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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.
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The trifecta of new all-time highs in the primary US stock indices (S&P 500, Nasdaq, Dow Jones) was not ignored by Forex traders, allowing for a strong reversal of the buy-side flows in the funding currencies, which up to that point on Friday, had drawn most of the demand interest. The retracement in the JPY and CHF allowed the GBP and NZD, both emboldened by British political news and the lingering positive momentum by the RBNZ keeping its powder dry on rates. The ebullient mood in equities, even if not reflected in global yields, was not an impediment for the market to re-engage in bidding up a depressed Aussie, despite ending as the main under-performer for the week as the interest rate cuts by the RBA are firmly on the table on the back of the big miss in Australia’s employment numbers the prior day. The USD and CAD, amid the lack of fundamental-driven events, traded in lockstep to the soft side last week, with the AUD the only currency performing worse than the North Americans. Lastly, the EUR kept finding follow through demand as the market appears to finally mark up the price of the single currency after a period of what looked in the charts a long accumulations campaign intraday.
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.
* The Information is gathered after scanning top publications including the FT, WSJ, Reuters, Bloomberg, ForexLive, Institutional Bank Research reports.
Trifecta of all-time highs in equities: The surge in US stocks won’t abate, with a trifecta of fresh all time highs in the S&P 500, Dow Jones and Nasdaq taking place as the market holds onto hopes that the US and China will be able to finalize the Phase One of a long-overdue trade deal shortly.
Stocks bought on liquidity, trade hopes: The heavy-weight S&P 500 has now printed weekly gains for the last 6 weeks, reflecting the rampant mood as the environment is again dominated the more ample liquidity in the system provided by the Fed and further fueled by hopes of a reflationary environment if the US and China can end up hashing out the first phase of the trade deal.
US-China maintain constructive rhetoric: Over the weekend, it’s been reported that the US and China negotiators had ‘constructive senior level discussions’, with Steve Mnuchin and Robert Lighthizer speaking with Liu He on Saturday, according to a statement from the Chinese Commerce Ministry. An agreement was reported to maintain close communication, the statement said. White House economic adviser Larry Kudlow said late last week that the US and China are down to the final strokes though “not done yet.”
US retail sales, Ind production a secondary driver: US advance retail sales for October came at 0.3% vs 0.2% estimate, which represents a decent recovery from last month’s -0.3% print. The control group stood at 0.3% vs 0.3% estimate. This last measure, which excludes food services, car dealers, building materials, and gasoline stations has a tendency to be the real gauge of underlying consumer demand. Overall, the data is a slightly positive input for the USD playing into the view that the US economy remains sustained in part due to consumers. On the flip side, the US industrial production for October came at -0.8% vs -0.4% estimate. While the data may have been influenced by the GM strike, this is the lowest reading since 2009 and a clear red flag that the trade war is feeding badly into the manufacturing sector.
Canadian data strengthens BOC rate cut outlook at the margin: The flat numbers in Canada’s existing home sales at 0.0% vs 1.3% estimate won’t act as an input to stimulate much demand into the Canadian Dollar. At the margin, it reinforces the notion that the BoC may opt for the previously telegraphed insurance rate cut in the short run.
GBP keeps finding demand on political news: In the UK election front, the Brexit party has stood down from 43 non Tory seats where the Tories came in 2nd in 17 in the last election of which 11 are Labour. In the upcoming election in December, the Conservatives need 326 states to obtain a majority vs 317 seats held currently. The line of thinking here, which led to further momentum in the Pound, is that if the conservatives can obtain an extra 8, they’d be able to secure a majority and hence a stronger mandate to execute on their wishes of a resolution in the Brexit saga.
RBNZ Feb meeting a ‘live one’: The Reserve Bank of New Zealand’s Christian Hawkesby, Assistant Goveor/GM Economics, Financial Markets and Banking, said that February monetary policy meeting is ‘live’. For the rate cut to eventuate, it would require the outlook to change though, Hawkesby said.
PBOC prepares the market for limited stimulus: On Saturday, the PBoC released its Q3 Monetary report, outlining the sluggish investment as growth keeps slowing down and industrial production stays soft. The report detailed that Monetary policy will “properly handle the short-term pressure,” essentially vowing to provide further stimulus as needed without overly aggressive to balance out the leveraging risks.
Not a whole lot in the calendar this week: For the week ahead, the RBA, FOMC and ECB minutes will be published, Canada’s CPI will also come into focus as will a speech by BOC Goveor Poloz. To end the week, ECB President Lagarde will speak at the European Banking Congress, while Europe and the US will publish flash manufacturing/services PMIs, with Canada due to release the latest retail sales data.
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The chart I will keep concentrating my attention to kickstart the week is the EUR/USD as the case to tu more constructive on its outlook remains a sensible strategy. I am personally looking to exploit buys of EUR inventory on weakness with the reasoning detailed below:
The second chart to outline a potential shift in flows, even if much will depend on the UK general election outcome, includes the EUR/GBP. I’d like to simply focus on the technical aspect in this scenario, and why in my opinion, playing longs can be structurally attractive as it offers a solid asymmetric risk reward. Let’s look in the bullet points below what makes me bullish.