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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 the market adopts a ‘true risk-off’ mood on the back of Fed’s Powell less dovish remarks on inflation, the USD reigns in the forex firmament while commodity-linked currencies see the greatest supply imbalances, especially the Aussie and the Kiwi, both recently hit by negative fundamentals (low CPI in Aus last week & bad NZ jobs on Wed). The Canadian Dollar is holding up firmer as BOC Goveor Poloz dials down his dovishness by making the case for a stronger economic recovery from Q2, in which case, considerations for another round of tightening may be justified. Too early to tell but expectations towards Canadian rate cuts have taken a step back. The Japanese Yen, emboldened by the deleveraging flows in equities and global yields, has benefited once again, while the Sterling, driven by tentative progress in the talks between the UK Labour and May’s govement on Brexit, continues to follow the Yen in locksteps. Lastly, weakness in the Euro has made its way back as a function of USD strength mainly.
On the heels of the FOMC outcome, where a less dovish Fed was the final verdict, the market has permuted into a ‘true risk off’ profile as evidenced by the sharp selloff in the S&P 500, which comes with the added caveat of breaking the bullish structure of higher highs and higher lows on the hourly. Besides, the US 30y bond yield keeps exploring lower levels, also finding a new leg down. The dreaded alignment of the micro and macro moving averages towards the bearish side in both US equities as well as in the US bond yields space, coupled with bearish structures off the hourly, portends an ugly technical picture for risk going forward.
Is this, yet again, another miscalculated move by Fed Chair Jerome Powell at a time when stocks were bought up in eaest amid the anticipation of little to no inflation, hence increasing the attractiveness towards equities’ free cash flows? Judging by price action, the suggestion that the miss in the Fed’s inflation target is just transitionary is an admission that the Central Bank is setting higher expectations towards a pick up in price pressures, which tends to be a hawkish message to the market.
As a result, we see the DXY bid after a very sizeable daily outside bar which has allowed the micro slope (25HMA) to tu positive, which more often than not, when combined with such aggressive buyside action, tends to lead to a change in behaviour, so I am expecting the USD to stay firmer ahead of Friday’s US NFP report. The preponderance of evidence to determine the clear state of ‘risk off flows’ is found everywhere, with the Japanese Yen index retesting the highest level for the week, previously achieved on the miss of the Chinese PMIs last Tuesday, a shocker that led to a brief upset in risk too. A pair that should be in everyone’s radar as an indicator of the USD prospects in the USD/CNH, currently retesting a key support, which has so far done its job to prevent the micro slope to tu bullish. The ugly risk dynamics were also clearly manifested through the spike in the VIX towards 15.00. USD, JPY vs Commodity-linked currencies (esp AUD, NZD) looks an interesting short bias intraday.
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EUR/USD: Bearish Outside Day Shifts Bias
The sharp selloff in the exchange rate, driven by USD buyside flows, has made it to the 100% proj target, which as the daily reader of my notes can tell, it’s a very common occurrence. While marginally trespassed, the target at 1.1194 has found sufficient absorption to allow for a tepid recovery. The bias has clearly shifted to the downside based on the break of the price structure, confirmed after 1.1197 was taken out and the hourly achieved a brief acceptance below the level. In the next 24h, with only low-tier events out of Europe and the US, I suspect the market bias to take its cue from the most recent technical cues, which has clearly tued negative as the micro slope (25HMA) also indicates. The way to play this market, bearing in mind that ‘true risk off’ dynamics are present, is with the idea that the risk appears to be more skewed towards the downside during Thursday.
GBP/USD: Not The Pair To Exploit USD Strength
I wouldn’t rush to tu the bias short on this exchange rate, as one would essentially be trading the two strongest currencies in the forex firmament, which is not the best way to spot clear demand/supply imbalances. The concentration of volume via April 30-May 1 POC has led to a temporary change of behaviour by the way of a mild recovery, now faced with an immediate area of horizontal resistance at the 1.3055-60 level. Should the USD rally extend, I am looking at 1.3020 as the next projected target based on a 100% measured move, confluent with a horizontal support. Alteatively, a break above 1.3060 allows a minor void area to be exploited until 1.3075 ahead of 1.3095-1.31, where I expect offers, if filled, to pose a real challenge as it aligns with today’s ADR limit.
USD/JPY: Bullish Structure But Risk Off Caps Upside
Today’s price action in the pair is going to be a function of how intermarket flows play out. We are in a true risk-off environment amid rising interest to bid the USD, which means the pair should stay directionless and struggle to develop a concise bias in either direction. Technically, the USD has achieved a successful leg up to revert the structure on the hourly from bearish to bullish. Any retest of 111.25-30 is expected to be met with strong buying interest as part of a right-hand shoulder. The lack of direction in the pair comes as Japan continues on holidays until next Tuesday.
AUD/USD: Range Breakout Allows 0.70c Retest
The resolution of the range incentivizes the market to keep adding short positions, setting the sight on the next obvious target at the 0.70, which coincides with the 100% proj target. The first area where the Aussie should struggle can be found at 0.7020 ahead of a retest of the broken range at 0.7030. This is a market that has written all over the wall a selling on strength bias, as both technicals and recent fundamentals argue for a lower value. Besides, the intermarket tide has tued negative, with the DXY on the rise and the Chinese Yuan also printing lower levels vs the USD, not to mention that the true risk off won’t do any favor to those looking to play AUD longs.
NZD/USD: Poised To Stay Pressured
This is an exchange rate where the most recent developments, both technicals and fundamentals, suggest that the risks keep building up for a follow through bearish continuation. Wednesday’s poor NZ jobs report has heightened the possibility that the RBNZ may cut rates, while Fed Powell’s presser has shifted the expectations towards a less dovish Central Bank. The printing of a new lower low in the hourly firms up the notion that the exchange rate should continue to find enough selling interest on bounces. If the scenario pans out, the round number at 0.66 would be the next target ahead of 0.6588, which as usual, would be the 100% proj target after the 0.6627 breakout point.