The Daily Edge

The Aussie Thrives Along With Risk

Date: 4/1/19

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 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 the chart below shows, to start the week, we have two clear outliers. Firstly, the Canadian Dollar has seen its valuation adjusted significantly higher on the back of a strong Canadian GDP for the month of January. The slope of the micro trend, which looks at 24h worth of price action through the 25-HMA, has been steadily bullish. Another currency currently embraced as part of the improved ‘risk on’ conditions is the Aussie, further boosted by the positive news out of China over the weekend, where the March PMI came upbeat. In today’s selection of the best markets to trade, I’ve focused on the Aussie due to precisely the alignment of these crosscurrents, with the constructive rhetoric around the US-China trade talks the icing on the cake, even if one must be aware that the RBA monetary policy statement tomorrow is a time for a reset of technicals. The Sterling, battered by the Brexit circus, alongside the Japanese Yen, sold after the recovery in risk, are the worst performers. I must state, despite the risk appetite, it looks as though the repatriation flows back into the USD, as I explained last week, are still playing a role to keep the USD at very stable levels.

Looking to create your own Currency Strength Meter via Tradingview? Check out this tutorial.

Key Narratives in Financial Markets

  • Commodity currencies, with the Aussie the most benefited, have been boosted on the back of a strong read in China’s March PMI, which signals emerging signs of a recovery in economic activity after the govement-backed pro-growth policies in Q1 2019. It’s important to note that part of the reason for the rise can be explained as a response to the post Lunar new year, while caution is still warranted given that new export orders remain in contraction, even if ticking up.
  • Following the resumption of trade talks between the US and China in Beijing last week, a convoy of Chinese trade representative, headed by China’s Vice Premier, is headed to Washington this week, aimed at making further progress. White House Economic Advisor Larry Kudlow gave a speech last week waing that the talks are no longer time-dependent, but policy-dependent, which raises the prospects of delays in a final agreement.
  • The Canadian GDP MoM came much better than expected, helping to boost the currency to head the leaderboard on Friday. The ‘risk on’ tone at the start of the new week is yet another reason to stay constructive the CAD even if one must be aware of the overstretched nature of Friday’s move.
  • Last Friday’s US data continues to support the case that the Fed has time to re-think the best course in its policy setting after the underwhelming US consumer inflation print (both PCE deflators lower), even if the data was somewhat offset by a pick up in new home sales.
  • RBNZ Goveor Orr has made it clear last Friday, as part of a Q&A, that the sharp selloff in the NZD on the back of last week’s dovish RBNZ policy was the outcome they intended to achieve. Orr said he was pleased as “the market has shown that they understand what we are focused on and they are forward-looking.”
  • In Brexit, the Brexit farce continues with no end in sight after the UK parliament rejected UK PM’s May withdrawal agreement for the third time. The failure to pass the bill, effectively, brings the deadline to leave the EU for April 12th. During the coming week, as part of the indicative votes scheme, the UK parliament will try to agree on the best way forward, while the EU has set scheduled an emergency meeting to discuss the Brexit situation on April 10th. As things stand, a customs union is the most likely scenario to be favored, but still lacking a majority.

Recent Economic Indicators & Events Ahead

Source: Forexfactory

RORO – Risk On Risk Off Conditions

Whatever measures we are looking at, it leads to the same conclusion. The risk appetite tone is back in vogue, as manifested by our prop Yen index, where not only the micro slope has tued negative for the past 24h, but the macro slope, which looks at 1 week worth of price action, has also reverted back down. If we ask ourselves, is the ‘risk on’ tone signal we are getting from the Yen index being supported across other asset classes, the answer is an outright ‘Yes’. From the S&P 500 flying higher past the 2,850.00 mark, the US 30-year bond yield finding further upside, not to mention the ratios of Oil/Gold or Copper/Gold as a barometer of the global demand or supply for industrial/energy assets. Lastly, the VIX (vol index) is down at 13.7 with no bids to be found amid the ‘feel good’ tone across the board, while in the credit market, the picture is analogous, where junk bonds have put on an aggressive rally when compared to the investment grade-bonds. Overall, this is a time to be constructive in commodity-linked currencies, while the DXY and JPY should be pressured. The GBP, EUR, as long as the Brexit circus extends, will show a rhythm of their own.

Key To Watch: Intermarket Flows & Technical Analysis

AUD/USD: Conquers Resistance at 71c.

The upside gap at the open of business in Asia is a clear testament of the bullish sentiment, with the area of resistance-tued-support just above 71c now acting as the first line of defense ahead of last Friday’s POC just 10p sub the round number at 7090. The synchronized move higher in equities and the DXY + Yuan (inverted) is clearly supporting the buy-side bias, effectively canceling the potential negative flows that may arise from the bearish trend in the AU-US bond yield spread for the time being. There is a vacuum area buyers may capitalize on until the next resistance at 0.7145-50.

USD/JPY: En-Route Towards 111.20 Resistance

With a stubbo DXY still bid despite the dual recovery in the S&P 500 and the US 30-yr bond yields, both showing bullish micro slopes, the clear path is for the upside pressure to keep building up. To start the week, technicals are promoting this narrative after the breakout of a sticky area of resistance in the hourly circa 110.85, which has allowed a test of the next area of resistance around 111.00, while opening the doors towards what’s expected to be a stronger wall of offers at 111.20 approximately, which is the breakout point of the major selloff seen last March 20. There is no reason to shift to an intraday sell-side bias while the intermarket flows remain so supportive.

AUD/JPY: Buy On Weakness Favored

The recent news of China’s March PMI, coupled with encouraging signs of progress in the US-China trade talks, alongside a full-blown micro ‘true risk on’ environment, this is a market that has the traits of buying weakness this Monday written all over the wall. The breakout of the previous swing high through 79.00 is the last declaration of intentions by a market that is setting up to see higher valuations, likely to thrive under the current intermarket flows. That said, the RBA monetary policy statement due on Tuesday is a clear risk for the pair, so remain nimble on your approach.

EUR/AUD: Lower Valuations Well Justified

Anyway you slice it, the exchange rate looks set to stay under pressure this Monday, unless a fundamental-driven event disallows it. The intermarket flows are unambiguously supportive of the downside as the micro bearish slopes in the Yuan (inverted), equities (inverted) and the German vs Australian 10y yield spread demonstrate. Moreover, the technicals are in favor of the downside, with the breakout of the previous swing low at 1.5785-90 creating a successful rotation lower, which is likely to attract further sell-side momentum-led flows to capitalize on this ongoing supply imbalance.

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