johnson’s Conservative party is likely to obtain a majority in this week’s parliamentary election. This poll charts, courtesy of ‘Britain Elects’ and shared by the Wall Street Joual, paints a clear picture. When accounting for all surveys and averaging the results, PM Johnson’s lead is extending as of late. Should the election produces no conclusive outcome though, the collapse in the value of the GBP could be quite dramatic as the market has been busy pricing in a Tories’s landslide victory. Besides, the BOC’s policy path may have to be repriced lower as uncertainty will retu.

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Recent Economic Indicators & Events Ahead

Source: Forexfactory

Professional Insights Into FX 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 broke below the bottom side of its range last Friday, a development that has technically worsened the overall outlook in the currency ahead of the ECB. The currency looks far too weak to expect a sudden tuaround and gains to come by, but one must be aware that Lagarde’s first presser as ECB President on Thursday may represent a major vol injector and act as a trigger for a resetting of the EUR valuation. Therefore, when it comes to the EUR, a much greater deal of clarity will not be obtained until Lagarde’s stance on policy is formally defined.

The GBP index has maintained an upward bias ahead of the UK election outcome. Trading the GBP earlier this week does not offer the same attractive rewards as the ebbs and flows have now receded significantly ahead of the huge risk events that lies ahead. Technically, bullish is the clear trend to stick with, but the fundamental risk is most likely going to cause the market to tread water in the next few days as positions and trading activity are dialed down.

The USD index has reached a location where one would think a period of distribution that allows the price to at least stall and potentially reverse back up towards last week’s breaking point. The performance in the index this week will hinge on the outcome of the FOMC, so again, technicals won’t act as a primary driver to gauge the next direction but rather the stance on policy by the Fed will. It is safe to assume though, that with forex seasonas against the USD in Dec, and technicals looking poor, any Fed-led bounce should still be met with grateful sellers.

The CAD index may have found a meaningful bottom, or at least, that’s what the maturity of its downcycle seem to suggest. Each leg down has carried lesser commitment – magnitude of the downside extension – than the previous (-1.65%, -1.45%, -1.10%). This premise is supported by the latest BOC decision, which appeased the prospects of a rate cut, although it is at odds with the horrible Canadian jobs report printed last Friday. I held the view that the CAD is starting to be perceived as a currency with a misplaced cheap valuation that should keep order flows skewed to the upside. However, the Canadian jobs shocker, which was the worst in 10 years, has understandable lower my conviction on this view, as I want to pair up technicals with fundamentals. Note, while the structure in the index remains bearish, the market grabbed lower liquidity where shorts were mitigated in what I see as the termination of the sell side campaign.

The JPY index fails to manifest, via its aggregated flows, a clear picture in the last week of trading, and I must say, understandably so, as the market dials down its commitment to take any aggressive bets against the Yen ahead of the risk events on schedule. While the macro trend is clearly to the downside, it is the day to day flows that I am most interested to decode based on what type of ebbs and flows went through the books, but in the case of the Yen, it really is in a holding patte going nowhere fast until the market can digest the risks to come.

The AUD index continues to look fragile in its outlook, which still suggest the double bottom to be raided as the next logical target. Once the Aussie comes into contact with this critical pocket of liquidity available, it will be time to watch like a hawk what pans out. Will the market see follow through supply towards the double bottom in Aug-Sept, or will Aussie buyers show up for a reversal back to the midpoint of the broad daily range. In the grand scheme of things, this is the binary outcome to pay attention as that’s where the index is headed next.

The NZD index managed to sustain its upward momentum into Friday last week, which made the bull run being even more impressive in nature as it blew up what I’d have expected to be a potential top given the level of confluence. The break above this important resistance point definitely depicts graphically that the NZD flows remain largely one-sided to the upside, hence there is no reason to be a hero by looking to engage in shorts unless you have a well calculated and premeditated strategy that looks to hold positions for longer time horizons.

The CHF index keeps its outlook unclear with rotational price action the norm, so we are none the wiser by analyzing the fluctuations in the last 24h of trading. This messy outlook is perfectly manifested via the recent bullish outside candle off the lows met with a bearish outside candle 2 days later, again, the perfect graphical example of this inconclusive outlook for the currency. I am personally staying away from forming any strong opinion on the Swissy as the overall flows stand. Trade with extra cautiousness if you are going to engage in this currency, making sure you crosscheck it against the weakest peers out there if you aim is to bank of CHF strength.

Important Footnotes

  • 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
  • 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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Ivan Delgado

The Daily Edge is authored by Ivan Delgado, 10y Forex Trader veteran & Market Insights Commentator at Global Prime.[/vc_column_text][vc_column_text]Follow Ivan on Twitter & Youtube weekly show.[/vc_column_text][/vc_column_inner][/vc_row_inner][vc_row_inner][vc_column_inner][vc_wp_posts number=”5″][/vc_column_inner][/vc_row_inner][/vc_column][/vc_row]


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