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It was all about the smart money re-grouping to push the USD higher on Tuesday, ending the day as the undisputable leader. If judging by the closing price in the USD index by the end of business in New York, looks like the market remains comfortable holding onto longs, with the impact its had on traders’ perceptions to join the trend clearly visible in the additional upside momentum vs G8 FX right off the gates on Wednesday’s Asian session. The key driver sustaining the ebullient mood in the USD but also on equities is the confirmation by official sources that a convoy of US trade delegates, including the big guns (Mnuchin and Lighthizer), is headed to China to resume in-person trade talks from next Monday. Amid mounting bids towards the US Dollar, a currency able to find back its mojo was the Loonie, which has run a fairly strong correlation against the DXY at times of solid gains from latter this year. The Euro continues to suffer after it broke a key level of support, releasing all the pressure it had managed to contain the prior day by a 20p range. The substantial losses in the single currency heading into this week’s ECB sets the bar for President Draghi to overdeliver on stimulus quite high given all the market has priced in. The Oceanic currencies, more so the Kiwi as the RBNZ hints at the study of QE down the road, were knocked down aggressively against most peers. The Sterling found little relief from the announcement that Borish Johnson has been elected new UK PM, with his speech devoid of references to the approach to get the best outcome in Brexit. The Swissy and the Yen, partly benefited by the crossfire of sell-side pressure in other fundamentally weak currencies (EUR, GBP, NZD), also put on a decent performance, even if still overwhelmed by the USD buy-side pressure.
The indices above show the performance of a particular currency vs a basket of the eight most heavily traded. 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.
US-China trade news keep USD assets bid: The key headlines lifting the USD and stocks was the confirmation that US trade negotiators are headed to Shanghai on Monday for face-to-face talks with their Chinese counterparts. Lighthizer and Mnuchin will travel to China with the negotiations set to extend until Wednesday. According to Global Times editor Hu Xijin, who’s become a mouthpiece for the Chinese govement, China has started buying US farm products and is now tu for the US to meet its end of the deal. “The US side should also honor its commitment and act timely to lift sanctions on Huawei. Without this step, I don’t think there will be a deal…”
Johnson elected as new UK PM: Boris Johnson, as expected, has become the new UK PM after defeating Hunt in the Tory contest vote, with the influence the news had on the price of the Sterling muted as Johnson did not offer any new hints about the tough Brexit negotiations ahead. Until new developments occur that models can latch onto to price in/out probabilities of a hard-Brexit, if guided by the directional inertia of the Sterling alone, the bear trend remains your friend. Johnson will appoint a new cabinet this Wednesday, set to be dominated by hard-liners endorsing a hard-Brexit policy. What this means is that a deadlock in parliament may ultimately ensue which may lead to elections before the Brexit deadlines come due.
BoE hawk consistent with shifting dovish rhetoric: BOE MPC hawkish member, Michael Saunders, spoke in a Bloomberg interview saying that the UK economy is weak and clearly not overheating, adding that the Pound is set to depreciate further on a no-deal, which is a scenario the BoE wouldn’t be able to stop from making the economy suffer. As a reminder, there has been a gradually dovish tu in the BoE rhetoric, as if they were setting the stage for more accommodative monetary policies should the Brexit negotiations remain stuck and the economic conditions remain as weak as they are. The conundrum of Brexit, Saunders said, implies that even if forecasts are relatively optimistic, “a smooth departure from the EU is very uncertain” which means possible inaccuracy due to exteal factors outside the BoE control. Still, he stuck to non-committal conditional wording, saying that “it’s hard to know how it would play out with any certainty and I wouldn’t want to give a strong steer now as to which way policy would go”.
Kiwi gets its wings cut out: The Kiwi ended the day as the worst-performing currency after the RBNZ suggested, according to Bloomberg, that it may investigate the possibility of tapping into an unconventional policy strategy, even if talks still at a “very early stage”. The RBNZ says it was responding to an official information request, even if the immediate reaction has been to panic sell the NZD. Understandably, since this is a new revelation the market was not prepared for (not priced in), the NZD currency index, which traded at its highest since late April ‘19, has room to fall further.
Watch tensions in the Korean peninsula: While risk-sensitive currencies such as the Yen barely budged, there has been an escalation of tensions in the Korean peninsula, even if the market still sees is as an isolated episode. First, we leat that the North Koreans announced a new “strategic” submarine capable of fully implementing the military-strategic intention of the Party, in other words, catered for its nuclear missile ambitions, which essentially suggests “denuclearization” could be dead in the water. Meanwhile, the South Korean military fired waing shots at a Russian military plane that violated SK airspace above the East Sea. It’s been reported that 3 Russian and 2 Chinese military aircraft were operating together in the area.
EZ PMIs risk today ahead of the ECB: Moderate risk events today when we see Eurozone PMIs ahead of the much anticipated ECB monetary policy meeting on Thursday, followed by the US Q2 GDP on Friday. As mentioned yesterday, and reinforced by Tuesday’s bearish price action in the Euro, the suppressed sentiment is predicated “on expectations that the ECB will cut rates and potentially announce the design of a new asset purchase program, justified by the deterioration of the macroeconomic conditions.”
Recent Economic Indicators & Events Ahead
A Dive Into The Charts (Tech, Funda, Intermarket)
At the core of today’s most notable forex moves, we find the excess of demand towards the USD, as reflected by the bullish breakout in the USD index, which I tend to monitor referenced against a basket of the 8 most traded currencies. The chart shows the imbalance of bids leading to a close at the highs of the day above a previous resistance, creating an interim bullish structure phase with a descending trendline overhead still to be cleared to reinforce the bullish dynamics even further. At the same time, the index has left behind the 13-daily ema baseline on increasing volume. The fundamental picture for the USD has also tued more positive in the last few days as the price action depicts, based on the verdict by the market that a 25bp rate cut by the Fed is the most likely scenario, alongside news that the US and China will meet in person next Monday. What this translates into is that we can build a hypothesis by which the USD can be expected to appreciate further heading into the second half of the week, even if the ECB outcome will have a major say on the USD stance, mainly influenced via EUR flows that may indirectly hit the world’s reserve currency.
Capitalizing on the USD strength via short EURs continues to be a trade paying off quite handsomely, and by looking at the chart, Tuesday’s commanding bearish bar suggests there is little technical credence for the rate not to fall further until the next level of horizontal support drawn in black. One must be aware that today we get EZ PMIs as a vol enhancer followed by the much-awaited ECB policy meeting, where vol will increase dramatically based on the outcome. I can picture a resumption of the bearish momentum today in the spot rate to support, from where the lack of commitment to hold shorts into the ECB may lead to a temporary pause.
The Sterling also looks poised to extend its losses towards its previous low with few buyers likely to engage before the low is tested. What this means is that any rebound provides an opportunity to engage in short-sided action in line with the clues one can obtain from the daily print, which include a candle close near the low (acceptance of cheaper levels), volume increasing and intermarket flows via the bond yield spread and the DXY also under pressure.
Another currency pair that appears to be carrying sufficient momentum to make it to its next critical support area circa 0.6960/65 is the AUD/USD, with the close by NY at the low of the day, with a breach of the 13-daily EMA and relatively stable tick volume compared to its prior day. The structure in this market is still bullish, which adds weight for buyers to retu once the mentioned area of support is tested. A close below will invalidate the thesis.
- 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