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 CAD was the star currency as a new week gets underway. There were a limited number of talking points, with the movements more technical in nature. Portraying this dynamic, for example, we saw the EUR accelerate its appreciation as a 4-day long range was finally broken, leading to further selling of the USD across the board. The recovery in risk, as reflected in the pick up of US yields, which moved up in tandem with equities, this time didn’t play that much of a role to stimulate demand into the Greenback. The Japanese Yen continues to put up a decent fight post-US NFP, even if the risk rally in equities and the snap back in yields defies its prolonged strength logic. Meanwhile, the Kiwi continues to be the absolute main outlier, still paying the consequences of the dovish RBNZ outcome from earlier this month. The Sterling follows as the second most vulnerable currency not far behind, while the Aussie has managed to attract further demand to tu the micro trend to positive.
Narrative In Financial Markets
- The vigorous rise in Oil prices led to a strong appreciation of the CAD & NOK as fears of further supply disruptions in Lybia built. Throw into the mix the dominant risk appetite dynamics as of late and a weaker USD as other elements influencing the rampant move in Oil.
- No news of any meaningful progress in the talks between the UK govement and the Labor party officials. The main sticking point in the ongoing talks appears to be the refusal by the govement to accept the UK as part of a Customs Union post-Brexit. UK PM May travels to visit Germany’s Merkel and France’s Macro today ahead of this Wednesday’s critical EU Summit, where a decision to extend Article 50 beyond June may be made.
RoRo (Risk On, Risk Off Conditions)
The fluctuations in risk-sensitive assets oveight exhibited the traits of ‘true risk on’ as the S&P 500 retested its previous trend highs led by energy stocks, US yields were snapped back, while both the Yen and the US Dollar were hit by major supply imbalances. Other asset classes were supportive of risk as well as shown below.
Recent Economic Indicators & Events Ahead
Levels To Watch: Technical Analysis In Majors
EUR/USD: Range Breakout Confirms Bullish Trend
The resolution above the top of the range at 1.1245-50 has taken the exchange rate to fill offers at an H4 resistance level as depicted by the orange line. The impulsivity of the rise, the alignment with the micro trend (25HMA) and the story being told by the latest market structure, is all suggesting that the obvious path of least resistance is to the upside. The ‘risk on’ conditions and the reported decrease in USD repatriation flows have likely played a role in the aggressive USD supply seen. The breakout of the range allows now a fresh upside target that resides at 1.1295-1.13 (100% proj extension).
GBP/USD: The 1.30 Remains A Buyers’ Stronghold
The dynamics so far have been to reject the 1.30 round number with sufficient impetus so that the exchange rate finds only brief acceptance every time the area is tested. Last Friday’s decline in the exchange rate shows an analogous patte, with the Sterling now recovering not only the topside of a steep descending trendline while also anchored by the upward slope of the micro trend (25HMA). Monday’s price action is quite disappointing for the interest of Sterling longs, as it fails to capitalize on the broad-based USD weakness amid the lack of Brexit breakthroughs. We should expect the erratic behavior in the pair to being the norm with spontaneous spikes on a headline-by-headline basis, with a potentially quiet Tuesday ahead of Wednesday’s headlines-charged EU summit. The pair faces a round number and an hourly level of resistance not far overhead.
USD/JPY: Full 100% Target Extension Reached
In concordance with market symmetries, Monday’s selloff in the exchange rate has found a cluster of bids at the 100% projection target of 111.28. Considering that the rise from March 25th came on a vigorous 2nd leg and that we might be missing one final thrust higher, this was a great area to potentially reinstate long positions for a retest of 111.50-55 (broken-support-tued-resistance). There is still some significant room for the exchange rate to fall without altering the uptrend as the ascending trendline off sub 110.00 would have to first be violated. As per intermarket flows, with a ‘true risk on’ environment in the last 24h, pockets of supply towards the JPY could be dominant.
AUD/USD: Pressure Builds Against 0.7130 Resistance But…
More and more bids keep adding pressure against the sticky area of resistance through 0.7130-35, where buyers have been unable to break despite the multiple attempts since early April. The last rejection of the level last week was quite impulsive in nature, achieving new lows, which implies that the current retest of the swing high formed at the time holds sufficient credence to still be perceived as an area where there is technical value to look for shorts from a market structure standpoint. Moreover, the projected target ever since the rise through the 0.7107 breakout point has been hit at exactly the 0.7130, which means the resting of offers circa this level could be considerable. A break to the upside would expose 0.7145-50 as the next obvious target for the bulls.
USD/CAD: Selling Campaign Almost Done Near Term
Judging by the speed of the CAD appreciation, one would think there is still some residual downside, which would be conducive with the view that the 100% proj target of 1.3295-1.33 must still be reached. That said, given the lack of trends in FX and the low vol regime, one would think once this downside target is reached, a time of consolidation should ensue before the next directional move. The rally in Oil and the weakness in the DXY was an obvious recipe for disaster for the buyers, but with such an overstretched run, I doubt enough appetite remains to find any acceptance sub 1.33 near term. The last two attempts at the level were rejected right off the gate with strong conviction.
- 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