The Daily Edge

The Fortitude Of The USD The Highlight In Forex

The Daily Edge is authored by Ivan Delgado, 10y Forex Trader veteran & Market Insights Commentator at Global Prime. Feel free to follow Ivan on Twitter & Youtube weekly show. The purpose of this content is to provide an assessment of the conditions, taking an in-depth look of market dynamics – fundamentals and technicals – determine daily biases and assist one’s trading decisions.

Let’s get started…

Quick Take

The dominance by the King of Forex this year (USD) continues. The consistent demand flows the currency has attracted speak by itself. Regardless of the NCoV consequences for the overall risk profile, the resilience of the currency is impressive. The fact that Trump has also reinforced his dominance in the polls for the Presidential race following the fiasco in the Iowa caucus is thought to have played a role too as more foreign capital heads back into US equities, with the S&P 500 printing a fresh record high. Those regular readers of the Daily Edge report were definitely kept well appraised of my prolonged bullish technical outlook in the USD by assessing the aggregate flows at an index level. The Swissy and the Yen, on the flip side, while maintaining second and third position respectively, in terms of performance since the start of the year, have succumbed to the ebullient mood to bid equities in the US to the boots. We then find a group of three currencies (EUR, GBP, CAD) which continue to be driven by its own idiosyncratic fundamental factors, much more dependent to the outlook in the rate setting domain by its respective central banks, especially the latter two. Lastly, the Kiwi and the Aussie, after a solid recovery off the lows, saw a pause in the buy-side flows, with a poor Australian retail sales print not helping the case for further upside. Today, the key events to watch out for include the US NFP and Canadian employment figures, set to inject the usual volatility in the USD and CAD. 

The indices show the performance of a particular currency vs G8 FX. An educational video on how to interpret these indices can be found in the Global Prime’s Research section.

Narratives In Financial Markets

* The Information is gathered after scanning top publications including the FT, WSJ, Reuters, Bloomberg, ForexLive, Institutional Bank Research reports.

Traders continue to buy back risk: This is reflected by the continuous upward trajectory in US stocks, with the S&P 500 surging to new record highs. The market is clearly betting that the worst on the coronavirus saga is behind that and that the ‘peak of the virus’ has passed as the rate of change in the total number of virus cases decelerates. Equally important, as US politics start to be factored in, the market love the idea of a re-election of Trump as President, and at this stage, according to PredictIt, Trump is clearly on the lead (more below).

Coronavirus more like a ‘bad cold’: Oveight in Asia, John Nicholls a clinical professor in pathology at the University of Hong Kong and expert on coronaviruses gave his take on the virus. He was a key member of the research team at the University of Hong Kong which isolated and characterized the novel SARS coronavirus in 2003. He’s been studying coronaviruses for 25 years (full bio here). The recording of the call can be found on our website. Quick summary: look at the fatality rate outside of Wuhan – it’s below 1{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814}. The correct comparison is not SARS or MERS but a bad cold which kills people who already have other health issues. This virus will bu itself out in May when temperatures rise. Wash your hands. A transcript can be found here.

China plans to resume normal business operations: In what should be seen as another sign of encouragement by the market, the Chinese govement has called for a number of regions to resume normal production in an orderly manner, except Hubei province to avoid unnecessary panic. Expect economic activity, therefore, to start picking up from next week, with China unlikely to observe a longer break. The key question is whether or not this retu to a more normal routine for businesses may endanger the current containment period and heighten the risk of a sudden increase in cases.

Sanders gains momentum but Trump far ahead in Presidential race: The odds of Beie Sanders winning the Democratic primary keep surging in detriment of former Vice President Joe Bid, according to online betting market PredictIt. Besides, as reported by several sources, the latest polls from Monmouth, Boston Globe/Suffolk and Emerson have Sanders extending his lead to nearly 20 over Biden in the New Hampshire primaries. However, the odds on who will take the presidency in the next General Election are still largely skewed towards Trump according to PredictIt. This is also true in the unlikely event that Trump gets to be matched-up in a rave against any other Democratic contender.

China aims to soften up Trump’s hardline stance on trade: The ‘feel good’ groove in the market was partially aided by reports that China is set to cut trade-war tariffs on some goods imported from the US by 50{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814}. Tariffs on some goods would go from 10{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} to 5{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814}, some from 5 to 2.5{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} as part of the tariffs imposed on Sep 1 last year. Currencies the likes of the Yuan or the AUD/JPY pair saw the upside momentum accelerate as a result of these headlines, which suggests further gestures of goodwill by China.

China to seek out flexibility in trade deal pledges: The bonafide gesture by China on cutting tariffs may only look like so on the surface, as behind the decision there seems to be a clear intention to soften up Trump. The reason being? More reports are emerging that China is considering, due to the coronavirus outbreak, using a term in the trade deal to launch a consultation with the US over virus impact. The Global Times notes: “China is likely considering using a term in phase one about “natural disaster and other unforeseeable events” to launch a consultation with the US over the potential impact of the coronavirus outbreak on the agreement but a decision is unlikely till full assessment at the end of Q1.” The news follow earlier reports about China wanting to seek out US flexibility on Phase 1 trade pledges given the extraordinary circumstances the country is faced with.

Euro unfazed by Lagarde’s intervention this week: ECB’s Chief Lagarde has given back-to-back speeches in the last couple of days, this time testifying about the economy and monetary policy before the European Parliament Economic and Monetary Affairs Committee in Brussels, noting that low rates and low inflation has significantly reduced scope to ease policy at a global scale. Her expectations, as detailed in Thursday’s intervention, is for the Euro area economy to continue to grow broadly in-line with expectations. The full text of her speech can be found here. The Euro was largely unfazed by the comments.

OPEC+ looks to cut production output by more than half a million bpd: The OPEC+ joint technical committee is said to recommend 600k bpd output cuts, according to Bloomberg, citing a OPEC+ delegate on the matter. Whether or not it remains enough for the price of Oil to reverse its bearish trend (down 20{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} last month) remains to be seen. Much will depend on how the coronavirus outbreak evolves. The fact that the Chinese economy, in most of the key strategic economic regions is in lockdown over the coming weeks, has dampened the outlook for the consumption of Oil. Also remember, the 600k pbd tends to be a rather symbolic number which in reality tends to be overlooked as compliance by members is a known issue. Besides, Russia has already suggested it might refuse to agree on the cuts proposed.

SGD keeps sliding unstoppable: SGD keeps selling off for a ninth day in a row as Singapore coronavirus cases hit 30 after a few more reported oveight. As a reminder to the reader, the monetary authority of Singapore issued a dovish statement on the Singapore dollar through an approach of deprecation of its own currency, stating that there is more to room to ease due to the coronavirus conce. The Singapore dollar nominal effective exchange rate had been fluctuating near the upper bound of the policy band in recent months but that’s changed fast given the latest coronavirus micro outbreak.

Trump enraged by UK’s Johnson Huawei decision: One should monitor closely the potential future relationship between the US and the UK in trade and it other critical areas as the backlash by Trump to the UK PM Johnson decision to let Huawei build part of the 5G network in the UK continues. According to the Financial Times, Donald Trump was very critical in a phone call with Boris Johnson last week. As ransquawk reports: “One individual briefed on the contents of the call said Mr Trump was “apoplectic” with Mr Johnson for his Huawei decision and expressed his views in livid terms. A second official confirmed that the Trump-Johnson call was “very difficult”. British officials with knowledge of the exchange said they were taken aback by the force of the president’s language.”

A sag of Australia retail sales: A pronounced shift in Australians shopping behavior has somewhat affected the retail experience, however, the recorded worse performance was also attributed to the particular hit by the bushfire catastrophe. Additionally, it’s worth looking at it from a different view of consideration as consumers are clearly taking advantage of the Black Friday sales a month prior to December which heavily affected the released of the December report. Notwithstanding the fact, the report also highlights a continuing weaker demand as consumers happened to participate in sales event which happened to justified a price competition in the consensus. On the other hand, consumers are getting smarter, opting to do their shopping online to avoid walking into crowds as well as into the physical store itself as retails are prone to be afflicted by it.

US NFP, Canadian jobs eyed: In the next 24h, the US and Canada will release the jobs figures, set to bring to life the USD and CAD as the market adjusts the valuation of the currencies based on the inputs received. In the US, expectations are for a solid jobs report, taking a very positive lead from the stellar ADP report earlier this week. In terms of average eaings, it is also expected to see an improvement. In Canada, the net change in employment is set to also come positive, but expectations are for a slight setback vs the prior month data, which came at 27.3 K. The measures of salary inflation, however, are set to come slightly weaker.

Recent Economic Indicators & Events Ahead

Source: Forexfactory

Insights Into FX Index Charts

The indices show the performance of a particular currency vs G8 FX. An educational video on how to interpret these indices can be found in the Global Prime’s Research section. The idea of this analysis is to complement one’s daily bias by accounting for this holistic analysis.

The risk dynamics, as assessed via the risk-weighted index, which accounts for equities and bond yields, this time was not as clear cut, as equities went up to new record highs (S&P 500), but this was met with a setback in the US bond yields. One canceled out the other and while the Yen has been under pressure this week, the lack of ‘true risk on’ on Thursday (SP500 & US30Y must go up in tandem) meant the conditions for the currency to keep depreciating were not there. By scanning the broader spectrum of the coronavirus-sensitive instrument, improvements continue to be seen, with the CRB commodities index finding a solid bid.

The EUR index remains at a location where based on the recent price behaviour, I’d anticipate a re-emergence of the buy-side interest with the downside quite limited to a max of -0.2{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814}. This is a prognosys that finds its logic on understanding the recent interactions at areas of liquidity. Right now, the index has landed at the origin of the supply bar that led to the last breakout lower, hence this is an area where a mitigation of shorts caught wrong-sided may occur. Note, even if the smart money tracker has finally tued bearish, there is no agreement with the price structure, therefore, the technical picture remains rather unclear off the daily.

The GBP index is on the verge of a key breakout in structure, which would confirm a fresh bearish cycle and finally see a resolution of the current range-bound conditions off the daily. An area of key horizontal support has so far acted as a line of defence for buyers, but Thursday’s close is quite troublesome for the interest of these players as it communicates the ongoing and gradual evaporation of bids, unable to outweigh the sell-side pressure. The establishment of a new bearish cycle, if/when validated, would allow further room lower, to the tune of 0.9{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814}-1{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814}.

The USD index, following a technical resolution above a critical resistance, has managed to see further buy-side activity. The steady demand flows have further room to run, so my suspicion, which remains backed up by technicals, is that unless the US NFP comes at a rather catastrophic print, we would continue to see consistent dip buying as players look to resistance long positions in the best performing currency this year. The upside potential I am projecting has me targeting the an extension towards the double top seen through Nov last year, which translates in the prospects of additional gains to the tune of an extra 0.5{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} from the current levels.

The CAD index, even if it still finds buying activity off the lows, this is occurring under an existing bearish environment in the daily chart. Either we look at the price structure or at the smart money tracker, both still point at this recovery as one that rests of a wet blanket. Therefore, there is a clear risk that the buying pressure ends up petering out and sellers re-take control of the price action barring a positive surprise in today’s Canadian jobs. I remain, therefore, of the view that there is substantial downside still to be found towards the next 100{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} projection target at the Dec double bottom. I will be happy to let the aggregate flows prove me wrong on this trade premise, but so far, the evidence to be long CAD off the daily is not there.

The JPY index, on the heels of the gap closure from last week, has been met with a neutral da of aggregated flows, as the doji-like candle off the daily depicts. I must say more work needs to be done by the sell-side camp to trump the bullish technicals, which remain supported by the price structure in this market (higher highs), alongside the bullish slope in the money tracker. What this suggests is that adding Yen short exposure at these levels offers little technical value.

The AUD index is far from trading at acceptable levels to consider gaining long exposure as an attractive play. That said, if the fears about the coronavirus keep fading, there is no doubt that further pressure against the current level of resistance faced overhead will ensue. For now, the inflection point where a shift in order flow back down was predicted has occurred, a rotation back lower that for now remains in line with the dominant bearish price structure, which means this is a market still in correction mode in the context of a bearish trend, which still has the backing of smart money tracker slope pointing lower. Venturing into longs at these levels when analyzing the daily timeframe gives little if any reassurance to be long.

The NZD index sees no change in its outlook. It’s been another day of tepid movements which do little to help decipher the next direction. The story line that I am reading here is that buying interest emerged off a line of strong support. Supporting the buy-side bias still remains in contradiction with the daily technicals. As I said yesterday, keep adding into NZD long exposure at your own risk, and be aware that the price structure and the order flow via the smart money tracker imply the risk of shorts taking back control is a realistic prospect. If looking for longs, you’d guarantee a better pricing at the support line undeeath vs current no man’s land.

The CHF index, after a significant pullback on the back of a pick up in risk appetite, has landed at an area of previous resistance-tued-support, amid an overall bullish environment. This stance is aided not only by the constructive bullish price structure but also by the upward momentum via the smart money tracker, which has been guiding is higher since the start of the year and it has yet to see a tu lower in the slope. Therefore, further exposure to CHF short inventory carries a heightened level of risk given the context laid out.

Important Footnotes

  • Market structure: 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
  • 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
  • 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 projection resides in the symmetry and harmonic relationships of market cycles. By drawing a 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 Fibonacci Projection