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Authored by Ivan Delgado, Head of Market Research at Global Prime. The purpose of these institutional-level chart studies is to provide an assessment of the market conditions for the next 24h of trading in order to assist one’s decisions on a regular basis.
Fundamentals: Break down of market drivers + key releases
Currency trading activity on Monday was below its usual standards as markets prepare for the outcome of the US mid-term elections. That’s the event that will be on everyone’s radar heading into the Asian session on Wednesday, that’s the time when the first results will start coming in. I am not expecting any defined directional bias ahead of the risk event unless Brexit news distorts the valuations in the Sterling and the Euro. In the rest of the currencies, it’s really all about wait-and-see until the market starts to react to the results. Market participants will also have to contend with the release of the RBA policy decision, which is not expected to provide any new stimulus for the Aussie.
With regards to the US midterm, I put out a tweet on Monday, quoting Morgan Stanley, noting the following: “The most likely outcome – Democrat House, Republican Senate – ~ 60-65% = status quo on fiscal stimulus, regulation, and trade. 35-40% Republicans hold Houses or Democrats sweep. Bottom line = Significant chance we see an outcome that shifts US policy from status quo.”In terms of scenarios to expect, find below Morgan Stanley’s view:
Here is a chart by TD Securities, showing that market volatility to past US midterm elections has typically been mild. Question is, is this a typical Presidency to put too much weight on these stats? It comes down to whether we see a split or one-sided Congress.
Risk model: Equity flowspick up, in line with ‘risk on’ structure
My prop RWI (risk-weighed index) continues to trade at elevated levels, which by default is a picture that should be supportive of risk. We need to deconstruct the fluctuations further though, and that includes both analyzing the flows and the structure present. On the latter, from an hourly perspective (best suited to analyze next 24h), the market remains on a ‘classic’ risk-on environment (positive yen crosses, commodity currencies). In terms of flows, we seem to be transitioning from an environment of USD strength into one of mild USD weakness, as marked in the chart above. Either way, in this type of environment, the main clues should be obtained via equities. As long as equities resume the upward momentum, the context would again be constructive to place higher conviction on risk trades. As I show above, the breakout higher in our prop EM FX index heralds more trouble ahead for the US Dollar, subject to US midterms.
EUR/USD: Deeper auction rejected, wait and see mode
Cycles & Levels:No changes to highlight in the higher timeframes (weekly, daily). On the hourly, the expected setback has found an imbalance of demand at the test of 1.1350/60 area. I will not be surprised if the market finds a new range in the next 24h between 1.1350 and 1.1420. If I was pointed with a gun to my head to pick the next direction, the impulsiveness of the bounce, knowing that it matches an hourly up-cycle, places the risks for a potential upside resolution. If we find acceptance above the 1.1425/30, the next area of resistance will be found at 1.1450-55, recent swing high.
Correlations & Volumes:Monday’s bullish candle carries low volume activity. The close near the highs of the day, paired with the POC left behind, reinforces the prospects of a range at the bare minimum, with a potential upside resolution as written above. Notice the POC is found at 1.1390, which happens to be the midpoint of what might be an expected range between 1.1430 and 1.1350. That’s another clue suggesting that today’s trading has 3 key areas of interest (1.1350-6-, 1.1390-1.14, 1.1420-30). As per the correlations, the Italian premium is well off its highs (purple line), while the 5-year German vs US yield spread (blue line) communicates that engaging in sell-side at key areas is justified.
GBP/USD: Hourly range breaks, new macro target
Cycles & Levels:The weekly is stuck in a range, while the daily is quickly advancing towards a major area of interest between 1.3085 and 1.31. Not only is the area a former horizontal daily support, but it’s also the midpoint of the most recent broken range. On the hourly, an interesting development is starting to occur, as the price is finding acceptance above the resistance at 1.3030. If further momentum can be built over the next week, based on the principles of market symmetry and normal distribution (bell curve), the next buy-side campaign could take us all the way to the next macro target of 1.33. This move would be in line with the weekly dynamics (retesting the topside of the range) but against the daily downcycle.
Correlations & Volumes: Generally speaking, when the tapering of volume occurs on the way up, as in the case of the Pound on Monday, the move is poised to exhaust. However, for such a scenario to be considered, sellers need to at least build value below the previous day’s POC, which comes at 1.3020. I’d personally need to see 1.30 re-taken to gain further conviction that the market is shifting its focus back down. Remember, at this stage, the pair is very much a sentiment play on the hopes that a Brexit deal can be hashed out. What this means is that even if the 5-year UK vs USyield spread trades at the lows of the year, short-term sentiment tends to overrule the power of capital flows in favor of the USD. As the overall risk scenario stands, it supports the upside.
USD/JPY: Active buy-side campaign towards 114.40-50
Cycles & Levels:The alignment among the weekly, daily and hourly makes me a bull for a test of 114.40-50 as per the 100% fib projection target off the newly validated up-cycle. Buyers managed to build higher value by finding equilibrium around 113.20, which is a precursor to seeing higher auctions as per price discovery dynamics. If waiting for deeper setbacks, this looks like a market that is about to take off without gifting us with discounted prices down at 112.60-20 key areas. If you are more of an intrepid intraday trader, a retest of 113.00 might be an attractive proposition.
Correlations & Volumes:As noted in my previous report, the market is going through what appears to be a perfect bullish storm. Not only we have recurrent positive structural views, but both the US vs JP yield spread and risk sentiment favors an appreciation of the rate. Subject to the US midterm election, this market shows strong indications that the next destination is north-bound.
AUD/USD: Sustaining gains at hefty levels, daily upcycle in place
Cycles & Levels:Again, familiar remarks off the weekly and daily, with no changes to highlight. The weekly remains clearly bearish but overextended, while the daily paints a bullish outlook. On the hourly, a new level of interest has been generated off 0.7180 ahead of the more key areas between 0.7150 and 0.71, where I genuinely think good opportunities to buy on weakness can be presented. Also, notice the order flow since Friday has reverted to more bearish, as the sequence of impulsive vs corrective waves favors downward auctions.
Correlations & Volumes:The Aussie has been a sentiment play since last week, on the basis that US and China can work out a deal on trade by the end of the year. The paltry volume on Monday does not communicate much higher levels from here neither does the slight retracement in correlations.The above view of buying into weakness hinges on the US midterm election outcome and must also be seen as dependable to the US and China keeping the glimmers of hope over partially resolving their discrepancies on the ‘tit for tat’ trade dispute heading into the G20 summit in December.