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.
The surge in US Dollar demand after the temporary truce reached between the US and China at the G20 has been the dominant theme so far. Granted, the market is still holding the firm belief that the Fed will go through an insurance rate cut by the end of July when they meet again (Fed’s Clarida gave us a clear hint on Monday) even if the S&P 500 hits a record high and the softening of US-China tensions argue the risks are building up for a hold in July. Should this scenario materialize, it would be a major upset for the market as the Fed funds currently prices in a nearly 80% chance for a cut. Throw into the mix that the US June ISM manufacturing index came upbeat on Monday, and should this week’s US NFP post a solid number, the case would be gaining massive traction for the Fed to have a rethink over the aggressiveness of its easing cycle.
Amid such changing landscape, as the chart below shows, the US Dollar attracted the most demand with aggregated tick volume showing decent commitment by buyers, while the close near the highs by the NY close yet another key clue that the momentum remains strong as the market adjusts its view on the Fed and the trade war. On the flip side, there is fear that the trade war may now pivot towards the European Union, as the US proposes fresh tariffs, starting with $4bn on EU goods. With the ECB clearly on a dovish mode, the Euro is certainly not anchored by fundamentals, and the latest EU PMIs are only making it look like an even weaker currency, fundamentally speaking. From a technical standpoint though, the structure in EUR/USD is still rather promising but as long as fundamentals are not congruent, it’s hard to envision consistent demand. The EUR index below clearly reflects this idea of a vulnerable Euro, as it accumulates 5 days of losses in a row when crosschecked vs an equally-weighted basket of major currencies.
The same dark clouds are hovering over the Sterling, which is the currency most punished as the Brexit process remains on standby until a new Conservative leader is chosen and becomes prime minister. The plan is that the process should be concluded before the summer recess. What happens next on Brexit will depend on who wins.
We then have the circle of the three darlings of the market as of late, referring to the commodity-linked currency complex, with the Canadian Dollar clearly the standout as the BoC appears to be one of the only exceptions in terms of a Central Bank that, through Canada’s economic indicators, is finding it hard to justify further rate cuts. This comes in stark contrast with the RBA, which just an hour ago made good on its series of hints that further rate cuts were warranted in Australia by slashing the cash rate by 25bp to 1%. Lastly, the Japanese Yen, while still on a downtrend from a daily perspective as the left chart below shows, saw solid demand after the opening gap, with the premise that best resonates to rationalize the move to have found sufficient buyers being that most of the China trade truce-led positivism had been largely priced in since mid last week.
Narratives In Financial Markets
* The Information is gathered after scanning top publications including the FT, WSJ, Reuters, Bloomberg, ForexLive, Institutional Bank Research reports.
- The RBA decided to cut its cash rate by 25 bps from 1.25% to 1.00%, noting that the rate will help to make inroads into spare capacity and achieve progress towards inflation target. Again, the RBA put emphasis on the jobs market as the key sector the cut needs to support. The Australian Dollar saw the typical seesaw but found buyers as the accompanying monetary policy statement does not make a clear case for more cuts from here on out.
- The USD has greatly improved its appeal on the back of the US-China trade truce at the G20 alongside the rather off-the-cuff meeting between President Trump and North Korea’s Kim, where they agreed to resume denuclearization talks.
- The selling of Euros on Monday comes as a combination of a pretext that is gaining traction in the trading floors, that is, the Fed won’t be as aggressive easing policy as the US and China go back to the drawing table to find a trade compromise, while conces are mounting that the US may soon pivot towards Europe as it proposed fresh tariffs, starting with $4bn on EU goods. Dairy, certain metals are set to be proposed to a list of goods to have tariffs levied further.
- The array of EU PMIs releases does not help the outlook for the Euro either, as Germany’s, Spain’s, Italy’s, Switzerland’s manufacturing sectors remained into contraction territory.
- US June ISM manufacturing index came at 51.7 vs 51.0 expected. The positive read strengthens the case for the Fed to be less dovish. Understandably, the USD reacted positively. According to the Fed funds watch tool via the CME, the market still expects a 78% chance of a rate cut by the end of July and odds of a 50bp cut still stand at a surprising 20%.
- Fed vice chair, Richard Clarida, gave a speech in Helsinki, giving no hint that the Fed is going to backtrack from what seems a well-telegraphed insurance rate cut by the end of July, hence the above 78% chance. Fed’s Clarida said there’s more uncertainty about trade negotiations, global growth prospects, adding that there is room for more accommodative policies.
- EU leaders’ summit was suspended and set to reconvene again on Tuesday. What should command most of traders’ attention is further clues on the “favourite” runners for EU top jobs.
- According to New Zealand’s Quarterly Survey of Business Opinion (QSBO), business confidence for Q2 came at -34%, which is a rather dramatic level not seen since Q1 of 2009. It implies the risks of further rate cuts by the RBNZ are a real prospect to be accounted for.
- China’s June Caixin Manufacturing PMI underwhelmed at 49.4 vs. 50.1 expected and 50.2 prior, which is a very poor result, weighted by output and new work declines. The headline read is the second lowest since June 2016 and indicates a clear contraction in the manufacturing sector as domestic demand continues to slow down.
Recent Economic Indicators & Events Ahead
A Dive Into FX Majors (Technicals, Fundamentals, Intermarket)
EUR/USD: Resolution Of Range Makes It To 100% Bearish Proj Target
GBP/USD: Breakout Of Key Support, Unfinished Business To The Downside
AUD/USD: Ascending Channel Patte Disrupted, RBA Cuts Rate 2nd Month In A Row
USD/JPY: Bulls In Short-Term Control But Sticky Resistance Lies Ahead
- 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