Central Themes: Wild Forex Vol & USD Strength
The Daily Edge

Central Themes: Wild Forex Vol & USD Strength

Authored by Ivan Delgado

Ivan Delgado is a decade-long Forex Trader. Feel free to follow Ivan on Youtube. Join thousands of traders who follow Ivan's insights to increase their profitability rate by learning the ins and outs of how to read and trade financial markets. Ivan has you covered with in-depth technical market analysis to help you turn the corner.

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The Daily Edge is authored by Ivan Delgado, 10y Forex Trader veteran & Market Insights Commentator at Global Prime. Feel free to follow Ivan on Twitter & Youtube weekly show. The purpose of this content is to provide an assessment of the conditions, taking an in-depth look of market dynamics – fundamentals and technicals – determine daily biases and assist one’s trading decisions.

Let’s get started…

Quick Take

Even if Central Banks kept rushing against the clock to implement further rate cuts, aggressive QE programs, and the re-activation of swap lines by the Fed, the ongoing US dollar scramble remains well and alive. Nothing that’s been done so far has managed to slow down the rapid appreciation in the US Dollar, which is leading to increasing chatter of coordinated and in-mass intervention by Central Banks, including the Fed, to step in to depreciate the currency. The bar is still quite high in my opinion, but do note, the currency has hit this week the highest volatility in decades, surpassing the peaks in vol during the GFC, which not only validates a ‘liquidity event’ crisis but may warrant an ‘excuse’ to intervene on the basis of ‘disorderly’ moves. It’s definitely important to watch this space and not take for granted any further unorthodox measures as the strength of the USD is yet another headache for the global economy, especially EMs. The volatility in FX is truly remarkable and if one were to figuratively wake up from hibeation to these wild levels of currency volatility, it wouldn’t probably believe what’s been unfolding. But that’s the danger when complacency of record-low compression in vol is met with a Black Swan, it magnifies the movements 10 fold as it creates a structural/framework tipping point. It took the full extent of 2019 for the AUD/USD to move 8{c55dae091e2f4b96c42546a5edb68ce9f701c78980adb8fd55b74e573b5f59f6}, that’s precisely the outsized range we saw the Aussie travel in the last 24h. That alone speaks volumes of where we are at in terms of vol and the poultry amounts of thin liquidity witnessed in Forex. A silver lining came via the performance of industrial commodities, fixed income and equities, holding up better in the last 24h, hence allowing a major correction lower in safe haven assets (JPY, CHF) and the EUR. By the way, if you believe the aggressive depreciation in the Euro is coincidental, I urge you to check today’s commentary on the EUR index to understand the context.

The indices show the performance of a particular currency vs G8 FX. An educational video on how to interpret these indices can be found in the Global Prime’s Research section. If you found the content in this section valuable, give us a share by just clicking here!

Narratives In Financial Markets

* The Information is gathered after scanning top publications including the FT, WSJ, Reuters, Bloomberg, ForexLive, Twitter, Institutional Bank Research reports. If you found this fundamental summary helpful, just click here to share it!

RORO on the mend: The RORO conditions (Risk On Risk Off) improved a tad as US equities kept recouping losses off the lows for a second day in a row, with selling in the long-end of the US govement bonds still noticeable, further suppressing appeal toward safe haven currencies. The rise in Oil and the broader industrial commodity spectrum, alongside the drop in the VIX from 85.00 to 72.00 has also allowed some unwind in safe haven FX longs.

The US Dollar the indisputable leader: The currency keeps rising no matter the degree of risk aversion in the markets. This is yet again another revealing sign that the USD liquidity crunch is real and ongoing. In the past few weeks, the evidence of a market short USD has been mounting through the selling of assets with safe haven attributes vs the USD, the structural breakout in the USD index or the rise of the currency despite ultra-dovish Fed policies.

Thursday’s swing in the Aussie eye-popping: The range of over 8{c55dae091e2f4b96c42546a5edb68ce9f701c78980adb8fd55b74e573b5f59f6} it’s an eventuality barely ever seen in the Aussie. After the initial weakness in the currency ahead of the RBA rate cut & QE program announced (will buy Australian govement bonds), it was met with an even stronger impetus on the opposite direction as the RBA Goveor Lowe opened the possibility of intervention in the currency should the moves continue to be as disorderly as recently seen.

The Bank of England goes all in: The Bank of England followed the latest easing decisions by the RBA, ECB & Fed and it has also stimulated the halted economy with a 0.1{c55dae091e2f4b96c42546a5edb68ce9f701c78980adb8fd55b74e573b5f59f6} rate cut and 200bn in extra QE. This Quantitative easing stimulus is equivalent to almost 2{c55dae091e2f4b96c42546a5edb68ce9f701c78980adb8fd55b74e573b5f59f6} off interest rates.

Fed reactivates USD Swap lines: It will help the RBA ($60b) and RBNZ ($30bn) alongside an additional seven other Central Banks. “These facilities, like those already established between the Federal Reserve and other central banks, are designed to help lessen strains in global US dollar funding markets, thereby mitigating the effects of these strains on the supply of credit to households and businesses, both domestically and abroad,” the Fed said in a statement.

USD intervention talk mounts: The re-activation of swap lines is another step in the right direction to provide a backstop to the ongoing liquidity crisis in USD funding at rates near the cash rate. One of the central thematic that so far Central Banks are abiding by is the fact that they will do whatever it takes to curb the deteriorating conditions, even if it includes mass, coordinated FX intervention. For the US in particular to intervene in the USD, the following is a good explainer on where we are at.

Latest on COVID-19: The market is especially conceed over the evolution of COVID-19 in the two largest financial centres (London and New York). The news is not encouraging as phase one of the mitigation plan is still at play and authorities are adapting on the fly. In New York, coronavirus cases rose to 4,152 from 2,383, while in the UK, coronavirus cases jumped to 3268 vs 2689 yesterday. The death toll rate continues to pick up at a steady rate as well, so the markets are still on tenterhooks as the curve in cases is still not flattening out. We also leaed that Italian death toll has now overtaken China. For a live updates blog, follow ZeroHedge.

Recent Economic Indicators & Events Ahead

Source: Forexfactory

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Insights Into Forex Flows

The indices show the performance of a particular currency vs G8 FX. An educational video on how to interpret these indices can be found in the Global Prime’s Research section. The idea of this analysis is to complement one’s daily bias so that traders can make better and smarter decisions by accounting for the aggregation of flows.

If you found the content in this section valuable, give us a share by just clicking here!

  • RORO (risk on, risk off) have improved at the margin.
  • Fixed income and equities holding up as global central bank + fiscal stimulus continues.
  • First time since the selling off the top that the S&P 500 rejects lows for a second time, evidence of more willing buyers at these levels.
  • The industrial commodity complex (CRB index) recouped yesterday’s sharp losses.
  • Gold priced in USD remains pressured, strengthening the notion that the run for cash (USDs) is still ongoing as proven by the soaring of the USD index.
  • The EUR index weekly chart has rejected its decade-long resistance. This resistance, as a reminder, is the 50{c55dae091e2f4b96c42546a5edb68ce9f701c78980adb8fd55b74e573b5f59f6} retrac from the post GFC sell-off.
  • Shorting the EUR at this massive resistance has proven for over a decade to work, hence the probability of EUR weakness eventuating was higher than a 50/50 coin flip.
  • The improvement in risk appetite saw the Euro take a beating. If risk-off retus, levels of vol in the EUR expected to rise further based on historical standards.
  • The GBP index on the weekly shows GBP has further room to fall based on GFC analog, to first towards its historic low, ahead of a final bearish projection target.
  • GBP tends to underperform G8 FX indices in a global crisis as the one seen unfolding, with the last GFC and Brexit leading to the GBP index falling to the tune of 20{c55dae091e2f4b96c42546a5edb68ce9f701c78980adb8fd55b74e573b5f59f6}.
  • This time, the sell-off in the GBP originates from levels much lower than pre-GFC, hence why caution is warranted, and a case for GBP to only meet its historic low target.
  • Fundamentally, the aggressive actions by the BOE was equivalent to almost 2{c55dae091e2f4b96c42546a5edb68ce9f701c78980adb8fd55b74e573b5f59f6} off interest rates as such, this is a decision still promoting GBP shorts.
  • Nothing has changed in the USD front from what’s been recently shared. We are in the midst of a scramble to get USDs as conces mount over liquidity/funding channels.
  • The measures by the Fed to reactive swap lines by adding a bunch of extra Central Banks as part of its borrowing facility access has had little net impact so far.
  • The fact that the Fed failed to make any difference in depreciating the currency is the ultimate clue that the outlook for the currency is unambiguously bullish.
  • What may tu the trend around is coordinated, in mass intervention in the USD by Central Banks and the Fed to slow down the rapid appreciation.
  • The levels of vol the currency has hit this week have now surpassed the peaks in vol during the GFC, which not only validates a ‘liquidity event’ but may warrant ‘excuse’ to intervene on the basis of ‘disorderly’ moves by the Fed.
  • The USD index has completed about ⅓ of its expected movement, with further forecasted gains in the next 3 months based on the analog behavior from the GFC.
  • The world now holds a much larger USD-denominated debt that back in 2008, therefore, the scramble to get hold of USD to serve debt could be greater than in the GFC.
  • The CAD index offers a very attractive level to pondering short positions in coming weeks as the currency retus back to the mid-point of its range.
  • The existing range parameters have been at play for the last 4 years but with the perfect bearish storm hitting the currency, I can’t help but to see technical value here.
  • Considerations to re-engagement in CAD shorts somewhere through the mid-range area in purple have the backing of the area acting as a reactionary level when tested.
  • If a resolution of the long-held range to the downside validates, it opens up the doors for an additional 8{c55dae091e2f4b96c42546a5edb68ce9f701c78980adb8fd55b74e573b5f59f6} fall in months to come in what I still perceive as an expensive currency.
  • The JPY index has made several attempts to break its weekly price structure, with Friday’s price action key to finally validate a close above the resistance level.
  • If acceptance is finally found above this macro level, it would have major technical consequences as it implies the next bull phase is ‘on’ for an ultimate target 15{c55dae091e2f4b96c42546a5edb68ce9f701c78980adb8fd55b74e573b5f59f6} higher.
  • Interestingly, even if the JPY only appreciates half in magnitude relative to the moves seen in the GFC, this final target I point at below would still be met.
  • Note, the target selected that may represent a potential top in the JPY aligns perfectly with the highest JPY valuations in 2008 + 100{c55dae091e2f4b96c42546a5edb68ce9f701c78980adb8fd55b74e573b5f59f6} proj target.
  • Moves in the JPY, in terms of vol, are still poultry compared to the 2008 GFC, hence the JPY remains at risk of a significant pick up in vol.
  • The AUD, after reaching a massive level of support dating back to the last GFC (all-time low as far as the chart goes + 100{c55dae091e2f4b96c42546a5edb68ce9f701c78980adb8fd55b74e573b5f59f6} bear proj), has found aggressive buyers.
  • Since the level of support reached was such a major confluence as it includes the 100{c55dae091e2f4b96c42546a5edb68ce9f701c78980adb8fd55b74e573b5f59f6} proj target from last decade’s + support line, it was a brave long at a great level.
  • If scenario #2 eventually plays out and the Aussie breaks past this support, a much more dire scenario will be validated whereby the Aussie would be exposed to severe losses until the next 100{c55dae091e2f4b96c42546a5edb68ce9f701c78980adb8fd55b74e573b5f59f6} bear projection target is met (that would be the new base case).
  • The measures by the RBA to cut rates and dip its toes on a QE program to buy govement bonds is a negative input, but the hints by RBA Lowe that intervention is not ruled out if further disorderly movements occur in coming weeks/months.
  • The NZD index confirmed last week a massive breakout of a weekly structure, which implies that the NZD has a lot of catch down to do, more than the Aussie.
  • This breakout of structure valides an ultimate target 18{c55dae091e2f4b96c42546a5edb68ce9f701c78980adb8fd55b74e573b5f59f6} lower from the breakout point, which makes the prospects to short the currency this year very appealing.
  • My more bearish technical view in the NZD vs the AUD finds its footing on the bullish outlook in AUD/NZD as it tests the parity level, an absolute line in the sand forever.
  • Coincidentally, if the NZD losses play out as envisioned, the low that would be put in comes in stark alignment with the low reached during the GFC in 2008.
  • If the risk-off conditions continue to play out in a protracted manner for months to come, the CHF is poised to keep appreciating with technicals backing up the bullish call.
  • In fact, the index has broken through its previous GFC high, which allows to draw a new bull proj target that, if met, would make the current level 12{c55dae091e2f4b96c42546a5edb68ce9f701c78980adb8fd55b74e573b5f59f6} underpriced at present.
  • However, we still need to see, as in the case of JPY, what Friday’s price action would be like, as the index must re-assert the technicals by closing above the resistance.
  • As in the case of the JPY, the vol realized so far in CHF has been tepid relative to the GFC, therefore, I wouldn’t be surprised that we see a pick up in vol moving forward.

Important Footnotes

  • Market structure: 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
  • 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
  • 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{c55dae091e2f4b96c42546a5edb68ce9f701c78980adb8fd55b74e573b5f59f6} projection resides in the symmetry and harmonic relationships of market cycles. By drawing a 100{c55dae091e2f4b96c42546a5edb68ce9f701c78980adb8fd55b74e573b5f59f6} 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{c55dae091e2f4b96c42546a5edb68ce9f701c78980adb8fd55b74e573b5f59f6} Fibonacci Projection

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