The Daily Edge

USD Hit By Major Supply Imbalance

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. Feel free to follow Ivan on Twitter & Youtube. Make sure you join our discord room if you’d like to interact with Ivan and other like-minded traders. Also, find out why Global Prime is the highest rated broker at Forex Peace Army.

Quick Take

The USD suffered a V-shaped tuaround, in other words, in a matter of hours its outlook went from steady bullish to now head into Friday with clear fragility to further losses. The culprit, after correlating price action to fundamental news, has been attributed to a surprisingly low US PMI read, paired with soft new home sales in the US. In stark contrast, the resumption of a risk aversion with both equities and global yields experiencing sharp slides led to the strong appreciation of the Yen (and Swissy). The Canadian Dollar, amid the continuous collapse in the price of Oil in a risk-off environment, succumbed for the second day in a row, while the Sterling also traded primarily lower, even if the overall weak performance was much more contained as the market appears to have fully priced in the resignation of Theresa May as British PM. The three currencies that managed to keep up with the Yen (and Swissy), albeit at a significant distance, were the Euro, the Aussie, and the Kiwi, in what’s seen as a rise on the demerits of the USD only.

Narratives In Financial Markets

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

  • Fragile risk dynamics leads to US equities and yields across the maturity spectrum selling off quite sharply as the narrative on the US-China trade conundrum worsens by the day.
  • The lead taken by US equities from European stocks performance was a pretty gloomy one, as both the German and European PMI series fell further into the red, re-igniting the idea that the global growth slowdown keeps spreading across the wider European continent.
  • The USD joins the offered tone in risk as the flash Markit US PMI underwhelms by barely staying above the 50.00 mark (50.9 vs 53.6 exp), interpreted as a significant shocker. The services component also fell to 50. Vs 52.6 exp. Another culprit was seen on the decline in US new home sales, which despite being a volatile indicator, added to the negative mood.
  • The setback in the US Dollar goes against the recent patte of a steady appreciation no matter the risk profile as EM capital headed back into the US. Receding flows into USD-denominated assets (repatriation or into money markets) may explain the tuaround.
  • Moody’s Analytics was that if the 10-year Treasury yield’s month-long average drops to 2.25% or lower, the FOMC may cut fed funds at its next quarterly meeting. As inferred from the CME Group’s FedWatch Tool, the futures market recently assigned an implied probability of 79% to a Fed rate cut by the end of 2019. In view of the underutilization of the world’s productive resources, low inflation should help to rein in Treasury bond yields.
  • UK Theresa May is expected to announce on Friday her timetable to step down as Prime Minister, with some reports suggesting that a leadership contest will begin from June 10th.
  • US President Trump kept attacking China via tweets by noting their unfair decade-long practices in trade activities while announcing an economic aid package to farmers/ranchers who may be hit the hardest by what’s believed to be a protracted cold war in trade and tech. Trump also confirmed that he will meet China’s President Xi at the Osaka G20 summit in June. Lastly, Trump said, “if the deal happens, that would be great, if not, that’s fine.”
  • On the Huawei rife, US Secretary of State Pompeo said that there is a real risk from China towards US national security, adding that US companies are going to cut ties with Huawei. Pompeo also said that Huawei is deeply tied to China’s communist party. The more embroiled the issue with Huawei restriction/ban becomes, the harder to get a trade deal.
  • In the next 24h, the focus will be on the US durable goods orders, which takes an even higher degree of importance after the USD selloff was attributed to poorer US fundamentals.
  • Over the weekend, the European parliamentary elections will take place. Votes from 28 EU countries will elect 751 members to the European Union.

Recent Economic Indicators & Events Ahead

Source: Forexfactory

RORO (Risk On, Risk Off Conditions)

Yesterday, I concluded that the overall risk environment was such that I felt inclined to think we were on the cusp of another round of ‘risk off’ on Thursday. Long and behold, the pendulum has effectively moved quite aggressively back into risk aversion mode as both US equities and US yields revert back to bearish tendencies from a micro and macro standpoint. The S&P 500, as our bellwether, resumed its downtrend with the technical backing of a bearish structure playing out. In the fixed-income space, the hammering of US yields follows a week-long of consolidation, with the extension of the selloff quite impressive as the US 30y yield makes a fresh low at 2.73%.

In the currency space, the Yen, alongside the Swissy (not covered in the report), were the absolute stars, in what’s a clear reflection of ‘true risk off’ flows. Granted, the bearish tuaround in the USD was not quite the scenario one would have expected as part of the ‘risk off’ script playing out, with the fall being almost fully attributed to a raft of negative US fundamentals. When tuing the attention to China’s assets, both the stock index performance in Shanghai and the USD/CNH, continue to imply that a protracted trade dispute between the US and China on trade is here to stay, which should remain at the core of one’s macro assessment to fade spells of overextended ‘risk appetite’.

Latest Key Developments In FX (Technicals, Fundamentals, Intermarket)

EUR/USD: V-shaped Structure Negates Bearish Bias

GBP/USD: Range Formation, Risk Of Head Fakes

USD/JPY: Sharp Selloff On Perfect Intermarket Bearish Storm

AUD/USD: Buyers Retu To Break Topside Of The Range

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