The Daily Edge

USD Demand Steady, US NFP UP Next

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.

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Quick Take

The bout of risk appetite that originated soon after the Iranian missile attacks to US-controlled air bases in Iraq stood the course through Thursday’s trading as the air clears with seemingly no intention from either side to engage in further retaliatory conflicts. The ebbs and flows remain supportive of the US Dollar, and as the regular readers of the Daily Edge are aware, I have reiterated for weeks the risk of a tuaround in fortunes for the world’s reserve currency, mainly predicated on the combination of the outperformance it has in January alongside the cheap valuation it traded at the tu of the decade. The market has also retained a sell-side bias in the Japanese Yen as the preferred instrument to deleverage from. The Kiwi, amid no apparent catalyst, and the Pound, pressured by dovish remarks by BoE’s boss Caey, fell at an even more rapid pace. In the case of the Pound, the macro outlook looks quite grim, with the EU expressing left and right a comprehensive trade deal this year is ‘effectively impossible’, which is part of the reason the GBP is under pressure as the market anchors its attention towards the phase of trade negotiations. Still a long way to go though. The Swiss Franc, meanwhile, continues to defy logic and for now is a train headed northbound steadily. The single currency (Euro) put up a decent performance too, even if lagging behind the strongest contenders for Thursday (USD, CHF), with no fundamental catalysts of note. Lastly, the Aussie has been supported in recent hours after a big beat on expectations in retail sales, while the Canadian Dollar, on balance, was little change. The market are now awaiting the US NFP and Canadian jobs report as the next volatility booster in the currency market.

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.

Fed speakers bring nothing new to the table: There was a large line up of Fed speakers on Thursday, with Fed’s Williams, Fed’s Barkin, Fed’s Evans, Fed’s Bullard, Fed’s Kashkari and Fed’s Kaplan all chiming in, even if what was shared in terms of monetary policy or the economy was of little relevance for Mr. Market. It’s going to be a tall order that some of these policy-makers come forward with an off-the-cuff market moving comment at this stage as the market has come to believe the Fed rates are at an optimal level.

China confirms trade deal signing day: The Chinese commerce ministry confirmed that its vice premier Liu He will go to Washington to sign the Phase One trade deal between the 13 and 15 of January. The deal signing will be set for 15 January at 1130 ET (1600 GMT), according to China. Both sides remain in close communication on particular arrangements on signing. This is the final evidence that was needed and acts as an anchor to promote the risk trades to build up on the ongoing momentum.

BoE Caey tilts towards the dovish side: The intervention by BOE’s Caey (here) knocked down the GBP during the London session, after the verdict was that his view on policy is leaning, at the margin, more dovish than before. Caey stated that the “rebound projected in BOE forecast for this year is not assured.” Other headlines that stood out included that UK growth has slowed below its potential or that policy space has been reduced due to the risks of the global economy trapped in a low rates cycle.

EU-UK at odds on trade negotiations: With skepticism by the EU side very high on reaching a comprehensive trade deal with the UK by the end of 2020, EU chief Brexit negotiator, Michel Baier, said that the time frame for a new relationship deal with UK is hugely challenging. Baier emphasized that given the time constraints, they will have to prioritise what we need to do this year. He was clear in that even in the best case scenario that the EU were to agree on every point of the future relationship with the UK, it would take more than 11 months. This timing problem is a problem weighing on GBP.

Smooth sailing for BoJo’s Brexit deal bill: PM Johnson’s Brexit bill passed the House of Commons by a vote of 330 to 231 in favor, and is now expected to be lifted into law by the upper House of Lords. This bill ratifies and formalized that Britain officially leaves the EU on January 31 with an exit deal. However, the focus of the market, ever since the day the election was won by UK PM Johnson, has shifted to the period of complicated negotiations with the EU in order to strike the best possible trade conditions. As long as PM Johnson’s remains hardlined on his idea to leave by December 31 2020, there is a clear risk of sustainable negative sentiment towards the Pound on a “no deal” scenario.

Iran not ready to stand down? While the markets appear to have clearly ‘move on’, there was a brief spell of unrest on Thursday, reflected by a quick intraday appreciation in the Yen (fully reverted in no time), after an Iranian commander told the state television that the missile attacks from 2 days ago was not aimed at killing US troops, but to damage military machines, and that missile attacks on US targets started operation that will continue across the region. This implies Iran may not be done, even if from the US side, they’ve maintained the version that Iran is standing down.

Evidence points at Iran as responsible for the plane crash: The NY Times claims to have obtained evidence via a verified video of a missile hitting the airplane that crashed over Tehran. This new piece of information follows the view held by the Canadian and British govement, who have pointed the finger at Iran as the responsible in what appears to be a major miscalculation that they remain adamant to admit.

BoC Poloz took the stage: BOC Goveor Poloz updated the market about his view on the economy and policy. Poloz said strikes and bad weather contributed to mixed data in Q4, adding that “it seems potential downside risks of the trade disputes have eased as US China approach a deal.” One can have access to the full script at a fireside chat via the following link

Australian retail sales big beat: The data seen was fueled by strong growth in Black Friday sales, both in areas such as electrical goods and online sales, but also in areas such as clothing and fuiture, according to said Ben James, Director of Quarterly Economy Wide Surveys. James added that “while seasonal adjustment removes regular seasonal pattes associated with Black Friday based on prior results, the strong seasonally adjusted rises in a number of sub-groups this month shows that the impact of this Black Friday exceeded that of previous years.”

It’s US/Canada jobs day: This means we are going to get a lift in the potential volatility in the currency market, especially on the USD and CAD pairs. The consensus is for non-farm payroll employment to rise by 160k, even if the unofficial number has been adjusted slightly higher following this week’s ADP and non-manufacturing ISM employment reads, which came strong. In the case of Canada, the employment figures, which have been very volatile as of late, point at a positive jump of following the huge mess of -71.2k in November.

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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.

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The EUR index retains a bearish view despite the gains netted in the last 24h. All signs, from the market structure to the tick volume dynamics, promote the idea of selling it on strength. The enhanced moving averages as a proxy to track smart money flows also backs up the bear view. Besides, the EUR seasonal patte in January is the most negative of the year.

The GBP index accumulated 3 days of unclear price action. I’ve anticipated the currency to struggle in its attempts to be breaking its overhead resistance and so far, this is what we are seeing. The string of Doji-like candles justifies to take a step back from any high conviction in GBP long trades, unless paired with currencies even weaker (JPY for instance). The market structure is bearish until acceptance can be found above the resistance line overhead. As in the case of the EUR, the GBP also shows a poor track record during the month of January.

The USD index keeps finding fresh legs up ahead of the US NFP. Trading the currency in the next 24h will carry heightened risks if you don’t account for the spike in volatility. The follow through continuation follows the highest tick volume candle since late August. The enhanced moving average as a proxy of the smart money trend has finally tued bullish too. I’ve reiterated for weeks that the USD was always going to be an interesting long play if the setups occurred, with the seasonal for the month of January the best registers for the currency in the whole year.

The CAD index saw a setback, but the interest to keep engaging at discounted prices remains elevated, as reflected by the sizeable low shadow daily candle. The accumulation of CAD long inventory continues to have the backing of the price structure, the smart money flows via the enhance moving average, the aggregated tick volume trend, low volatile trend. The seasonals for the CAD are also positive, averaging over 0.33{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} of gains in January.

The JPY index, on the back of a huge bearish outside day candle, has accomplished the anticipated follow through supply. The next 24h bias remains bearish but it carries higher risks of the price whipsawing around on the release of the US NFP, with the JPY one of the most sensitive currencies to react to the data points, alongside the USD. A retest of the previous lows in line with the dominant flows as per the smart money flows (enhanced MA) remains my base case. The seasonal patte for the Yen averages +0.25{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} in Jan since Jan ‘82, be aware.

The AUD index continues to offer a decent risk-reward scenario to ponder bullish ideas going forward. The case for Aussie longs is predicated on the fact that a macro level of support, which has proven very sticky since its first test back in early Oct last year, has now been reached. Here is where one could expect a shift in order flow. Remember, in the context of a wide range as is the case in the index (drawn in a white rectangle), the smart money flows via the enhanced moving average loses its relevance when the extremes of a range get tested. The bullish pin bar off this key support with the spike in tick volume reinforces the bullish view. Besides the forex seasonal patte is positive to the tune of +0.54{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} in Jan since the early 1980s.

The NZD index, despite Thursday’s setback, if we consider the overall structure, remains bullish heading into Friday. The commanding bullish outside day has been ineffective in attracting buy-side flows on dips this time, even if it’s still my view that this is a market that runs the risk of facing deep pockets of demand the lower it goes, especially around current levels of support.

The CHF index shows a positive trend and there is no reason to fight this trend so far, as no technical exists that the tide might be about to tu. That said, if you are playing with a more strategic approach, remember that shorting the CHF at these levels, not only can offer a decent pricing despite going against the trend, but it also pays handsome swaps against higher beta FX. The forex seasonals for CHF is for the currency to average 0.53{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} in Jan since 1982.

Important Footnotes

  • 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
  • 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.
  • 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{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} projection resides in the symmetry and harmonic relationships of market cycles. By drawing a 100{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} 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{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} Fibonacci Projection


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