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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.
We had an uninspiring day of price action in the forex arena on Monday, with most of the US-China trade-led vol concentrated in the equity market. It is precisely in stocks where we are seeing the first technical cracks again as the risk profile worsens, with IT shares suffering the consequences from the high stakes gamble decision by the US to ban Chinese-based Huawei and ZTE Corp from any dealings with US telecoms. Surprisingly, the Japanese Yen has failed to attract sufficient demand, in a ‘puzzling’ move that I explore in today’s report. The Aussie got off to a great week after the positive Australian election news, as the sitting coalition govement retained power. However, the RBA Goveor Lowe speech today, highlighting the possibility of a rate cut at the June meeting, has thrown cold water on the positive AUD outlook as it gives back most of this week’s gains. With regards to the USD, there was a significant absence of flows coming through the books, with a speech by Fed’s Powell failing to spice things up. Same applies to the CAD, as the USD/CAD comatose trading manifested. Last but not least, the appeal towards the European currencies, especially the Sterling, remains subdued, as the Brexit process stays ‘stuck’ following the failure of the cross-party talks between the Conservatives and Labour. The next Brexit divorce agreement vote is due in early June.
* The Information is gathered after scanning top publications including the FT, WSJ, Reuters, Bloomberg, ForexLive, Institutional Bank Research reports.
The disconnect between the pricing of the JPY, using our prop index as a reference, and that of equities and to a certain extent fixed income, continues. It shows a rare disparity unlikely to last. Personally, with the tit for tat US-China punitive tariffs, Huawei’s restriction/ban from dealings with the US, and the war of words sounding increasingly provocative and retaliatory in nature, it continues to enhance the prospects of a protracted trade war at a rapid pace. On the back of such uneasiness, it looks as though the S&P 500 has started to frontrun the bearish sentiment by breaking into a new cycle low, which has been confirmed after the break and hold sub May 17 low at 2,850.00, a move that has also been vindicated by the bullish price action in the VIX. The micro slope has also tued negative, which only reinforces the bearish bias. In the meantime, fixed-income, with the US 30y our best gauge to evaluate the overall risk profile as it relates to global yields, remains on a ‘holding patte’ by extending its 2.80%-2.85% range for a 4th day in a row. Personally, I find it really hard to see much impetus to the upside eventuating with the US-China trade issue escalating.
As per the currency flows, the DXY has maintained its hefty levels, which is far from being the ideal scenario if one expects the risk profile to be on the mend. The most puzzling move so far, one that keeps defying logic, which suggests it has its hours numbered unless ‘risk on’ is re-ignited, is the depreciation in the Japanese Yen. Believe it or not, hence my ‘puzzling’ expression, with a more than dubious risk dynamics, the Yen index displays its most bearish profile ever since the onset of the month-long Yen risk rally on April 15th. This reveals two key takeaways. Firstly, short-term traders should be on the watch to exploit long opportunities in the Yen on the basis of a poor risk environment. Secondly, it tells us that the supply interest on the Yen has been very strong from a more macro perspective, which does make sense as our equally-weighted Yen index reached its 100% target projection move from a weekly perspective, as shown below.
When it comes to Chinese assets, we want to pay attention to the Shanghai Composite, which remains pressure on the back of the Huawei ban, but most importantly, we still want to understand what’s happening in the Yuan valuation front. The bullish trend in the USD/CNH remains firmly in place, even if some of the short-term momentum has been lost as authorities in China pledge to defend the 7.00 handle, which is definitely the level the market is watching for. According to the Economics Team at Nordea, the move towards 6.91% may represent a concrete attempt by China to allow the countering of 10% tariffs on Chinese export goods. However, more worrisome should be if China aims to weaponize the Yuan as a tool to counter-attack the US for its 25% tariff hike. If that’s the case, 7.91 would be the next target, which is a scenario the team at Nordea assigns low probabilities given that, as stated yesterday by the Economics Team at Nordea, “a move through 7.00 would make Chinese assets suffer massively as would the growth momentum in Asia.”
EUR/USD: Flows Consolidate Limited by Friday’s POC
GBP/USD: Friday’s POC Location To Reinstate Shorts
USD/JPY: Bullish Structure As Yen Defies Risk Profile
AUD/USD: Finds Higher Value, RBA Lowe To Determine Next Bias
USD/CAD: Directionless Flows, CAD Benefited By Trade News