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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, futures and options, in order to determine daily biases and assist one’s decisions on a regular basis. Feel free to follow Ivan on Twitter & Youtube.
The US Dollar recovered some ground intraday but continues in a macro downtrend alongside the Japanese Yen as overall cross assets performances indicate, still characterized by ‘true risk on’ conditions. The Pound continues on a tear while the Oceanic currencies were the worst performers even if the backdrop of risk appetite dynamics should result in decent interest to cap the downside as long as the mild deterioration in equity valuations is limited in nature. The Canadian Dollar is another currency that put on a fantastic performance on Wednesday in response to a sharp recovery in Oil prices. Trapped in a hiatus of low vol and a fairly neutral bias is the Euro as it navigates its lowest quarterly range since its existence.
Short-term flows have reverted back to an environment of USD fortitude while trade with a fairly neutral outlook as per the slope of the 25HMA, which captures the price movements in the last 24h. However, by stepping out to visualize what’s the dominant regime from a 5-day perspective by using the slope of the 125-HMA, nothing has changed yet, with uptrends in the equities and US yields alongside weakness in the US Dollar and Gold qualifying the environment as ‘true risk on’. The downward slope in the price of gold at a time when the USD has been also pressured strengthens the case of the macro ‘true risk on’ as capital seeks out riskier investment propositions.
Analysis of Forex Majors
The EUR/USD market has entered a period of consolidation, with the price encapsulated between the 1.14 round number and the backtest of the top of the former range breakout circa 1.1360-65. The extremely limited fluctuation from Wednesday is an accurate reflection of a pair that is running its tightest quarterly volatility since the Euro debt back in 2019. It’s become very painful to trade this pair for swing/day traders, although intraday opportunities at the most granular levels will always remain available. The overall macro outlook still continues largely supportive as denoted by the market structure of recent weeks of painfully slow moves but still with higher highs and higher lows. Besides, the macro slope of the German vs the US bond yield spread in the 10-yr guides us higher. Keep following the 10-y yield spread for some diverging opportunities with price intraday as the macro and micro narrative has clearly strengthened the role of this historically top leading indicator with price.
The Pound continues on a tier and the strategy proving to be most effective to capitalize on this market is to look for ‘buy on dips’ during a period of intermarket flows’ alignment. The trend has been evolving in a fairly non-volatile and regular fashion with pullbacks quite shallow, which vindicate the strong buy-side flows behind a market with major demand imbalances still at play.
As I argued during Wednesday, with a USD/JPY overly extended to the downside at a time when the slope of the 5-DMA in the US30Y and SP500 still exhibited an upward momentum, any weakness presented a genuine buy-side opportunity. This thesis was conditioned to an intraday recovery in the likes of yields and the DXY, which is precisely what we saw, leading to an impulsive move. As the macro ‘true risk on’ backdrop stands, I imagine residual demand resides to keep pushing the market higher although it will be very much dependable on the constant fluctuation of DXY/US30Y/SP500.
From an intermarket view, the AUD appears to have received too harsh of a punishment judging by the 5-DMA upward slopes of the Yuan+DXY (both inverted) even if the AU-US bond yield spread exerts a slight downward pressure as negative fundamentals in Australia mount. We’ve entered a period of oversold conditions in the hourly, which only makes the case to find an imbalance of demand around these levels unless further setbacks are seen in correlated assets. Even if that’s the case, one would think the macro divergence alone limits the downside for now.
With the recent impulsive moves in both directions this week, the USD/CAD market is starting to establish a broad range between 1.3250 and 1.3130 approximately. The downward slopes in the 5DMA still offers enough justification for this market to resume its downtrend if we can get an extension lower on DXY and Oil. By the close of business in NY, the outlook for the pair looks bearish given the sharp tuaround in Oil and the broad DXY downtrend.