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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 in order to determine daily biases and assist one’s decisions on a regular basis. Feel free to follow Ivan on Twitter & Youtube.
As we head into Tuesday’s busy European session, the lead to be taken from Asia is one where caution is warranted, not only because of the miss in the Chinese PMIs (both official and Caixin), which has led to some spells of ‘risk off’ and a timid retu of JPY buying but also due to the upcoming Fed’s SOMA day. What this means is that as part of the Fed’s QT program, April 30th marks the day when the Central Bank will shrink USD liquidity by 28.1bn in its balance sheet. Whenever liquidity is withdrawn via these redemptions, there is a patte of US Dollar strength, which more often than not, is accompanied by a greater apprehension towards risk-seeking strategies. The miss on revenue by Google does not help the case either, even if by the close of business in NY the conditions look rosier than the picture I am painting. The Aussie is the worst performer after a rapid decline on the back of the underwhelming Chinese data, while the Euro, Pound, and Yen, in this order, are performing with a firmer footing. The Canadian and the New Zealand Dollar, as part of the commodity bloc, were dragged down by the negative news out of China. Big day for CAD traders too as the Canadian GDP is due ahead of BOC Poloz Speech.
There has been a pick up in risk appetite conditions as the dual rise in US stocks and bond yields clearly reflects. The decline in the DXY and Yen index was another sign that we were supposed to be headed into Tuesday with an open mind when it comes to risk. However, the Chinese PMIs have clouded the landscape. Besides, a huge dose of prudence is warranted because even if the micro slopes (25HMA) have tued ‘risk on’ in the last 24h, in 3 out of the 4 primary markets monitored to evaluate risk dynamics (S&P 500 the exception), the macro slopes (125HMA) are still pointing towards the recovery in the long maturity bond yields, DXY, JPY as corrective in nature. Moreover, I must reiterate that it’s a big SOMA day on Tuesday, which essentially means that USD liquidity will be removed from the market, with the net daily impact in most cases positive for the currency. Whenever that’s the case, and if recent market dynamics prevail, it tends to increase the sense of risk aversion, keeping commodity-linked currencies subdued.
A lesson from last week’s ebbs and flows should be that one cannot be overly dependant on just equity movements alone to determine the direction of risk-sensitive currencies such as the Yen but rather always try to find compelling evidence by syncing up the direction of equities and bond yields, as was the case on Monday, where a ‘true risk on’ environment evolved as a function of the increases in the value of equities, bond yields, coupled with a USD on the backfoot. Always remember, these days we can separate currencies in 3 different packs, the risk-sensitive group (USD, JPY), commodity-linked (AUD, CAD, NZD), and the European block (EUR, GBP, CHF). The influx of activity in a particular currency will, therefore, be determined by RORO conditions, episodes of liquidity withdrawals, driven by fundamentally-motivated events, that’s why it’s always emphasized to treat the market as a mechanism of autoregulation based on fundamentals, Intermarket, and technicals.
Interested about downloading today’s key levels in the major pairs? Find the MT4 templates, updated daily, by clicking the link.
EUR/USD: Mother Of All Confluences Reached
“While anything can happen, if you are looking for a pristine area where a compelling amount of technical confluence can be found, the area between 1.1185 up to 1.12 offers an absurd amount of technical confluence in the form of the 50% fib retrac of the last leg lower, 100% proj target hit through the 1.1166 breakout, horizontal resistance levels, 3rd touch of a descending trendline, and to top it off, USD liquidity will be pulled from the market as part of the Fed’s SOMA day. Note, the impulsive correction has created a new cycle up in the lower timeframes, so it’s going to take potentially a few attempts before the current buyside tide can tu in favor of sellers again. That’s why we usually see M or W formation before a change of behavior that aims to change the current motion/dynamics. The European data today will play an important role to dictate the next directional move, one that if it pans out higher, should be met by sellers ready to engage in what looks like an incomplete bearish cycle, having run only 2 legs down in what’s usually a move that evolves in a 3 legs down before a distribution/accumulation.”
GBP/USD: Consolidation Into Descending Trendline
The inability of the Sterling to make further headway above the 1.2945 resistance area has led to a double rejection, with a subsequent retracement to retest 1.2910-15 support, creating a tight range. A resolution beyond the edges of the box is needed to see the next directional bias play out, with the well-defined target at 1.2960-65 ahead of 1.2975-80 (ADR limit, 100% proj target, horizontal resistance). On the downside, 1.2895-1.29 is the next area of liquidity that ma be exposed ahead of 1.2875-80 (ADR limit, 100% proj target, horizontal support). A break above 1.2945 resistance would be technically damaging as it will violate a descending trendline coming from April 12 high.
USD/JPY: Range Established Within Bearish Structure
The selloff above 112.00 achieved a change of dynamics in the exchange rate that should still be considered the dominant bias even if the lack of follow-through selling in the last 2 days allows us now to draw a range with the extremes found at 111.90 and 111.45 with 111.65-70 the midpoint. The release of the disappointing Chinese PMI in Asia has led to an influx of the JPY bids, reverting the ‘risk on’ profile slightly to the downside, hence potentially exposing the next area of support. Remember, activity around the JPY is much thinner than usual, especially during the Asian session, due to the week-long Golden week in Japan.
AUD/USD: Knocked Down By Weak China PMI
The AUD was marked down immediately after a poor set of Chinese PMI numbers, taking the rate towards its next area of support at the 0.7035, which also aligns with an intraday 100% proj target. If the Aussie gains further momentum from here (be waed the extension looks overstretched), the next destination upon price action maturity looks set to be 0.7020-25, where an area of horizontal support meets the ADR limit for the day. Ultimately, the target, if price accepts below 0.7035, appears to be a retest of 0.7010, which would coincide with the broader 100% proj target.