The Daily Edge

Risk-Sensitive Currencies Stay Under Pressure

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.

Quick Take

Mondays tend to be a low key affair unless there is a disruption in the news flow over the weekend. The last 24h of trading was no exception, with the aggregate tick volume below the normal standards and the movements contained in familiar ranges. There were two currencies undepleted of healthy levels of volatility though, which include the Pound, boosted by an upbeat UK July GDP as the lingering effects of the no-deal Brexit bill still play out in the background, alongside the Swiss Franc, which we could dub as a “falling knife” at this stage after 3 consecutive days of sharp declines. The Euro found demand on the back of Germany’s shadow budget chatter, with the Aussie also following the Euro tail very closely as the quadfecta of positive developments last week has seen steady flows concentrated in the oceanic currency as the fav proxy play on China. The low-volatility Monday, nonetheless, had it tough in those looking to engage in trading the USD or the CAD, both undergoing painfully compressed ranges. 

The indices show the performance of a particular currency vs G8 FX. An educational article about how to build your own currency meter 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 aided by UK GDP reading: The Pound regained the upside after the UK m/m July GDP came upbeat at +0.3% vs +0.1% expected where services output was the major contributor, which represents the largest one-month rise since November 2018 even if ONS notes the prospects for growth to be sustainable throughout the year look fragile. Additional factory activity data also came solid, including manufacturing production, industrial production as well as construction output.

The UK Parliament goes into suspension: On the Brexit process, the UK parliament has been officially suspended with the govement spokesman keeping the hard-line stance that the govement will not seek an extension. Meanwhile, Brexit Minister Raab said he will go to negotiate a deal while noting the govement will respect the rule of law after the Queen gave royal assent to the bill that blocks a no-deal Brexit. The next big date for the Brexit saga will be the EC summit on 17-18 October.

Germany may create ‘shadow budget’: The Euro found some demand half-way through Europe after louder chatter that Germany may adjust its budget if the outlook worsens, according to a ministry official. Reuters elaborated further by noting that Germany may create a ‘shadow budget’ to ramp up public expenditure outside the limits set by the national debt rules. The report notes how officials are “flirting with the idea of setting up independent public entities that would take on new debt to increase investment in infrastructure and climate protection.”

Fighting words by  Xijin: The Chief Editor at Global Times and China’s sounding board tweeted: “China’s economy is slowing down, but it’s still on path going forward. Massive infrastructural construction is continuing, people’s livelihood is advancing. American economy is idling, with exuberance supported by bubble. It is Washington that is nervous.”

More RRR cuts coming in China? After China announced a further easing in monetary policy by cutting the Reserve Requirement Ratio (RRR) by ½ percent to 13%, applicable to all bank from Sept 16th, a further 1% reduction for additional commercial banks will follow in mid-Oct and mid-Nov. Additionally, according to the Global Times, China is “likely to launch more reserve requirement ratio (RRR) cuts this year as the economy is under dual pressure from the trade war and domestic economic adjustments.”

The US to consider tax cuts: US Treasury Secretary Mnuchin said that Trump will think about tax cuts next year, even if the reality is that getting the bill through the Democrat-controlled Congress would be highly unlikely. Mnuchin also stated that “there is no reason to believe Fed Powell’s job isn’t safe”, and that “we’re prepared to sign a China deal if it’s good for the US”, while assertive of the fact that “we have not seen impact from trade war on the US economy”, which in Mnuchin words, makes the “President perfectly fine with continuing tariffs absent a new deal.”

Recent Economic Indicators & Events Ahead

Source: Forexfactory

A Dive Into The Charts

The indices show the performance of a particular currency vs G8 FX. An educational article about how to build your own currency meter can be found in the Global Prime’s Research section.

The EUR index keeps finding demand off the lows, which coincides with the same area where the currency was given a solid impulsive pop during late July. The upside remains well capped by the baseline, with the next few days of trading until the ECB monetary policy meeting still facing the prospects of downside risks as technicals stand. Today’s correction came amid significantly lower-than-expected buy-side participation as the aggregate tick volume depicts, which is not that encouraging to see follow-through demand emerging as commitment is low.

The GBP index is retesting a key resistance level, and unlike the EUR, the prospects for the perky Pound to print further gains are definitely a possible outcome as the market remains immersed in a campaign of pricing out the chances of a no-deal Brexit this year. During Monday’s retracement, the index found dip-buying strategies dominating the proceedings, with the demand imbalance most notable at the test of the daily baseline (13d ema). Overall, the Sterling looks constructive even if one must acknowledge the upside is currently limited by a line of resistance, which if based on the volume carried on the retest, is not that encouraging.

The USD index continues to print the right sequence of low tick volume candles into a relevant structural area (50% retracement previous balance area) to make me think the outlook for the US Dollar is definitely attractive from a risk-reward perspective. That said, I always tend to wait for a retake of the baseline alongside other elements to validate my trades, although I must confess that the technical area where the USD has paused holds significant value for the currency to see renewed buying interest starting this Tuesday.

The CAD index, akin to what we are seeing with the GBP index, has stopped in its tracks at a key level of resistance, with a doji-like bar (uncertainty) printed on Monday. Since the bar must be assessed in the context of an uptrend, the outlook on the currency looks bright, with recent fundamentals in Canada backing up the bullish narrative in this market. Any setbacks should be seen as buying opportunities as the index is also aided by a bullish structure of rising bottoms.

The AUD index continues to defy gravity by keeping its momentum intact as another key level of resistance approaches. Given the overextension of the index, I’d consider any extra push higher worth more than 0.20-0.25% from Monday’s close as potential opportunities to face the AUD strength heading into this major level. Also note, the current bullish leg is developing with tapering tick volume, which tends to be a precursor for a reversal back to the mean. These are very dangerous levels to be entering long positions on the AUD if you ask me.

The NZD index is not as stretched as the AUD, so from a re-distribution of flows perspective, should the risk appetite extend, it makes sense that the NZD may start to outperform its neighboring currency from here. The room that exists until the next key resistance in the chart is also more ample than in the AUD, with over 1% of additional gains still potentially in store. The index trades in bullish territory for the first time in months after the breach of the baseline.

The JPY index continues in a slump with 0 technical prospects that a bottom has been found. The break through the baseline alongside the close and acceptance below a key level of support has been a very damaging technical event for the Yen. As long as the risk dynamics remain supportive, the room for the Yen long positions to unwind further remains ample, which is why I am still expecting the currency to be one of the main losers this week, up to the ECB outcome.

The CHF index keeps selling-off sharply with the elongation of the last bar on such a poor aggregate tick volume suggesting the currency may soon find bargain hunters all over. That said, the currency remains in a state of being a “falling knife”, which makes catching it a dangerous proposition indeed. The close at the very low of the day in NY is quite conceing as well, as you’d want to ideally see some type of absorption. Besides, the index does not yet provide a clear technical level of support to lean against until the 100% proj target 0.4% lower.

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.
  • 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


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