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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
With almost 24h for markets to digest the US midterm elections, we are now in a better position to make a judgment call. While volatile swings were exhibited in-situ as risk scenarios (sweep of either party) were debated, the conclusion was an expected result – Democrats gained control of the House, Republicans retained the Senate -, hence why the volatility in the currency market has been fairly subdued amid the lack of a surprise factor.
This makes the outlook for trade policy and the Fed largely unchanged short-term. The US political gridlock will lead to spending cuts and additional tax incentives both unlikely, while an infrastructure budget might be possible as long as the potential for an impeachment process of President Trump doesn’t steal the limelight.
Richard Franulovich & Sean Callow at Westpac, shared their insights into what’s next following the outcome of a divided Congress.
Heading into Thursday, today’s main events include the Chinese trade balance, the EU economic forecasts ahead of the key risk event in the form of the FOMC. China’s trade numbers will attract attention given the ongoing trade war with the US. Exports in China should continue to remain solid following higher-than-expected figures in Sept, mainly due to front-loading activity.
Find the FOMC preview via Bill Evans, Chief Economist at Westpac:
Risk model: Next leg develops, positive equity flows may recede
Today’s interpretation of the latest market gyrations makes for an interesting read. The risk-weighted index is making new highs as a result of the rallies seen in both equities and yields. Overall, I conclude that the structures seem to be tentatively shifting towards extreme ‘risk on’ conditions, while the flows are reverting back to USD-strength, even if I still see this behavior as temporary in nature. There are quite a few caveats to bear in mind short-term. We are seeing the S&P 500 futures, as a proxy vehicle of equity flows, building upon recent gains, creating a fresh up-cycle in the process, but coming into closer contact with its 100% Fibonacci projection. This sends two messages: Firstly, the up-move firms up the ‘risk on’ structure in the benchmark index by the validation of a new up-cycle. On the flip side, I am expecting the buy-side flows to recede soon (anywhere between 2,825-30).
Looking at the US yields (30-year), even if we are not out of the woods to call it a new up-cycle, the double bottom formation followed by the sharp snap back up makes me shift the focus back up, in line with the underlying trend. The flows have rapidly reverted back up, while a retest of 3.46 would confirm the market is poised for at least a transition into a range-bound structure again. If this scenario comes to be true, it will lend a hand to risk trades while suppressing the risk of ‘risk-off’ flows unless emanating from an environment where equity sell-side flows come back under pressure (not to be ruled out short-term as explained above).
My overall constructive stance on risk must also be sustained upon the premise that the DXY index maintains its downward cycle. For now, a descending trendline continues to guide us south-bound but you must always be prepared for any eventuality that may occur. An early waing would be the breakout of the trendline, in which case, the previous validated swing high may come under siege by the re-grouping of buyers. Note, the break of the descending trendline will still keep us in a down structure though, unless 96.70 is tested, and since the level is at a fair distance, I hold a solid conviction that the clues coming from the DXY communicate risk should continue to be underpinned based on the bearish outlook for the DXY. This opinion is also rationalized based on the positive developments in emerging markets, where our EM FX index has broken higher vs the USD.
EUR/USD: Buyers fail to conquer trendline, outlook constructive
Cycles & Levels: On the weekly, I am awaiting a test of 1.1550 to confirm the establishment of a range. We need to see the test of the projected midpoint of the expected range before calling it. On the daily, the cycle remains down and we really are at a crossroads here (descending trendline, horizontal resistance, 50% fib retrac). Buyers cannot yet claim a milestone has been reached that would allow further upside until a close above the trendline eventuates. On the hourly, I won’t qualify the US election-led swings as valid cycles, hence why I am sticking to the newly formed up-cycle, which makes this the second up-cycle off the key support at 1.13. I am expecting the development of a move up in line with the underlying hourly structure, subject to not finding acceptance sub 1.1357. Therefore, there is still substantial downside leeway where one can find opportunities to engage in buy-side business.
Correlations & Volumes:In terms of volume, we’ve seen a significant pick up as one would expect on such a high-risk political event, yet the interpretation is nonconclusive as the price closed unchanged for the day. The volume will start having much more significance if a break of Wednesday’s low occurs. If further progress is to be made to the upside, the newly formed POC (highest accumulation of volume) comes at 1.1460. A clearance off this level makes 1.15 the next target to aim for. Note, as the German vs US yield spread stands, you should not hold your breath that a continuation to the upside is a clear-cut. If anything, the higher the pair goes, the greater the opportunity to engage for macro sales. In contrast, the recovery in the German vs Italian yield spread is assisting the pair’s outlook, as the Italian headlines fade away.
GBP/USD:En-route to test its descending trendline circa 1.32
Cycles & Levels: As reiterated, the weekly is in the process of re-testing the top-side of its range at 1.3280. On the daily, the acceptance above 1.3085/1.31 tus the focus towards the descending trendline marked in the chart circa 1.32. Even if the daily is still in a down-cycle, the impulsiveness of the recovery should be worrying if you are a seller. That said, we are starting to get some tentative evidence off the hourly that a potential downward correction might be in store back to re-test 1.30-3050 area. Considering that the price has made it to the 100% fib proj target and that this second cycle is far less impressive in magnitude and speed that the first one, the breakout of the trendline seen is the first clue needed for this scenario to come true.
Correlations & Volumes:The 5-year UK vs US yield spread screams sell-side opportunity at key macro levels (1.32 and above). Don’t forget that very short-term, the move up has been a sentiment play boosted by a Brexit deal optimism, and further assisted by USD weakness across the board. Notice how the volume has been on the rise in the last 3 days, which communicates the market keeps its commitment firm towards higher levels. Wednesday’s POC stands at 1.3140, so that’s the key level to re-take to gain further clarity in the resumption of the uptrend towards mentioned upside targets.
USD/JPY: Market’s verdict is for 114.40-50 as the next target
Cycles & Levels:The weekly is clearly bullish as per the active up-cycle and from a purely technical standpoint, one would be hard-pressed to be a seller before 114.40-50. The daily continues to make further upside progress in line with the active up-cycle, which has a target of 114.40-50. On the hourly, we’ve printed a double bottom before re-taking the midpoint of the range, therefore the market is very much on course to test the upper edge of the box at 113.75-80.
Correlations & Volumes:With the risk sentiment being so well supported and the US vs JP yield spread at such hefty levels, there is sufficient justification for the price to catch up to its intrinsic valuation. Wednesday’s bullish candle leaves behind plenty of volume being trapped circa 113.20, therefore this should be a market that still enjoys very solid interest to buy the dips.
AUD/USD: Daily up-cycle quite mature, 100% proj target hit
Cycles & Levels:On the weekly, it’s the first time since January that the market breaks through its descending trendline. This milestone is the first technical development required to build for an eventual re-test of 0.75 even if such call still looks a distant prospect. It’s interesting to note that the Aussie has reached its 100% fib proj target, so I am definitely expecting the market to trade much more topish very much in line with the expected slowdown in the equities rally very short-term. That said, the up-cycle is firm and the resolution above a descending trendline confirm that. However, the leg appears to feel quite mature. On the hourly, I wouldn’t rule out the area at 0.7350/60 to act as an intraday buy opportunity on the confluence seen (trendline + support). Just be aware that the further upside should be significantly more difficult to come by. A break below the ascending trendline exposes a series of intraday support as marked in the chart above.
Correlations & Volumes:In terms of volumes, the increase in buy-side business support the overall buying bias but just be aware that the close by 5pm NY was below the POC. This makes the most immediate task at hand for buyers the re-take of 0.7280 ahead of 0.73. What this means is that you will be hard-pressed to provide strong arguments about engaging as a buyer at these hefty levels for an attractive risk-reward unless trading intraday swings. With regards to correlations, with the Chinese Yuan weakness back in the last 3 days even on a lower USD and the Aussie vs US yield spread trading within a tight range near trend lows, I’d say 0.73 and the swing high overhead 0.7315 hold value as areas to short intraday.