The Daily Edge

The Aussie Steals The Limelight

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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Quick Take

While it’s fair to say that the EUR and the USD experienced its fair share of intraday volatility, the net change by the end of business in NY sees the Aussie as the absolute dominator. It is being followed by the Sterling and the Kiwi, two currencies that have recently suffered, as the chart below illustrates, from its own hardships as it is the stuckness in the Brexit saga and the clear dovish tilt by the RBNZ earlier this month and subsequent re-pricing of the market. Meanwhile, the Euro and the US Dollar, both were hit by supply imbalances as the countries’ respective Central Bank left little doubt that more accommodative policies are coming. In the case of the ECB, in the form of a new round of TLTROs while the Fed is on its way to relax its policy by terminating QT even if we still need to clarify the future composition of the balance sheet. One thing is obvious, equity markets keep loving the prolonged patience the Fed has embarked upon. Somehow mixed in the middle we find the Yen, unable to hold onto its gains as one would expect when you have such a rampant S&P 500, retesting its year highs. Lastly, the Loonie keeps retracing its strong gains from 24h ago.

Narrative In Financial Markets

  • The AUD is the main triumphant of an action-packed Wednesday, with the credit to be given to RBA Deputy Goveor Debelle, who made some rather hawkish statement on the economy by noting that the jobs market is surprisingly strong while leading indicators are solid. Due to the tight similarities in G10 Central Bank policies, any potential communications out of the expected script (dovish for the RBA), is an event sensitive to market participants and as seen, to the AUD.
  • The expected volatility around the ECB, US CPI and FOMC minutes occurred, especially as ECB President Draghi began his policy statement, but the net effect at the end of the day was pretty disappointing, with a Draghi reiterating the negative outlook for the EU economy, while keeping the forward guidance on rates unchanged, on standby, at least until the end of 2019. As per the details of the new TLTRO, it won’t be until May/June that we’ll know more about it.
  • The marginal miss in the core US CPI reading, coming at +0.1% vs +0.2%, was easily counterbalanced by the weakness in the Euro, hence strength in the USD. It was on the fixed income market that the lack of any inflation in the US was reflected via lower Treasury yields.
  • The FOMC minutes didn’t bring much life to currency markets. It was an opportunity for the market to further dig into the recent change of rhetoric by the Fed, as the minutes referred to the March meeting where the ‘dots’ (rate projections) by board members had been lowered to reflect a largely neutral stance with no change in the policy rates for the remainder of the year. The bottom line is that the Fed is trying to massage its communication to make it look as though they are currently in a prolonged patient stance, so far helping to appease vol spikes.
  • As part of the EU Summit, leaders have agreed to kick the can down the road by extending the Article 50 (Brexit deadline) to Oer 31. UK PM May made her official statement to the press, saying that the extension could be terminated if the withdrawal agreement is ratified.

Recent Economic Indicators & Events Ahead

Source: Forexfactory

RORO (Risk On, Risk Off Conditions)

Notwithstanding the weakness in the Euro, which by default strengthens the US Dollar given the 60% weight as part of the DXY index, the dominant dynamics by the end of business in NY involve an environment characterized by broad-based USD weakness in a context of ‘risk on’. It is the rampant rise in US equities, with the S&P 500 forming a V-shaped reversal to test its recent highs, that acts as the main source of support to prevent the Yen from finding an excess of demand. The drop in the treasury yields is more a reflection of the tepid inflation read in the US, coupled with a neutral Fed, further strengthening the notion that an indefinite period of patience is needed. Surprisingly, our Yen index exhibits a bullish structure on the hourly, even if the present price action is more a function of dual weakness in the EUR and the USD than a reflection of ‘risk off’ flows. This prognosis is further anchored by the strong reversal in the VIX (vol index), down towards the 13.00 handle, but even more evidence originates by looking at credit markets, where junk bonds are flying vs investment-grade paper, a strong testament that the market is on a risk-seeing mode. The only two ratios not quite showing us the perfect picture for risk are Oil vs Gold and Copper vs Gold, both on a downward trend short-term, mainly due to the USD-induced Gold strength. Overall, we should consider the environment tentatively positive to keep supporting the likes of commodity currencies, while any further strength in the Japanese Yen should be relatively contained as per the current RORO analysis.

Latest Key Technical Developments In G8 FX

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EUR/USD: Bullish Price Action Post ECB & FOMC

The quick round trip towards the touch of a 3rd trendline was met with a vigorous rebound, which strengthens the idea that this is a market with ongoing bullish traits. Playing shorts around the resistance 1.1275-80 in light of the V-shaped bullish reversal becomes riskier in my view. Ever since the bottom found on April 2nd, the episodes of acceptance seen are occuring on the topside, with the latest action on the aftermath of the ECB and the FOMC anchoring this view, as the market failed to find any acceptance on the auction lower on Wednesday. If looking to play longs, 1.1250-55 remains the best level to lean against while sellers will look to exploit plays off 1.1275-80 ahead of 1.13.

AUD/USD: 100% Proj Target Hit To The Pip

The ongoing buy-side campaign in the Aussie came to an abrupt halt once the 100% proj target of 0.7175 got hit late in the NY session. From there, a pullback into the 0.7150-55 is to be expected before a cluster of bids looks to re-engage in the bullish momentum. Personally, the caveat is that we’ve completed a 3-legs push up, which tends to be followed by a period of distribution/consolidation in prices, but we should first wait and see if the current bullish structure has concluded or the market aims for an incomplete newly found 100% proj target at 0.7184. As long as the Aussie remains above its ascending trendline, and with intermarket flows strong positive, the path of least resistance should continue to be to the upside in the near term.

AUD/JPY: Pressure Builds On Major Daily Resistance

The strong demand towards the Aussie has led to a revisit of a daily level of resistance circa 79.60-65, where judging by the price action, an enormous number of offers are sitting. The current environment of broad–based USD weakness in a context of rising equities should still incentivize enough demand in the pair to think that the prospects of an eventual breakout would be justified. Until the resolution to the upside happens, if at all, this is a market that should be treated as what it is, that is, a range bound patte, with selling tops and buying bottoms the best way to play it. However, as intermarket flows stand, the current top play faces poor prospects of major rotations back down. If a breakout were to eventuate, 79.88, 80.00 and 80.15-80.20 are the sequence of targets to reach.

EUR/AUD: Breaks Long-Standing Range

The breakout of the range, conditioned to gather further momentum, opens up the doors to a new downside target of 1.5673, even if the round number 1.57 will represent a hindrance on the way. As technicals stand, the acceptance below the key support at 1.5750-55 makes a backside retest of the level an ideal area to reinstate shorts ahead of the round number 1.58 (alignment with today’s ADR topside limit). If this latter level is reached, it would really throw cold water into the hopes of a potentially downtrend extension to instead anticipate a mere widening of the range, with the new bottom found just ahead of 1.57, with coincides with the low registered on April 2nd.

EUR/JPY: Bearish Structure In Conflict W/ Intermarket Flows

I personally wouldn’t be placing too high hopes for the bearish trend to resume judging by the micro trends identified in our RORO model, where equities recovered in style as the USD sold across the board. These are not the dynamics that are going to favor a rish back to buying Yens, while the Euro should keep its demand fairly ample across the board as a function of USD weakness. Should the exchange rate break through the recently formed descending trendline, it would negate the short-term downtrend to instead bring the focus back into 125.55-60. On the contrary, a resumption of the sell-side action sees 125.00 as the next transition, with an eventual target in the area of 124.50-61.

USD/JPY: Critical Support Reached On 3 Legs Down

An important level of support on the 4-hour chart circa 110.85 has acted as the temporary bottom found by the pair, even if under the current dynamics of lower US yields and DXY, the demands towards this particular exchange rate should be limited. No doubt rising equities support the selling of Yens as portfolios seek riskier bets, but you will be hard-pressed to find time in which the pair can put on a solid recovery unless US yields start to move in congruence with equities. For now, the key technical level to the upside one must pay attention as the first real test of conviction to keep the bearish trend going is the intersection of a descending trendline. A break and hold above would increase the risk of a range developing, considering the current intermarket flows, where rising equities are negative the Yen while lower US yields/DXY add pressure to the DXY. Should the downtrend resume in case ‘risk off’ makes a comeback, a 100% proj target at 110.71 may be eyed.

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