The Daily Edge

Strong USD Demand After Solid US Growth

Date: 3/1/19

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, futures and options, 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

As liquidity dries up and we transition from US trading into the Asian zone, the USD and the Euro were the best performing currencies in the last 24h, although it was the former that ended the US session in the strongest fashion after US growth figures came surprisingly upbeat. The Euro was supported through the first half of the day, with positive inflation readings out of Germany anchoring the buy-side bias. The Canadian Dollar followed the rise in the USD almost in locksteps.

The Sterling’s outperformance throughout the week came to a pause after back-to-back days of very solid gains as a Brexit delya looks baked in the cake, while the Oceanic currencies and the Yen were clearly unloved as the first chart below shows. From a macro perspective, when analyzing the 5DMA slope, the Euro and the Sterling remain the only 2 currencies with an uptrend in play, the CAD follows closely behind, while the AUD, NZD, JPY are starting to develop broad downtrends vs the strongest peers.

The USD is still not out of the woods, with a stellar run in the last session yet the 5-day performance is still largely bearish. From a daily view, the USD shows overbought conditions as per the 25-period slow stoch in the hourly but such an outlier as the US GDP was may see further buying momentum. That said, even from a 5-day standpoint, the slow stoch is entering overbought conditions. Interestingly, the Pound has entered oversold territory within the context of a broad uptrend, watch it closely if you swing trade.

Narratives in Financial Markets

  • US Q4 GDP outcome of 2.6% saar (annualized growth) results in a reinvigoration of the US Dollar, which ends as the best performing currency for the day. It came at 0.65% in Q/Q terms. The breakdown shows solid consumption and a decent read in inventories while the net exports and business investment were the notable drags of the report. In other positive US news, the Feb Chicago PMI came at 64.7 vs 57.5 exp, an excellent result again.
  • The summit between US President Trump and North Korean Dictator Kim yielded no progress in the efforts of the US for the isolated country to get denuclearized or from the Korean side to get the US sanctions lifted. The impact of the event was limited in the markets.
  • US President Trump’s Chief Economic Adviser Larry Kudlow told CNBC that the progress in the US-China trade deal ‘has been terrific’, adding that he believes both counties are headed towards a ‘remarkable historic deal’. Some of the progress includes a reduction in subsidies to state-owned firms, transparency of the Central Bank’s activity in buy/sell foreign currency as well as a partial understanding on China scaling down its technological ambitions in EMs. Many of the details must still be approved at the highest ranks of the Chinese govement. A planned summit between Trump and Xi is thought to occur around mid-March.
  • Fed’s Kaplan reiterated, in line with the uniform consensus message by the rest of Fed speakers, that the Central Bank will make a decision on the balance sheet runoff halt in the not-too-distant future. The market seems to have fully priced in this one though. Meanwhile, Fed’s Vice Chair Clarida said the Central Bank is entering an era when it is ‘especially’ conditioned to adjust policies based on incoming data.
  • Both German national and regional inflation data showed a recovery. The Feb preliminary CPI came at +0.5% vs +0.4% exp while the Feb Saxony CPI reading stood at +0.3% vs -1% which should provide some small degree of comfort to Euro buyers.
  • The BoJ announced a tweak to its bond-buying operation in March by buying fewer bonds. With the 10-yr bond yield under 0%, expect further adjustments in the near future.

Recent Economic Indicators & Events Ahead

Source: Forexfactory

RORO – Risk On Risk Off Conditions

This week, we’ve transitioned into USD-centric dynamics in our RORO model, with the major spike in US yields driving the mood. What’s still interesting is how poorly the DXY is lagging behind US yield from a macro standpoint. Anyhow, on the heels of the strong US growth numbers, the reinvigoration of the DXY bullish bias from a micro perspective is keeping beta currencies (mainly AUD, NZD) depressed, further supported by the absence of gains in equities.

So, in the very short-term, we must contend with a scenario #5 (USD strength) and keep our attention in equities, where interestingly, the compressed range this week has led to both the 25-HMA and 125-HMA both tuing flat in a reflection of the lack of directional bias. In the macro scene, the ‘true risk on’ picture is not as clear cut given the hiatus of limited vol in the SP500, which keeps us in range. So, a resolution higher would take us back into ‘true risk on’ while a move lower.

Even a move lower in equities would still face the contradictory signals from higher yields and a lower DXY (macro wise), which means we wouldn’t yet be at a stage where we could claim a macro ‘risk off’ period, at least not on a week-by-week performance basis. This is a market to stay short-term oriented folks.

Dashboard: Intermarket Flows & Technical Analysis

Analysis of Forex Majors

In terms of the EUR/USD, wherever the German vs US 10-yr yield spread is headed, so does the currency pair. The correlation is as high as it’s been for months, so you want to pay close attention to the re-anchoring of this historically reliable instrument to understand the next capital flows. As the outlook table indicates, the market is neutral short-term, although the macro dynamics still support higher prices, even if that’s going to be tightly dependable of the yield spread as mentioned.

In the short-term, the GBP/USD has come back to earth after a stellar run. The pressure lower in the DXY as well as in the UK vs US bond yield spreads have led to a setback that may be interpreted as a window to potentially engage in buy-side opportunities if you still count on this uptrend having further legs up. If that’s your view, a reversal of the cross-asset flows, as I always suggest, is the first pre-cursor to put yourself in a lower risk entry position.

In the USD/JPY, other than the bearish macro trend in the USD, the rest of signals indicate we’ve permuted into a healthy uptrend with technical and intermarket dynamics endorsing the impulsive move higher. Notice, the move is almost entirely driven by the spike in US yields given that equities and the DXY remain fairly subdued this week. What this means is that it is the US yields market that you must be paying the closest attention for this strong momentum to still find pockets of demand at such hefty levels.

In the AUD/USD, it’s all about the AU vs US bond yield spread that’s driving the fluctuations in the pair. The correlation coefficient runs at an incredible 80% (both micro and macro). Therefore, remain fixated on where this spread goes and you will put yourself in a better position to find opportunities. As of late, the influence of the DXY + Yuan has been abating as the key driver. My impression is that as long as the AU vs US yield spread can adjust higher, this is a market poised for a significant correction as we are still in an environment of an uptrend in the DXY+Yuan (inv) markets and equities are simply in consolidation mode rather than any panic selling. I can’t see lower AUD levels on this backdrop unless as I mentioned, the intermarket studies deteriorate more aggressively.

In the USD/CAD market, we are getting a mixed bag of signals, with the strength in the DXY and US yields capping the downside, while Oil (inv) both from a micro and macro limits the recoveries. During this week of trading, we’ve transitioned into a 1.3240-1.3120 range, so that should with the currency pair now trapped in a phase of rather noisy fluctuations with no clear bias.

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