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Fundamentals: Break down of market drivers + key releases
Risk model: From bad to worse, structure shifts to classic ‘risk off’
What risk bidders may have feared has come to fruition with the break lower in the S&P 500 as the bellwether barometer of the appeal to hang onto equities in the Weste hemisphere. What this means is that the bearish structure on the hourly has now been confirmed, which results in a further deterioration of our risk-model from tier-2 risk-off conditions to tier-1 (classic risk-off). Equities now join lower cycles in US yields and the underlying bullish cycle in the DXY, constituting the worst case scenario for risk from a cycle or structural point of view. In terms of order flow, in the last 24h, the environment has been dominated by USD weakness amid a debilitated state of affairs in stock performances, a context that should still be playing in favor of the Japanese Yen.
If the market were to respect the current market structures, which means we just need to see the re-calibration back into USD longs, make no mistake, this market looks poised to catch risk-off flows. If the scenario materializes, it should be Yen supportive as stated above. Notice, the DXY is fast approaching the 50% Fibonacci retracement of its latest buy-side campaign, which should reinforce the notion of greater appeal towards the Greenback. I am not placing much hope on a market recovery in the US yields given the fact that buyers have failed miserably at the retest of the daily resistance as depicted by the chart above. What about the S&P 500? I am not getting much inspiration out of the hourly outlook, as the breakout of the structure occurred on the heels of a poor magnitude last leg-up, which communicates buyers run out of steam.
As the RWI (Risk Weighted Index) chart above shows, the value has been on a sharp decline, yet JPY crosses are yet to catch up. Proof of that is the major divergence seen in the AUD/JPY, even if this pair may have some more justification to still hold stronger given the AUD-specific buy flows on the back of the Aus jobs report. Short USD/JPY, EUR/JPY or CAD/JPY appear to be a great proposition.
EUR/USD: Time for sellers to step in, risk-reward appealing
Sellers have a clear task in the next 48h, and that is, to fix the slight trouble they find themselves in by approaching the second half of the week with the price back above 1.13. On a weekly basis, sellers must re-take the upper hand and close below to keep the unambiguous bearish bias. On the daily chart, the downcycle is clear, acceptance sub 1.13 was found even if the extension fell short in magnitude from the previous leg down (for now). This market must soon find sellers willing to engage at the next levels of high interest at 1.1353 and 1.1395, which would make for some great risk-reward as the horizontal level aligns with the dominant cycle. The latest 2 corrective legs up have come amid a smart-money acceleration based on the increase of tick volume as the first stage out of many hurdles in the Brexit deal has gone through. With regards to correlations, we’ve seen a pick up in German vs US yield spreads but further deterioration in the German vs Italian spread. Watch the interaction of price at the key decision areas 1.1350 & 1.1395/1.14 as that will give us the next clues for a directional move.
GBP/USD: Range established, more Brexit volatility eyed
I am not going to extend too long on the Sterling analysis as erratic volatility looks set to still dominate. On the hourly, the market has carved out a range between 1.2887 and 1.3037, which makes the mid-point at 1.2962. Look for clues around these levels, especially at the edges of the range for maximum risk-reward exposure. Note, the tick volume indicates back-to-back smart money acceleration moves as per the increase in price updates activity. Heading into early Europe, it looks as though the upside might be threatened given the failure to rotate by sell-side accounts off 1.3037.
USD/JPY: Evidence of a temporary top, sellers control hourly flows
We are starting to get clear signs that this market wants to roll-over by rejection, yet again, the massive weekly resistance between 114.00 and 115.00. The pullback we are seeing is still within the context of an up-cycle on both the weekly and daily, but the first red flags are starting to pop up. Firstly, the expected 100% projection to 114.40/50 is not complete. Secondly, as we dissect the hourly, we can see the ascending trend line has been violated amid an increase in sell-side volume, which tends to be a continuation leg. Additionally, both the US vs JP 5-year yield spread and the risk sentiment index are both hinting further downside. The next key support levels, as highlighted in the chart above, stand at 113.35 ahead of the psychological 113.00 round number.
AUD/USD: Buy on weakness, next target at 0.73
The Aussie continues to defy the risk-off flows by appreciating further on the back of positive fundamentals (Aus jobs). The breach of the 2018 descending trendline is undoubtedly also supporting the technical picture, as it’s the fact that sellers appear unlikely to achieve much out of the rotation seen off 0.73 last week. The daily structure continues to scream ‘buy-me’ on weakness, while the hourly chart is also looking very appealing to engage in buy action. As usual, I’ve drawn for readers of my report the key areas of interest if you are looking to be a buyer today. On the topside, I wouldn’t count on much resistance to be found until 0.73 round number. If on a daily basis this market can close above 0.7315, that’s going to be more fuel for technicians to support the trend. When looking at the volumes, we can also see that Wednesday’s push came on increasing volume, which reinforces the narrative of buy on weakness for at least a re-test of 0.73 if not higher. It’s also worth noting that the Aussie vs US 5-year yield spreads are trading at the highest levels since early Sept, so watch that space too.
Bonus chart: What are you missing?
The chart that I want to bring to your attention is the Aussie vs the Japanese Yen.The divergence vs the risk-weighted index is unlike anything I’ve seen in months. If the pair can make it all the way up towards the 83.00 round number or near-by, all else being equal, it represents a compelling short from a risk perspective but also from a value standpoint (see AU-JP yield spread).