The Daily Edge

US NFP Eyed Amid ‘Risk On’ Flows

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

The only pieces of news that managed to spice things up in the forex arena ahead of today’s US NFP report, came courtesy of Brexit and the ongoing trade negotiations between the US and China. The Sterling ended as the weakest currency on Thursday, even if the UK parliament has effectively passed a bill that blocks a no deal Brexit outcome by the narrowest of margins (312-311). The irony is that it won’t really depend on the UK to dictate if a no-deal doesn’t happen, as the last say is by the EU. Rumors have it that the EU and the UK are mulling a 9-month extension, to be discussed and potentially agreed upon during next Wednesday’s Summit. Meanwhile, there are no signs that the current talks between the govement and the labour party will yield fruits ahead of next week’s Summit, which is apparently to be blamed for the deterioration in the Sterling sentiment. As per the Sino-US trade talks, the latest we’ve heard in the Asian hours of Friday, via Chinese state media Xinhua, is that President Xi has expressed optimism amid the substantial progress on trade, citing a message of the Chinese President sent to Trump. The headlines have spurred a fresh wave of buying into risky assets, with the AUD the most benefited. Earlier on Thursday, Trump said the trade deal could be announced in about 4 to 6 weeks. As a cautionary note, US trade representatives have reiterated that there are still some major issues left in the table. As a reminder, China’s Vice Premier Liu met with US President Trump in the White House during the course of Thursday.

Recent Economic Indicators & Events Ahead

Source: Forexfactory

RORO – Risk On Risk Off Conditions

As the granular tendencies (applies a 5-period moving average) in the hourly illustrate, the latest headlines by Chinese state media Xinhua got picked up by algos and fast money during the Asian hours, with pro ‘risk on’ flows looking to squeeze weak-handed players in a move that shows all the signs of a ‘true risk on’ transition. The spike in the S&P 500, the US 30-year bond yields, combined with the selling of Yens, is the proof in the pudding. The USD continues to find strong pockets of demand even as risk flourish. This could be partly explained due to the ongoing low volatility regime in G10 FX, which encourages carry trade positions as the pre-conditions of risk appetite on a low vol environment becomes music to the ears of investors. Since the USD is effectively one of the highest yielding currencies, market participants are tempted to borrow in low yielding currencies also referred to as funding currencies such as EUR, JPY to buy USD.

Key Levels To Watch On USD Pairs After The US NFP

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