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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.
Tuesday’s tuaround in risk dynamics should not send the false signal to think we are anywhere near from being out of the woods. The crosscurrents in equities, fixed income credit and currencies, specifically the performance of the USD, JPY, CNH suggest the dominant thematic of ‘risk off’ is not going away, or at least, there is no evidence yet. The disparity in performance between the Yen and the rest of G10 FX should be the first reminder every day one opens the charts to the degree in which financial conditions have deteriorated. The USD and CAD did well on Tuesday, the latter regaining its lost appeal after the best Canadian jobs report in recorded history last Friday. The Euro is starting to wane a tad as the German data remains underwhelming to say the least, with today’s European preliminary GDPs, including Germany, another major test. The AUD & NZD, amid the dicey US-China trade dispute, remain on the backfoot, while the Sterling keeps suffering pains of its own as the political stalemate on Brexit continues.
* The Information is gathered after scanning top publications including the FT, WSJ, Reuters, Bloomberg, ForexLive, Institutional Bank Research reports.
The risk environment saw a relief intraday rally, which while meritorious on its own right due to the dicey US-China trade dispute, is far from reassuring in terms of thinking we are out of the woods. The S&P 500, as the reference to assess the appeal back into stocks, has seen the micro momentum tu high as the slope of the 25-HMA depicts, even if it should be perceived as a poor quality run on the basis that it is fighting the bearish macro trend (125-HMA slope) and the bearish structure. The US 30-year bond yield, as another leading indicator of risk conditions, trades around 2.85% after very tepid movement near trend lows, which again, is not a positive signal.
The improvement in buy side flows back into the DXY, alongside a broadly bid JPY index, is another reason to be worried that we are lacking sufficient evidence to expect this relief rally to be sustainable. But no other markets provide the degree of evidence to play down Tuesday’s risk recovery as do the Shanghai Composite and the USD/CNH, especially the latter, which keeps pressing higher en route to 7.00. As a rule of thumb, the lower the Yuan goes, the more pessimism exists that the US-China trade stalemate will be resolved anytime soon. Capital flights from China are playing a key role in the depreciation. Besides, with the VIX trading at a level not far from 20.00, I can’t see investors finding much comfort, something already translated in the suppressed valuations of junk bonds (HYG), near-trend lows.
Overall, this marginal gyration in risk is far from acting as an indication that the underlying ‘risk off’ tide is tuing.
EUR/USD: Bearish Cycle Into Strong Demand
The exchange rate offers a mixed-bag outlook. On one hand, we’ve seen a back-to-back day of a supply imbalance, resulting in the formation of a second leg down. However, the bearish momentum has stopped on its track at a crucial decision point at 1.12-1205 (retest demand May 9th), where a cluster of bids is causing absorption of offers as depicted by the compression of the price. The current support is a potential candidate area where the active bearish cycle may terminate. The backdrop is not the most encouraging for buyers though, as they will have to fight a double distribution down, making the prospects of a retu to a bullish bias a tall order as the rate will have to first clear the 1.1220 resistance level and the descending trendline with acceptance above.
GBP/USD: Bear Trend Firmly In Place
All the technical indications point to an extension of the bearish trend, with one exception, that is, the drop in the exchange rate has now reached the 100% measured target from the former range, an area where profit-taking activity occurs as market makers step in to attempt rotations back to the mean. So far, the supply imbalance amid no progress in Brexit has been the dominant thematic, as clearly manifested via the double distribution down day. There will be a handful of resistance the Sterling must re-take to improve its outlook, from yesterday’s POC, the 1.12920-25 resistance line, which if above, may see the potential capitalization of further upside into the 1.2940-45 resistance line. The OBV (On Balance Volume) holds an unambiguously bearish slope as sell-side volume dominates.
USD/JPY: Retakes Key Line at 109.50
The P-shaped volume profile constitutes a bullish development, one that now hinges on the ability of buyers to maintain the price above the 109.45-50 to avoid a resumption of the dominant trend. If buyers can start building upon the recent momentum by breaking through 109.75-80 resistance, that’s going to expose not only 111.00 round number, but it will damage the higher timeframe bearish bias, as sellers will lose the advantage of protecting the midpoint of the former range. Alteatively, a move down and acceptance back sub 109.45-50 shifts the focus down to 109.00-10. For now, the OBV indicates buy side pressure dominates, while the intermarket flows (DXY + RORO line) suggest that the recovery we’ve seen is congruent with the pick up in the pair’s valuation.
AUD/USD: Selling Bias PiggyBacking the Yuan
The downtrend, even if not supported by the aggregated volume pressure, is clearly bearish. This is an outlook that is also being promoted via a lower Yuan and higher DXY. The fact that the volume accumulation, as represented by the OBV (thick orange line) is trending higher, it indicates a market very well capped by sell-side limit orders, that’s the only way we can be trending down yet the aggregate volume shows the buyers being the side most actively on the bid. The last resolution below 0.6935 low has opened up the doors towards 0.6920 as the next 100% target measure, while on the upside, any recovery should find it problematic to break the POC of the last 48h circa 0.6940-45.