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Well, well, well, it’s definitely getting interesting to see Trump caving in. I must admit, I did not, nor did the rest of the market, see this one coming. Testament of the surprise by everyone and their dog is found in the rampage of volatility hitting the forex market as a market long-sided funding currencies scrambled to the exits the moment it was revealed that the US is essentially walking back on the increase of tariffs by 10% to China. High-beta G10 FX flew and never looked back. The decision by the Trump administration to cave in, even if it will never be recognized in public, seems to be a clear admission that the latest round of tariffs was a miscalculation. It also proves that one must constantly adapt to the changing dynamics with Tuesday’s moves certainly causing a re-think into riskier trades that may last a few days. Beyond that, nothing really has changed, and the lack of clarity on how the US-China trade relationships will pan out makes any long-lasting risk trades an overly ambitious consideration at this point.
The indices show the performance of a particular currency vs G8 FX. An educational article about how to build your own currency meter 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.
Trump’s blink confirms further tariff hikes a miscalculation: The USTR issued a statement out of the blue stating that some Chinese products will be removed from the additional tariff list, while others, including cell phones, laptops, and videogames and some clothing products, will be delayed to December 15. The radical change in stance by the Trump administration injected a major hype into risk trades in what’s seen, as the US caving in, with Trump probably thinking he played his last hand too aggressively, hence the walk back to avoid further tightening of financial conditions.
It doesn’t take a cynic to understand why Trump caved in: Goes without saying, the US tried to massage its reasoning by stating that some products were removed from the tariff list based on health, safety, national security, and other factors. Trump’s excuse was even more delusional, saying the decision had been made in case it had an impact on shopping during the Christmas season, which undermines his credibility, as it represents an admission that tariffs may indeed be hurting the Americans.
Trade talks still ‘on’ behind closed doors: Fueling the rally in risk even further, a report via Xinhua emerged that China’s Vice-Premier Liu spoke with US trade representative Lighthizer and Treasury Secretary Mnuchin, with plans being drawn to resume the talks in the next two weeks. The perception had been that keeping the scheduled meetings in Sept was unrealistic, which is why these headlines represented quite a disconnect that had to be manifested through further adjustment in risk trade valuations.
The caving lowers the chance of 50bp Fed cut: There are quite a few conclusions to draw from the rampant moves seen. Most importantly, the market has fully priced out the chance of a 50bp by the Fed in Sept based on the CME Fedwatch Tool, even if it maintains the conviction that as the context stands, another 25bp is baked in the cake. Note, since there are talks between the US and China scheduled in 2 weeks, the Fed might decide to wait-and-see in September until it gains clarity on what side the balance tilts.
The Chinese Yuan soars & revisits 7.00 handle: The positive trade news out of the US have immediately translated into a much higher Chinese Yuan, helping to consolidate the state of ‘risk appetite’ as the currency has become the best barometer to set the tone in risk dynamics. The higher the Chinese Yuan, the less risk of deflationary pressures being exported around the world, which is another angle from which to interpret the movements and repercussions of the Yuan valuation.
HK protests force China to deploy troops at the border: The situation in Hong Kong remains very tense as the Chinese govement starts to build up military troops and armored carriers in the Hong Kong border. Even Trump retweeted a social media post showing the caravan of Chinese military/police. Meanwhile, according to CNN, protesters at the Hong Kong inteational airport are still disrupting the flow of passengers and blocking the police buses outside of the airport. So far, the US State Dept has been sending ambiguous messages by stating that it condemns violence and urges restraint but sounding far from commital.
Running out of adjectives to describe the dismal German data: Mounting evidence of the dramatic deterioration in German data keeps coming. The latest August ZEW survey of the current situation came at -13.5 vs -6.3 expected, while expectations stood at -44.1 vs -28.0 expected. In terms of the headline number, it is the weakest level in over 9 years, with the expectations series not far behind. According to the ZEW official statement: “The most recent escalation in the US-China trade dispute, the risk of competitive devaluations, and increased likelihood of no-deal Brexit places additional pressure on the already weak economic growth. This will most likely put further strain on the development of German exports and industrial production.”
US inflation data uncovers wage growth issues: The US July CPI y/y came slightly better-than-expected on the headline number, at +1.8% vs +1.7% expected, while on the flip side, wage growth was very poor, with both hourly and weekly average eaings missing expectations by a large margin. The most dovish Fed members are likely to latch onto these dismal wage levels as further logic to lower rates.
Singapore portrays the slowdown in Asia: On the back of last week’s trifecta of rate cuts in the Asian/Oceanic continent (RBI, BT, RBNZ), the latest growth numbers in Singapore were simply appalling, which continues to solidify the notion that the Chinese slowdown is especially accentuated in the Asian region. Singapore Q2 GDP came at a mesmerizing -3.3% q/q (annualized), seasonally adjusted rate, which led to yet another downgrade in economic growth forecasts from Singapore.
Recent Economic Indicators & Events Ahead
A Dive Into The Charts
The tuaround in currencies has been nothing short of spectacular, as the announcement by the Trump administration to partially remove or delay further tariffs on China, alongside unexpected positive news that the US and China are still negotiating on trade behind closed doors, led to an epic scrambling towards the exits by long-sided in funding currencies. Therefore, the announced delay on some of the US tariffs on China has been interpreted as positive news for the USD vs low yielding FX (funding currencies) such as JPY, EUR, and CHF. At the same time, high beta G10 FX (AUD, NZD, CAD) and EM currencies are also on high demand all of a sudden. However, there is not much clarity as to where we are headed from here on out, which is why the current ‘risk-on’ rally should not be seen by any stretch as the onset of a full reversal in risk dynamics.
Out of the high beta G10 FX aggressive gyrations, the one that appears to look the best positioned to bank on the new short-term ‘risk-on’ regime is the CAD. The index has re-conquered its daily 13ema baseline on higher tick volume by printing a sizeable bullish outside day, causing a shift in order flow that places the currency in a great position to find further buying interest in the coming days. The Australian and New Zealand Dollar require more upside work to be done before I see enough merits to tu more constructive. Notice how the Aussie stopped in its tracks at the daily baseline? Same can be said from the recent market auctions in the EUR, USD and JPY indices, all finding rejections at this delimitation line, which is what I personally use to determine what’s the daily trend in the market, with the assistance of dow jones-derived market structures and volume dynamics. In the EUR index, it’s precisely the rejection of its baseline that keeps me caution to endorse shorts, and the same occurs with the JPY index, with the rapid fall suggesting it needs a retrace to find value traders jumping in. The Swissy index has also printed a topping formation via an outside bearish day, so one would expect to at least retest its baseline in the coming days. The one currency index that remains under selling pressure is the Pound, retesting and so far rejecting a resistance line.
In today’s note, as usual, I will concentrate on the daily charts to keep it relevant for the next 24h, hunting for either opportunities where I perceive that a decision was by the market which puts the odds of a directional move above the 50% mark, or an area in the chart that will be drawing higher-than-usual interest by real money, macro funds, market makers and other big players (areas where a potential play in lower timeframes could be found). I may also revisit recent calls in order to assess whether or not the market has agreed.
By studying today’s currency indices, it suggests that the sentiment on the Canadian Dollar is expected to gain further momentum. The next step is to find a currency that remains susceptible to further downside in index terms, and here, a familiar one keeps popping up, that is, the Sterling. By then analyzing the GBP/CAD, it looks like a squeeze setup is in the making for a potential retest of the previous low, in what should be seen as an incomplete cycle since the 100% proj target is yet to be breached. I also like the fact that the price closed at the very low of the day by NY, coupled with a higher volume candle. To me, it looks ripe for further downside action and I will personally be playing it from the short side today.
Next, nothing like an old fashion 3rd touch of a trendline in line with the dominant trend, which is precisely what Oil presents us with today. Note, the way the commanding bullish bar has attacked this visual cue (trendline) is a waing that momentum is clearly against shorting this market, but still, this is a move that looks significantly over-cooked and why I’d expect a potential retracement this Wednesday, potentially to the baseline. By the way, this 4-day bullish run was initiated after the price found an exceptional confluence at the 51.00 line of support, which was in perfect alignment with the 100% proj target.
The next chart falls into the category of assessing a call in hindsight, which takes me to the EUR/CAD, and once again, the overextended run from last week found a top at the 100% proj target, which was confluent with the major 1.50 round number. The market, at this point, is around 250 pips lower from the projection, which hopefully helps to portray how significant these 100% proj targets off the daily become to find tops and bottoms. Not necessarily as an encouragement to play counter-trend, but this is a concept that can add its fair share of extra pips in your account by taking profits when the time is right.
Akin to the EUR/CAD, another market where a funding currency went ballistics versus a high beta FX involves the EUR/NZD, with the chart not lying by displaying the magic of the 100% proj target to call the very top with insane precision. By drawing a symmetrical distance from the recent low through a swing breakout point, it would have given you an ultimate target of about 1.7550, which is where the market could no longer sustain its bullish spike.
Last but not least, the Bitcoin market, which has been acting in congruence with the behaviour seen by ‘safe-haven’ assets since the escalation of the trade war, presents a bearish resolution below its baseline on higher volume via Binance, hinting at further downside this Wednesday.
- 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. 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