The Daily Edge

Yen Bought After US NFP

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

What did we lea after the US NFP? In my opinion, it essentially reinforces existing trends in the market such as a Fed that will continue to find it well justified to stay on the sidelines for the remainder of 2019 and beyond, while it also provides a Goldilocks scenario for equities, as US growth remains relatively high despite little to no inflation. US bond vigilantes came roaring back by joining the bid in bonds last Friday, pushing US yields aggressively down, which can partly explain the rise of the Yen even as equities stay bullish. The Euro is another currency that remains very stable doing its own thing in a very confined range vs the US Dollar. Meanwhile, the antipodean currencies, especially the Kiwi, find no respite on its bearish trend as the market keeps discounting a more dovish RBNZ, while the AUD shows the first signs of weakness after a solid 3day bull run. In the last 2 days, I must say that the movements in the Sterling have resembled a lot to those seen in the Kiwi, both the clear underperformers in the G8 FX space. Somewhere sandwiched in between we find the Canadian Dollar, which remains supported as a commodity currency, in a context of bullish Oil prices.

Narrative In Financial Markets

  • The March US Non-Farm Payrolls saw a rebound that will appease the critics that believe the Fed is not yet done rising rates. If anything, the +196k headline print, alongside an absence of inflationary pressures via wages, is the ultimate best case scenario for stocks, while it reinforces the idea that the Fed’s rate hiking cycle is a thing of the past.
  • The Canadian jobs report, after a stellar run of hefty headline numbers, finally saw a reversal to the mean by printing -7.2k vs a conservative +6k estimate. There was a silver lining though, as the wages ticked higher for the month of March while the jobless rate stood unchanged.
  • US President Trump jawbones the Fed to embark on further easing, in yet another dangerous sign of the attempts by the current administration to politicize the Fed. Right from the horse’s mouth, Trump said: “I personally think the Fed should drop rates because they are slowing down the economy and instead of QT it should actually now be QE.”
  • The Australian election is now almost certain, according to the press, to be set for May 18th. No immediate impact for the Aussie but worth being aware of such an event as politics have become an integral part of forex market movements, dominated by the Weste hemisphere.
  • No new clarity gained after the talks between the UK govement and the Labour party yield no fruits. Amid this scenario, news broke out last Friday that UK PM May has endorsed, via a formal letter, an extension of the Article 50 until June 30th, 2019. This Wednesday’s EU Summit is the next focal point to achieve a new timeline by which to abide in this messy process.

Recent Economic Indicators & Events Ahead

Source: Forexfactory

RORO – Risk On Risk Off Conditions

The rise in US equities for a 7th straight day in a row masquerades a more negative shift in dynamics than it originally may appear on the surface. Bullish equities is definitely a ‘risk on’ sign, but it fails to be accompanied by congruent swings in fixed income, as US bonds were bought up aggressively once again as the US NFP report relaxes any fears of a pick up in inflation while it continues to show a weakening employment growth trend within still very tight labor conditions. The US NFP does reinforce the state of Goldilocks by equities, as the US growth, while decelerating, still remains very solid by G10 standards, at a time where inflation is still nowhere to be found, which undoubtedly makes companies’ cash flow all the more attractive as real yields fall. Further denting the overall risk appetite, and a clear sign that the conditions are less than ideal, both the DXY and our prop JPY index have shifted the micro trend to bullish since last Friday, with the latter following the move down in yields in locksteps. The dual industrial ratios to help us further gauge risk, such as Oil vs Gold or Copper vs Gold, are booth exhibiting a bearish slope, which is risk negative. In credit markets, junk bonds remain supported vs investment grade bonds, which is a positive for risk, as is the close sub 13.00 in the VIX (volatility index). The last 2 reads are conducive with a rising stock market.

Markets To Watch: Intermarket & Technical Analysis

EUR/USD: In A Consolidation Patte, Proj Targets Defined

The US NFP outcome has only reinforced the current range profile of this market. We’ve entered a well-defined consolidation with a resolution beyond 1.1245-50 or 1.1205-12 needed to expose the next 100% proj target at 1.1280-85 to the upside or 1.1170-75 to the downside. The midpoint of the range at 1.1230-35 is another critical point that may provide clues of the side in control. The latest volume profile, while price closed sub the POC, it has connotations of a single distribution, with little value built at the bottom of the range to think a breakout is imminent. Remember, from a cycle standpoint, the bearish cycle initiated on March 21st offered enough signs of reaching full maturity judging by the decreasing magnitude of its downward legs. The current range is yet another sign that the sellers have lost control unless they can start filling bids sub 1.12.

USD/JPY: Impulsive Selloff As US Yields Roll Over

The aggressive selling of the exchange rate is about to reach its 100% proj target at 111.30-35, an area that aligns with a sequence of multiple lows from early April. The rollover of the US Dollar occurs in line with the resumption of the bearish trend in US yields even if the DXY is not yet reflecting a bearish microtrend as per the slope of the 25HMA. Moreover, with very bullish equities (7 rising days in a row), one would think the mentioned target of 111.30-35 would see a major cluster of bids as market participants find value in joining the bid at what’s perceived as cheap prices in the current context. The rising trendline from March 25th is another technical backup buyers can resort to as further evidence that any buy on dips strategy is still very much entered in a rather constructive environment.

AUD/USD: Short-Term Sold In A Directionless Context

If one market portrays like no other the lack of volatility in the currency market, that’s this exchange rate, which continues to be trapped in a narrow range for over a month now. It’s a market perfectly suitable for those playing range bound strategies and other methodologies with a reversal to the mean at the core. Look for overextensions to be faded both ways, especially the first part of this week, with very little in the way of stimulus for vol to pick up considerably. The latest bearish initiated on the back of the US NFP has a target of 0.7085, where a rebound is expected. On the upside, buyers need to regain 0.7110 for a retest of the previous highs around 0.7130.

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