The Daily Edge

USD Fails To Keep Momentum Post US NFP

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

After an impressive start of 2020, the USD was unable to keep attracting buy-side flows, with the US NFP not justifying the extension of that momentum. The headline employment figures came a tad below expectations even if the real catalyst keeping bulls at bay came in the form of wage pressure, lowest print since July 2018. The Aussie, on the contrary, drew the steadiest buy-side interest since the very start of the Asian session last Friday in response to an outsized upbeat reading in Australian retail sales. This time, the Kiwi was able to play catch up and managed to successfully piggy-back the momentum of its neighboring peer. But even amid USD weakness, other currencies such as the Pound or the Canadian Dollar didn’t capitalize on it, especially the Pound, with the selling tendency from Friday extending at the open of Asia today as interbank dealings were dominated by supply imbalances in response to the dovish remarks by Bank of England MPC member Vlieghe. The Yen continues to retain a clear bearish bias even if by analyzing the index, one must be aware that the evolving flows show volume tapering, with weakness led by momentum accounts vs real money. The EUR, as it’s been the case for some time, keeps showing dull movements with low vol the norm. Note, this week’s economic calendar is lighter than usual, dominated by second tier events.

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.

NFP disappoints, USD sold: Last Friday’s US December non-farm payrolls came softer-than-thought at 145K vs 160K expected, with a slightly higher revision of the last read to 266K from 256K. The unemployment rate stood unchanged at 3.5{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} vs 3.5{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} expected as was the participation rate at 63.2{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814}. The avg hourly eaings disappointed at +0.1{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} m/m vs +0.3{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} exp, with the yearly reading showing an avg hourly eaings of +2.9{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} y/y vs +3.1{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} exp, lowest since July 2018. As a result, the dominant flows ended up being USD negative.

US Manufacturing deep into recession: The component of employment in US manufacturing fell by 12k, which when combined with last week’s poor manufacturing ISM number, keeps validating the premise that the manufacturing sector in the US is deep in a recessionary phase due to the US tariffs, with no end in sight to get much better this year despite the phase 1 trade deal about to be signed up. As the team at NAB notes, thel U.S. National Bureau of Economic research (NBER) noted in a report that “U.S. companies and consumers are paying almost the full cost of U.S. tariffs, and the impact of those duties on import volume magnifies over time.” It said “the 2018 tariffs – many of which were applied in October – are only now having their full impact on U.S. import volumes”.

Canadian jobs up, wages down: The Canadian employment report for December surpassed expectations by coming at 35.2K vs 25.0K estimate, a much better result that November’s disastrous -71.2K print. The full-time employment change was 38.4 K vs -38.4 K last month, while the part-time employment change came at -3.2 K vs -32.8 K last month/ The unemployment rate improved to 5.6{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} vs 5.8{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} estimate and 5.9{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} last month. The hourly wage rate for permanent employees YoY dropped to 3.8{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} vs 4.2{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} estimate, which is a marked decline from last month’s 4.4{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814}.

Reports of another attack in Iraq: Over the weekend, there have been reports of four people wounded in a rocket attack on a base in Iraq. It is thought that US military personnel were housed at the Balad air base,. However, so far, the reported wounded appear to be Iraqi soldiers, with no word on any US casualties. There is no official claim as to who conducted the attack. Markets will be in high alert to any further escalation between Iran and the US, even if the base case by the US is that Iran aims to stand down from further retaliatory offensive against US targets.

Pound under the cosh to start the week: We’ve seen sell-side pressure on the Pound during interbank trading after weekend comments by Bank of England MPC member Vlieghe, who said he is ready to cut interest rates if data does not improve. The policy-maker detailed that “personally I think it’s been a close call, therefore it doesn’t take much data to swing it one way or the other and the next few [MPC] meetings are absolutely live. I really need to see an imminent and significant improvement in the UK data to justify waiting a little bit longer.” The FT describes Vlieghe as a member with a solid track record to have provided early hint in policy direction. Back in Sept 2017, a hawkish speech by him was the precursor to the first BoE rate rise for a decade, materialized 2 months later.

US threatens Iraq if military forced out of the country: Amid pressure from the Iraqui govement for the US to abandon military operations in the Middle East country, the US is reportedly threatening Iraq with the seize of the central bank accounts in the NY Fed if the army is forced out of the country. Iraq’s care-taker govement voted last week to expel US troops fighting ISIS since 2014 after the killing of the Iraqui general Soleimani. According to the WSJ, “an adviser to the prime minister, Abd al-Hassanein al-Hanein, said that while the threat of sanctions was a conce, he did not expect the U.S. to go through with it. If the U.S. does that, it will lose Iraq forever,” he said.

Iran admits human error caused plane accident: In what should be barely any surprise, Iran has finally Iran admitted that it accidentally shot down the Ukrainian airliner that killed all passengers last week. The Iranian military says that it. The statement by the Iranian military said that the plane “took the flying posture and altitude of an enemy target”, hopefully providing some closure to the heart-broken families. The news ignited further protests against the Tehran govement by their own people, while the inteational community, including France, the UK and Germany have issued a statement strengthening the rhetoric towards their commitment to monitor that Iran sticks to the 2015 nuclear deal and urging to reverse all measures that violate it and are noncompliant.

AUD boosted by retail sales & seasonals: The AUD was the standout performer last Friday. The initial buy-side pressure emerged off a strong 0.9{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} retail sales number in November, far better than the market consensus (0.4{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814}), in what represented the largest increase since November 2017. A look at the details revealed that clothing, department store and household goods sales drive the overall increase, with the Bureau of Statistics noting an exceptionally high boost to sales from Black Friday sales. Despite the upbeat data, judging by the pricing of rates, the February RBA meeting is live, with next week’s December employment report a key data point to impact the prospect of a cut.

This week’s economic calendar is lighter than usual: Events in the calendar will be mostly second tier, with the exception of some US and Chinese data, even if unlikely to act as anything else other than a brief spell of fast price fluctuations. In China, we get December activity readings and Q4 GDP, while in the US retail sales and CPI are due. In Europe, the ECB will release its latest minutes, expected to cause little volatility. Besides, be reminded that on Jan 15, the US and China are scheduled to sign the Phase 1 trade deal.

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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 does not offer fresh new insights from the existing bearish outlook. Last Friday’s US NFP-induced volatility kept the index confined within Thursday’s price range, a patte that keeps playing into the view of the depressed vol dominating the currency (see bottom window). Technically, bears remains in overall control judging by the market structure to the tick volume dynamics, cementing the idea that any excessive demand towards the EUR faces selling. The enhanced moving averages as a proxy to track smart money flows backs up the bear view as does January’s EUR seasonal patte, averaging more than 0.5{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} in losses since 1982.

The GBP index appears to be failing to accept higher levels and with a second failed test of a critical resistance area overhead, followed by a bearish close on Friday, the risks are building up for further losses this week. That said, Friday’s candle does not carry sufficient tick volume to up the odds of follow through. The market structure is bearish, anchored by the enhanced moving averages tracking the main trend by the smart money category. Besides, be reminded that as in the case of the EUR, the GBP also faces the prospects of a poor performance during January.

The USD index shows little new evidence that the bearish pressure ignited on the back of a disappointing US NFP last Friday may find further legs down. The enhanced moving average as a proxy of the smart money trend has stabilized in bullish territory, while Friday’s bear candle carries little tick volume comparatively (no major commitment from real money accounts). The compounded tick volume trend (13ma applied to the OBV) stays bullish too, which increases the risk of keeping USD short exposure. The seasonals for January are extremely positive too.

The CAD index is a market that has my blessings to engage in buy-side business on weakness for a resumption of the uptrend. There are enough elements that I like as part of the index to think that sooner or later this market will attract the regrouping of the smart money buying. The area between the 38.2 and 50{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} Fibonacci retracement offers good value. The index continues to have the backing of the price structure, the smart money flows via the enhanced moving average, the aggregated tick volume and even the low volatile nature of the trend (ideal conditions). The seasonals for the CAD average over 0.33{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} of gains in January.

The JPY index was the main defeated currency from the sudden recovery in risk appetite from last week. By looking at the amount of tick volume as a proxy of the capital committed ever since the outside bearish day, I’d say the risk of a reversal backup is increasing. What the volume taper suggests is that the recent sell-side flows are devoid of real money and that the one-way traffic seen has been characterized by trend following momentum strategies. The overall bias is bearish and on balance, that’s the direction most likely to keep playing out, but when the index trades this low with no backing of the aggregate tick volume patte, I’d be conceed. Besides, the seasonal patte for the Yen averages +0.25{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} in Jan since Jan ‘82.

The AUD index keeps cementing my bullish view even if price has already run away far enough to see little value being a buyer at these levels. I’d be expecting a setback on any break of Friday’s high as the midpoint of its range lies overhead. The current leg up originated off a level of macro support, which has proven, again, to be a reliable location to shift the focus to AUD longs. Being able to read market pattes is incredibly valuable, and in the case of the AUD index, the premise of trading it in the context of a wide range (drawn in a white rectangle) made sense. The bullish pin bar off this key support with the spike in tick volume was the catalyst. The forex seasonal patte is positive to the tune of +0.54{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} in Jan since the early 1980s.

The NZD index has regained its bullish footing by attracting further buy-side pressure of a key level of static support. On balance, the overall outlook remains bullish this week. The price structure is supportive of higher prices, as is the fact that the enhanced moving averages tracking the smart money flow remains pointing higher. The compound tick volume (13ma to OBV) is, however, communicating that the selling pressure is dominant (red flag). The volatility to be trading NZD pairs remains above the usual monthly average.

The CHF index continues to display a positive trend, hence taking contrarian short positions carries a significant amount of risk as no technical backing exists at this point. The price structure is bullish, the smart money moving average supports this view, as does the overall tick volume pressure. As I’ve emphasized before, if you are counting on global growth to pick up this year, from a longer term strategic approach, shorting the CHF at these levels pays well in terms of swaps. 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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