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. Feel free to follow Ivan on Twitter & Youtube. Make sure you join our discord room if you’d like to interact with our team. Also, find out why Global Prime is the highest rated broker at Forex Peace Army.
Safe-haven bids into the allure of the Japanese Yen and fixed income markets are the name of the game as the markets gradually come to the realization that the global economy is about to enter a period of subpar growth as the US and China drag on the trade strifes. The behavior of risk-sensitive assets is finally revealing that the market is buying into the notion of a protracted trade war with no end in sight, and as such, leveraged-seeking strategies are on deleverage mode. The USD received a better bid tone as US consumer confidence held firm, while the Aussie also found significant interest even as Aussie yields in the 10y maturity fall below the official cash rate of 1.5%, which communicates the market is overly confident that the RBA will cut its benchmark rate in June. The Canadian Dollar has been the most unloved currency as the market prepares to adjust the currency valuation based on today’s BoC policy meeting. Lastly, the Euro has traded on a softer note as the fragmented EU parliamentary election results feed through and Italy makes headlines once again for the wrong reasons. The Pound is finding a better footing so far as traders await the transition away from PM May at the helm of the UK govement starting next week, a period where GBP vol will be subject to which candidate is ahead on the bookies.
Narratives In Financial Markets
* The Information is gathered after scanning top publications including the FT, WSJ, Reuters, Bloomberg, ForexLive, Institutional Bank Research reports.
- The risk-averse dynamics have taken a decisive tu south, as US equities go through a late day sell-off while US bonds see further buying right throughout the day. A reflection of the negative outlook towards the US economy is the further inversion of the 3m/10y yield curve.
- The market appears to finally come to terms on pricing in a protracted trade war between the US and China. Talks are set to extend for months, if not quarters. A complete collapse in negotiations no longer a scenario to be ruled out either if recent rhetoric serves as an indication.
- The rude health in the US labor market is yet again being reflected via the US consumer confidence data, which came significantly higher at 134.1 vs 130.1 exp. It lent some support to the US Dollar, as of late moving more in tune with the latest fundamental cues.
- The Dallas Fed manufacturing PMI fell to -5.3 vs 5.8 exp. The latest announcement to increase tariffs on Chinese goods imports is the main culprit behind the worsening of conditions. What this reading entails is the build-up of downside risks for next Tuesday’s US manufacturing ISM print.
- The Canadian govement is preparing to present the bill in order to ratify the new NAFTA agreement, a mere formality in Canada but one that may face difficulties to pass the Democrat-controlled House in the US. Stay tuned to headlines as it may impact the CAD.
- EU Commission President Juncker was quoted, via the BBC, that there is no room for further negotiations in the Brexit withdrawal agreement. Remember, with Theresa May on her way out, the race for the successor of UK Prime Minister is due to start on June 10th.
- According to a report by Bloomberg, German Chancellor Angela Merkel is planning to stay in power until at least 2021 amid disagreements and lack of conviction in the succession plan.
Recent Economic Indicators & Events Ahead
RORO (Risk On, Risk Off Conditions)
The deleveraging scene keeps on worsening, with the music we can hear in the trade negotiations far from soothing the nerves from a market that is increasingly in disbelief of a trade deal any time soon. In other words, it looks as though the market is behaving as if the US and China have gone past the point of no retu, and as such, Mr. Market is unwinding with asperity risky bets. Instead, flows are heading back into the safety allure of bonds as equities take a hit. The S&P 500, as our global guidance to take the lead in equities, has been hammered again after an impulsive sell-off, while the technical picture in US yields is the darkest it’s been as the US30y loses the 2.7% handle. Note, the market’s exasperation can also be reflected in the further inversion of the 3m/10y yield, a clear waing sign that the market is pricing in a severe slowdown domestically. The resurrection of the DXY, alongside another episode of runaway strength in the Yen index, tops the risk off dynamics. By expanding the view into the wider spectrum of the RORO model, we can clearly observe a grim outlook maintained in Chinese assets as well as the VIX and junk bonds.
Latest Key Developments In FX (Technicals, Fundamentals, Intermarket)
EUR/USD: Sellers Achieve Break of Hourly Structure
GBP/USD: Enters A Range As Selling Vol Pressure Builds Up
AUD/USD: Consolidation With Trappy Edges Eyed
USD/JPY: Risk-Off Environment Keeps Downside Risks Intact
- 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