Funding Currencies Suffer As ‘Risk On’ Back With A Vengeance
The Daily Edge

Funding Currencies Suffer As ‘Risk On’ Back With A Vengeance

5 Dec 2019
Authored by Ivan Delgado

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. You can also subscribe to the mailing list to receive Ivan’s Daily wrap. 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.

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

Funding currencies, most notoriously the Swissy and Yen, fell out of bed, accompanied by overall weakness in the US Dollar and Euro. The risk landscape experienced, once again, a 180 degree tuaround after a Bloomberg report hinted at the Phase One trade deal between the US and China moving closer. The renewed optimism around a positive resolution in the current impasse to ink a deal turbo-charged the Kiwi and the Aussie too. The New Zealand Dollar keeps outperforming its neighboring peer driven by a more sanguine domestic landscape, reinforced by the RBNZ announcing plans to force banks to raise capital ratios, while the Aussie lags behind as mounting evidence (Aus GDP, retail sales, trade balance) shows the economy is still limping unable to get out of second gear, which will definitely keep the RBA on the watch to adjust policy if needed. The Sterling finally saw the smart money sponsorship campaign by targeting much higher levels, it left and never looked back. Lastly, the CAD was marked up aggressively after the Bank of Canada kept rates unchanged at 1.75% while sounding less dovish than previously thought. 
 

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.

Narratives In Financial Markets

* The Information is gathered after scanning top publications including the FT, WSJ, Reuters, Bloomberg, ForexLive, Institutional Bank Research reports.

US-China closer than thought in trade deal? A report by Bloomberg that the US and China are moving closer to a trade deal despite heated rhetoric, citing people familiar with the talks, represented an inflection point for ‘risk on’ dynamics to comeback with a vengeance. The report argues that despite the increase in tensions about the HK and Xinjiang bills, seen as separated issues all together, that significant progress was made in the amount of tariffs that would be rolled back in a “Phase One” deal

Trade deal before Dec 15 tariffs deadline? In terms of a timeline, the Bloomberg report notes that U.S. negotiators expect a phase-one deal with China to be completed before American tariffs are set to rise on Dec. 15, the people said. Outstanding issues in the talks include how to guarantee China’s purchases of U.S. agricultural goods and exactly which duties to roll back, they added.

Trump’s lack of urgency in deal to be downplayed? The Bloomberg report, which is worth deconstructing as it single-handedly acted as the driving force behind the price action reversal in FX, it notes that the people familiar with the talks, who asked not to be identified, said that U.S. President Donald Trump’s comments Tuesday downplaying the urgency of a deal by pondering the idea of no deal until after the 2020 election “shouldn’t be understood to mean the talks were stalling, as he was speaking off the cuff.”

Funding currencies fall out of bed: As a result of the rampant bounces in stock valuations since the Bloomberg report above, the likes of the Japanese Yen and the Swiss Franc suffered the most as the necessity to seek out protection in one’s portfolio via safe havens is re-evaluated. The close of the Japanese Yen belows its month-long consolidation is especially conceing if one holds JPY longs.

CAD boosted by the BOC outcome: The CAD was marked up aggressively after the Bank of Canada kept rates unchanged at 1.75% while sounding less dovish than previously thought. Some of the most revealing headlines included that the Central Bank “sees nascent evidence that the global economy is stabilizing,” which reinforces the notion of what was nonetheless stated in the statement, which read it is “appropriate to maintain interest rate at current level.”

Saudi Arabia had enough dealing with cheaters? The WSJ reported that Saudi Arabia is toying the possibility to increase production due to other OPEC countries dishonestly increasing oil production unilaterally, which violates the group’s output curbs. The Wall Street Joual reports that: “If the noncompliance continues, the Saudi official signaled that the kingdom would begin merely complying with its commitment-rather than overcutting to make up for laggards in the group.” Oil saw a dip before bouncing back.

GBP mark up phase underway: The Pound found the institutional money sponsorship to finally unravel the next bullish price delivery phase in line with the view I promoted daily since Monday’s open. Don’t be tricked by thinking the latest UK election poll has suddenly caused this rise. This was a very well premeditated move that the smart money has been working out for days now, first allowing the market to come lower to grab liquidity before the mark up phase. The market is pricing in a landslide win by the Conservatives ahead of the election.

RBNZ to force banks to increase capital ratios in 7 years: The NZD was given a boost early Thursday after the RBNZ announced plans to force banks to raise capital ratios. The statement notes that large banks will have to hold 18% in total capital (and 16% in tier one capital) vs current 10.5% minim. Meanwhile, smaller banks will have to hold 14% in tier one capital. The new requirements must be met in 7 years from 5 initially.

Australian data keeps disappointing: The Australian retail sales and trade balance outcomes were another slap in the face for AUD longs, even if the currency remains underpinned by the latest US-China trade headlines. The Australia October retail sales saw no growth by coming at 0.0% m/m vs +0.3% expected, while the October trade balance came at $4502m vs +6500m expected, with imports coming flat and exports falling by 5% as Chinese trade activity slowed down. 

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Recent Economic Indicators & Events Ahead

Source: Forexfactory

Professional Insights Into FX Charts

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.

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The EUR index has shown the most pronounced bearish tendencies in the last 48h of trading, ever since it found a rejection off the 50% equilibrium area or midpoint of its broad range. The likelihood that the previous low is now taken out is quite high, with a reversal potential a real possibility as this level represents a technically strong support. If a long setup in a preferred EUR-pair occurs around this support, the area validates the considerations to dip one’s toes in a position given how cheap the EUR would be in a still ranging context.

The GBP index finally found the smart money sponsorship to see a sharp markup in price as the market piles into long positions ahead of the UK election day on Dec 12. We are right in the midst of a GBP long-side campaign, which makes it much riskier to support contrarian views against the Pound. The market, in my opinion, will now be fixated in the next 100% proj target, which does not come until the price extends its upside run for another 0.9% approximately.

The USD index remain en-route to meet its downside target, at this point just a stone’s throw away. Once the confluent level is reached, there is an increasing likelihood that the institutional sell-side campaign will come to a temporary hold ahead of the US NFP report on Friday. Remember, the swing low in the USD index about represents a symmetrical 100% target move, which would be an ideal place for shorts to start distributing its profitable run this week.

The CAD index was marked up violently after the BOC appeased the prospects of an immediate rate cut, which led to a quick re-assessment of what at the time of the statement was a misplaced cheap valuation in the CAD. Note, while the structure in the index remains bearish, the market has now been able to grab lower liquidity, likely closing a fair share of shorts, only to see a major impulsive move, one that may have well represented the termination of the sell side campaign. Besides, it looks like this is a meaningful cyclical low as each leg down has carried lesser commitment – magnitude of the downside extension – than the previous.

The NZD index keeps extending its upside momentum after further positive local news. This time, the RBNZ announced it plans to force banks to raise capital ratios. Remember, unless you fit into the category of being a momentum short-term trader, you don’t want to be paying up these expensive prices to own NZD inventory. If you look at the chart below, the price has surpassed the 100% proj target and is now testing an area previously sponsored by the smart money to originate a long lasting very successful bearish campaign.

The AUD index is the chart I am having the most issues getting a read from, a view that when applied to my own trading, automatically cancels my interest to endorse a bias, hence it tends to be a currency I don’t want to put on my radar to trade. That said, the index keeps respecting key levels, with the test of a right hand shoulder resistance finding grateful sellers. Fundamentally, there has been way too many conflicting factors, both positive and negatives, which has resulted in a rather messy affair trading the Aussie.

The JPY index has printed what I refer as a bearish outside continuation candle, shifting the focus, once again, toward the downside. This time, reinforcing the bearish bias, one must factor in the fact that the index has finally closed beyond its lengthy daily range. This translates into a market finally finding the necessary acceptance to agree on potential lower prices. The next projected target does not come until 0.9% lower, so we could be in for a few weeks of JPY weakness heading into year-end, subject to the China trade deal outcome.

The CHF index, akin to the mixed outlook I hold in the Aussie, has been unable to provide sufficient clarity to reinforce one particular bias. This is mainly due to the crossfire of alteating risk off and risk on headlines pertaining to the US China trade deal status. I personally don’t hold a strong opinion, hence why I’d be careful to overcommit. If forced, I’d say that the bearish outside candle on Wed cancels the bullish bias short term and makes the previous low the next area where sellers might be fixated to find the liquidity necessary to mitigate shorts.

Important Footnotes

  • Cycles: 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
  • Trendlines: Besides the horizontal lines, trendlines are helpful as a visual representation of the trend. The trendlines are drawn respecting a series of rules that determine the validation of a new cycle being created. Therefore, these trendline drawn in the chart hinge to a certain interpretation of market structures.
  • 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% projection resides in the symmetry and harmonic relationships of market cycles. By drawing a 100% 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% Fibonacci Projection