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.
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Risk sentiment was buoyed by reports that the US govement is likely to delay auto tariffs to the EU and Japan up to 6 months. The Japanese Yen was the currency most punished by the news just as equities in the US tued around and never looked back. The fact that US President Trump plans to fight one trade dispute at a time rather than having too many fronts open, with his plate rather full having to deal with China and the revised NAFTA deal, was translated in an immediate spike in the Euro. Regardless of the renewed demand for the Euro, the DXY is not backing off, still trading quite firm across the board. The best performer currency was the CAD, supported by a rise in Oil, recently stellar fundamentals in the form of a huge increase in employment creation and risk appetite on the mend. On the flip side, the Sterling, with no Brexit breakthroughs even remotely close to happening, is lacking the love (demand) of markets. The Aussie is also on the backfoot after the market reacted negatively to an increase of 0.2% in the unemployment rate in Australia, despite the rest of the data was quite encouraging, from the total jobs created to the increase in the participation rate.
Narratives In Financial Markets
* The Information is gathered after scanning top publications including the FT, WSJ, Reuters, Bloomberg, ForexLive, Institutional Bank Research reports.
- Risk recovery after US President Trump announces that tariffs of up to 25% on European and Japanese cars will likely be delayed by a period of about 6 months. With the US-China trade tensions heating up and the revised NAFTA still to get the go-ahead from Congress, the Trump administration has decided that is best to focalize its resources in the current open fronts.
- Weak Chinese growth figures, coupled with disappointing US retail sales and industrial production, set to ratchet up fears of a slowdown in the global economy. Granted, a line of thinking is that the poorer the economic data in the US-China, the more pressure by the two sides to retu back to the drawing table on trade negotiations. Others think China may just resort to further stimulus of its domestic economic via larger lending to businesses, fiscal incentives or a cut in the reserve requirement ratios, unwilling to back off to the US demands.
- China’s rhetoric on trade has been ramping up after China’s foreign ministry made a statement saying that if the US refuses to do business with China, others will take up the slack. The comments do not set an encouraging outlook for a quick resolution of the current impasse.
- Germany’s Q1 preliminary GDP came flat at 0.4%, in line with expectations. With regards to the GDP in Q1 out of the EU, the data also confirmed a sluggish pace of +0.4% growth.
- According to Canada’s trade negotiator Freeland, the US and Canada are closing in on a deal as part of the revised NAFTA agreement, noting work still to be done for US steel tariffs to be lifted. Overall, the comments were relatively upbeat which hints a deal is nearing.
- US President Trump is reportedly about to sign an order to ban Huawei products by US companies as part of efforts to address threats to national security. Even if this action falls outside the dispute on trade currently underway, you have to think it won’t help the relationship.
- A lower-than-expected US inventory data, alongside improved risk appetite, under the price of Oil, en route to finding acceptance above the $62.00 handle and helping the CAD.
- In a report published by Axios, it speculates that a US delegation may be headed to China for a resumption of trade talks as early as next week. The market didn’t react on the headline as it lacks the substance of being confirmed by official sources. Meanwhile, Secretary of the Treasury told a Senate hearing that he is likely to re-visit China ‘at some point’, hence reinforcing the notion that for now, it’s all rumors without much to chew on.
- Canada’s April CPI data came at 2%, a tad to the soft side, even if judging by the price action in the CAD, the market treated as a bit of payback after last month’s strong reading.
- The Australian Dollar sold off in response to a rise in the Australian unemployment rate to 5.2% from 5% exp, which was caused by a higher participation rate, which is a positive for the economy. Besides, the creation of employment stood at +28k, which is well above expectations, reinforces the notion that the RBA will keep its status quo, not yet opting for a rate cut, as the figures don’t yet justify that the Central Bank acts upon its policy statement waing line of “paying close attention to developments in the labor market.”
Recent Economic Indicators & Events Ahead
RORO (Risk On, Risk Off Conditions)
In such a headline-driven market, where certain Trump tweets have sadly become the cues that news-identifying algos pick on to set the directional bias, one must be aware that RORO dynamics are in a constant state of flux. We are not in an environment where linearity in one’s interpretation keep you often enough on the right side, but rather, you must be in constant adaptation.
Even if I claimed, rightfully so for the first half of Tuesday, that we were at a stage of a false sense of risk recovery, reports that the US is likely to delay the auto tariffs on the EU and Japan, has created a sudden change of behavior in equities that have persevered till the late stages of the NY session.
Unlike Tuesday, this time the S&P 500 has penetrated its previous high, which sets up a more encouraging outlook heading into Wednesday as the momentum and structure tus bullish intraday, leading the VIX to come down towards the 16.00 handle. However, that’s where the good augurs end.
The junk bonds performance is not tracking the positive price action in equities to the same degree. A further reason to take the potential nascent prospects in equities and the overall recovery of risk with a pinch of salt is the follow through demand seen in the fixed income market, as the US 30Y yield performance can attest, last at 2.82% even on the delay of auto-tariffs.
Surprisingly weak US/China data has strengthened the appeal to hold tight into US Treasuries too. Another note of caution emerges when analyzing the trend in the DXY and JPY index, both keeping a constructive outlook if using as a guide the structure and micro trend via the 25HMA.
What about the activity in Chinese assets? The acceptance by the USD/CNH above 6.90 continues to be a red flag for risk, even if China pledges to keep the Yuan at stable levels. The increase in HIBOR rates has made the borrowing to short the Yuan more expensive, which is a sign that the depreciation of the Yuan may experience a potential slow down from here on out. We shall see. When it comes to the Shanghai Composite, a tentative even if mild in nature recovery is underway, but remember, the Chinese govement has been reportedly active buying stocks through state-owned entities to support valuations in order to relax the tightening of financial conditions.
Latest Key Developments In FX (Technicals, Fundamentals, Intermarket)
EUR/USD: Bullish Structure Emerges, Not Backed By Volume
There has been a sudden withdrawal of liquidity in the Euro as reports emerge that the US auto-tariffs to the EU is not a trade war fighting for short-term for the Trump administration. As a result, the upthrust bar has damaged the bearish bias by creating a disruption in the price structure. The break of the prior swing high, alongside the support found at the right-hand side of the chart through the 1.12 round number, keeps the nascent bullish outlook rather constructive. As a caveat for bulls, notice that this recovery in the exchange rate is not backed by a positive bias in buy-side volume pressure via the OBV (thick orange line). The amount of USD buy side volume has been clearly dominant so it will take a significant change in volume activity to keep the rate supported past 1.1220. For now, this is not a market that lacks sufficient evidence of which side is in control. Patience for the price and the volume structure to align as was the case in the bearish run of the last 2 days is warranted.
GBP/USD: Meets Its Next Measured Move Target
The exchange rate saw a one-way street move up until the completion of its next 100% measured move target at the 1.2830 where market makers/dealers/profit-taking, coupled with improved risk appetite on the back of a potential delay in the auto-tariffs to the EU by the US re-ignited buyers. There is a lot of work that needs to be done for buyers to regain the upper hand given the badly suppressed demand towards the Sterling as Brexit breakthroughs are still an elusive outcome. If the resumption of the bearish trend transpires, the next projection is found at 1.2760, which judging by the sell side volume pressure, it’s an outcome that could eventuate, especially if risk off retus.
USD/JPY: En-Route To Retest 109.15 If Risk Worsens
The spike in JPY supply as risk appetite picked up through the US session was well defended by a cluster of offers around the POC of last Tuesday circa 109.65-70. As I type during the Tokyo moing, risk has been deteriorating again, encouraging demand towards the Japanese Yen. The RORO line in the 3rd window indicates valuation in the exchange rate looks rather expensive, partly supported by the rise in equities but the absence of traction by US 30y bond yields and the rolling over of the DXY is a reason to stay cautiously optimistic that the downside is not over yet. The OBV line in thick orange is starting to display a bearish slope again, reinforcing the risk of more losses. Remember, Tuesday’s P-shaped volume profile with a close below the POC is not the ideal structure to be a buyer. This scenario will be canceled only if buyers can muster strength above 109.75, but even if, 110.00 looms.
AUD/USD: Sell-Side Bias Set To Extend Post Aus jobs
The Australian Dollar sold off in response to a rise in the Australian unemployment rate to 5.2%, which appears to be the headline algos were programmed to act most aggressively on, even if the rest of labor data seems to suggest that the aggressive sell-off looks like a stretch. The initial movement made it all the way to the 100% measured move target, where the cluster of bids caused a sudden change of behavior once again, back towards the retest of 0.6915 breakout point. The absorption candle in the first 30m suggests the downside looks limited unless more value can be created, while the correction will see its greatest obstacle at 0.6930 POC is 0.6915 is cleared. Overall, the bias is clearly down, but the fundamentals argue against an overextension. Remember, the Australian Dollar will continue to be greatly influenced by the dynamics in the Yuan market.
- 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