The Daily Edge

Rotational Currencies, USD Technicals Worsen

Date: 4/3/19

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

The Yo-Yo type movements in the Sterling continue, this time what we saw was a spontaneous reversal back to the upside as algos and fast money piling into the GBP after news broke out that UK PM May is open for a dialogue with the Labour party to unlock the Brexit conundrum. If only it was as easy as it sounds! I continue to reiterate, as a waing to intraday traders, the GBP remains completely taken hostage by a market entirely driven on a Brexit headline-by-headline basis. The Japanese Yen exhibited a combatant profile through Wednesday, despite in the grand scheme of things, it continues to be the main underperformer as ‘risk on’ has recently taken over vividly. The Aussie was sold on the back of a more dovish RBA, even if the trappy nature of the currency due to its low vol and a stellar Aus retail sales, alongside positive news on the US-China trade talks, have now reverted a large part of the losses incurred in the last 24h. The Kiwi is still piggybacking the Aussie amid the lack of individual drivers. The CAD and the USD continue to attract steady flows, even if it’s looking as though the EUR/USD and as a consequence, the DXY, may be at an inflection point as the cycle reaches full maturity.

Key Narratives in Financial Markets

  • US equities managed to recover early losses following the eaing waing via retailer Walgreens. The S&P 500 has been rising for 4 days in a row as risk remains steady.
  • The RBA left a sense that they are getting more dovish, resulting in a lower AUD. The final ‘policy guidance’ paragraph was changed for the first time in years, noting that the Central Bank is now “monitoring developments” , which seems to imply, there is more room for them to maneuver and consider lower rates, with the jobs market likely what will eventually move the needle, as there was an overemphasis in the statement today. The RBA also recognized for the first time that the housing downtu is weighing on prices.
  • The Australian budget offered little surprises. For the first time since the GFC, the budget is projected to be in positive territory through 2019-2020. The Aussie barely budged.
  • UK PM May announced a plan to work with the Labour party on a unified front to Brexit, while seeking an article 50 extension from the pressing April 12th deadline. This news led to a strong boost in the value of the GBP, recouping yesterday’s losses. It implies that both parties may find a compromise that involves a ‘custom union’ as the best alteative.
  • Fitch has affirmed its top rating of AAA for the US with a stable outlook. The news came the same day as the US printed a rather disappointing durable goods orders at -1.6% for Feb.
  • Australian retail sales came upbeat at +0.8%, much higher than the +0.3% expected. On top of that, the Australian trade balance came at a surplus of 4.8bn, which is over 1.1bn above market expectations. Overall, a very positive set of events for the Aussie.
  • Adding to the AUD positive news, the FT is reporting that the US and China are getting closer to a final trade agreement, noting that representatives have solved most of the issues standing in the way of a deal. However, there is a caveat as part of the report, as they are still haggling over how to implement and enforce the agreement.

Recent Economic Indicators & Events Ahead

Source: Forexfactory

RORO – Risk On Risk Off Conditions

By the close of NY on April 2nd, the overall risk appetite waned a tad although it’s too premature to determine whether or not it may lead to a permutation into ‘risk-off’ flows coming back. For now, we are lacking sufficient evidence, as the price action in equities and fixed income (SP500 & US30Y as bellwethers) appear to be entering a stage of consolidation rather than new initiated selling pressures. The drop in the DXY during the late hours of the US is a sign that risk conditions remain fairly relaxed, but the bullish micro flows into the Japanese Yen as per the upward slope of the 25HMA Yen index (first time since March 28th) should be a source to be cautious and wait for further technical evidence. When looking at industrial metals the likes of Copper vs Gold, the ratio has been coming down this week, but it looks as though the corrective price action is suggestive of profit-taking flows vs renewed sell-side interested. Similarly, for the interest of ‘risk on’ conditions, the Oil vs Gold ratio remains very elevated, a clear communication that the market keeps betting on global growth picking up. When analyzing the VIX (vol index), it exchanges hands near the lows of its ongoing bearish cycle, while US credit markets, as depicted by the HYG vs IG ratio (junk bonds vs investment-grade bonds) also remains in a broadly bullish trend ever since the bottom found on March 8th. On credit markets, the Research Team at Morgan Stanley issued a waing in the last 24h, noting that “while US corporate bond markets have continued to rally, with high yield credit spreads tightening by 15bp yesterday – representing their biggest one day tightening since January – it seems investors have ignored weakening credit fundamentals as the first quarter saw the most credit rating downgrades for US companies relative to upgrades since the beginning of 2016, according to Bloomberg.”

Markets To Watch: Intermarket & Technical Analysis

EUR/USD: Reaches Confluence Support + 100% Proj Target

The exchange rate looks set to be in a late maturity state as part of its bearish cycle, if one is to judge by the critical support we’ve reached at 1.1180-85, but most importantly, how we’ve reached it. The sell-side campaign from the highs of 1.1440 has come in 5 legs, with each impulsive leg down decreasing in magnitude and velocity as the blue rectangle measured moves reflect (170p, 108p, 63p). The price has now reached what may potentially become the ultimate target where a period of distribution occurs before an attempt to build up a fresh upside bias on the basis of an exhausting cycle due to the completion of its 5 legs sequence (3 impulsive down, 2 corrective up). To strengthen the bullish case scenario, the descending trendline in red should be violated and acceptance found, ideally, above 1.1230, which coincides with the midpoint of the last consolidation patte. It’s worth noting the extreme accuracy in terms of price reactions to each an every 100% proj target hit.

USD/JPY: Testing 111.15-20 Confluence Support

Judging by how the bullish trend has panned out since prices bottom out sub 110.00, it looks as though the US ISM-induced spike is still part of an incomplete 3 leg upcycle, in which we would still be missing another push into new highs. The fact that the bullish extension off 110.00 on March 28th went for a 141p run, suggest there is still an awful lot of buyers committed, given that in terms of magnitude, such push achieved almost 50% as much as the previous 1st push of nearly 100p. The first conviction test for buyers is occurring as I type, as an area of strong confluence at 111.15-20 (ascending trendline + resistance tued support) is being tested. The price has pulled back, as it’s been the case in the entire sequence of movements, at the 100% proj target. It’s worth noting that even if we were to see further setbacks of the bull run, as long as the deeper ascending trendline originating off sub 110.00 is violated, this is a market with still credence to be bought from a technical perspective. As we shift our focus towards intermarket flows, the recent rampant run in the S&P 500, US yields and the overall bullish stance in the DXY offers a positive background. It’s important to monitor any expected weakness in the DXY, given the late stage cycle in EUR/USD, as that may create additional sell-side pressure, conditioned to the performance of equities and bonds.

AUD/USD: Same Old Trappy Story

If you are looking for a market with the traits of being extremely choppy and trappy in nature, look no further than the exchange rate of the Aussie vs the US Dollar. It’s all about grabbing pockets of liquidity whenever possible to revert the price back to the mean. One could argue that in the grand scheme of things, the main trend is still down, at least that’s what the last 2 weeks of price action seem to suggest with 3 peaks reached, each lower than the prior, allowing us to draw a descending trendline. However, there remains a deficiency in conviction by sell-side accounts to break through the 7050c. With each attempt ever since the 2nd week of March finding consistent demand imbalances. The outlook for the range to extend and the Aussie to recover on the back of the RBA dovish outcome is definitely on the cards, especially following a blockbuster Aus retail sales report and the underpinning of intermarket flows, where equities and the DXY + Yuan (inverted) support the buy-side narrative in the next 24h, even if the Australian vs US bond yield spread makes new lows.

BTC/USDT: Blink & You Missed It

The explosive move by BTC from levels near 4k up towards the 5K vicinity represents the achievement of the 100% proj target based on market structure symmetry. The bottom of the consolidation that took place through Q1 ‘19 was about 3.2k, and in light of the range breakout being confirmed after 4.1-2k gave in (depending on exchanges), it’s to expect that the run will most likely run out of juice in the 5-5.2k vicinity. This is a level that we’d call the macro 100% proj target, which also happens to coincide with the low of the first impulsive selloff in BTCUSDT following the resolution of its long-held low of 6k through H2 ‘18. Note, there is another 100% proj target that has been surpassed (micro), which has served well as a reference to reinstate long positions by intraday traders, as the 2nd chart clearly reflects.

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. The weekly cycles are highlighted in red, blue refers to the daily, while the black lines represent the hourly cycles. 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