The USD Stays Immune To Shift In Risk Dynamics
The Daily Edge

The USD Stays Immune To Shift In Risk Dynamics

Authored by Ivan Delgado

Ivan Delgado is a decade-long Forex Trader. Feel free to follow Ivan on Youtube. Join thousands of traders who follow Ivan's insights to increase their profitability rate by learning the ins and outs of how to read and trade financial markets. Ivan has you covered with in-depth technical market analysis to help you turn the corner.

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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Quick Take

The financial markets finally took a bit of a breather after the disproportionate one-sided movements in instruments the likes of the Yen, the Aussie, the Yuan, bonds, gold, equities. The fact that there was no new alarming developments in the number one driver of the market since last week, that is, the coronavirus outbreak, acted on its own right as the trigger to justify what’s seen as a correction very much technical in nature, not yet enjoying the fundamental backing of a complete disregard by market forces to the virus news, far from it. It is still a real possibility that the coronavirus saga keeps getting worse before it gets better. Amid this more sanguine environment, the Yen succumbed to the improved bid tone in risk, as did the allure towards the Swiss Franc, even if both remain top performing currencies in January, alongside a USD that keeps charging higher as the US economic news keep shining. As a result of the recovery in risk appetite, the Aussie and Kiwi moved higher in locksteps. Meanwhile, two currencies also enjoying buy-side flows, even if it may not last (spoiler: watch for shorts) judging by the technical stance conducted include the EUR and CAD. In my objective technical analysis of the G8 FX indices, I make a case as to why you want to be on the alert for these currencies to be, sooner or later, engulfed by renewed sell-side pressure. Lastly, the GBP traded on a soft note as it got hit by news that the U.K. will allow Huawei to build parts of the 5G network, in a move that defies Trump, and potentially the future trade relationships with the US.

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.

Narratives In Financial Markets

* The Information is gathered after scanning top publications including the FT, WSJ, Reuters, Bloomberg, ForexLive, Institutional Bank Research reports.

Aussie inflation a touch firmer: The Australia Q4 2019 inflation came at a headline number of 0.7{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} q/q, which is slightly higher than the 0.6{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} expected. Annually, the reading stood at 1.8{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} y/y vs expectations for 1.7{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814}. In terms of the core inflation, the trimmed mean, which is what the RBA historically monitors most closely, came at 0.4{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} q/q, which was bang on estimates, while the annual reading was 1.6{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} y/y, a touch firmer than the 1.5{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} expected. While it should not be considered a disappointment, the modest appreciation in the AUD still portrays a market skeptical to rea too much into it as the printings remain at the lower edge of the RBA target band, which has a mandate of 2 to 3{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} for core over the course of a cycle. Nonetheless, it may help the case for the RBA to delay potentially a decision to lower rates further. 

Risk-off recedes, far from out of the woods: The appeasing of the risk-off dynamics became the dominant element ruling markets in the last US session amid the broader context of a well-anchored risk averse narrative as the ramifications of the coronavirus pan out. There is a high probability that the coronavirus news get worse before it gets better. What this means, unlike an isolated risk-off episode the likes of a US-Iran retaliatory conflict, the underlying thematic that feeds this risk averse environment won’t go so easily away. To draw some parallels, it took markets more than 3 months to get over the SARS virus in early 2003.

Technical correction in risk-sensitive assets: After the Yen, Gold or bonds experienced such heavy buying in recent days, or we saw the major sell-off in equities, there was a real risk of an unwinding of longs as the moves had gotten out of whack in the short-term, in what so far appears to be a mere technical correction. The fact that there was no new alarming news worsening the coronavirus spread outlook acted on its own right as the trigger. No new statistics on the official state of affairs with regards to related fatalities and infected cases. 

Coronavirus outbreak may reach peak in 7-10 days: According to Xinhua news agency, citing respiratory expert Zhong Nanshan, the Novel coronavirus outbreak may reach peak in one week or about 10 days. “It is very difficult to definitely estimate when the outbreak reaches its peak. But I think in one week or about 10 days, it will reach the climax and then there will be no large-scale increases,” Zhong said. Zhong is the head of a national team of experts set up for the control and prevention of the novel coronavirus-caused pneumonia and an academician of the Chinese Academy of Engineering.

GBP hit by Huawei news: The Pound was apparently weighted after the U.K. confirmed it will allow Huawei to build parts of the 5G network, in a move that defies Trump, and potentially the future trade relationships with the US may be put at risk. According to the WSJ: “The govement said Huawei would be given permission to build noncritical parts of the country’s 5G network. Britain’s National Security Council concluded that the security risks the Chinese company presented could be managed.” British Foreign Secretary Dominic Raab said: “Nothing in this review affects this country’s ability to share highly sensitive intelligence data over highly secure networks, both within the U.K., and with our partners.” 

WHO chief meets with China’s Premier Xi: The WHO (World Health Organization) chief Tedros Adhanom met with China president Xi to discuss all the measures in place to contain the coronavirus outbreak. A spokesman said that Tedros is keeping the WHO emergency committee ‘in the loop’ about the situation. It’s worth noting that the WHO has recently walked back some of its initial considerations, and after describing the virus risk as “moderate” over the weekend, it has finally admitted that the risk is “very high in China and at a regional level, and high at a global level”. That said, it doesn’t look as though they will declare the virus as a public health emergency near term, which if true, may continue to appease the markets in the very short-term. 

FOMC key event eyed: The Fed meets today, and if the expectations for no change in stance were not sufficiently well telegraphed, the latest coronavirus scare reinforces the notion of a Fed on ‘wait-and-see’ near term. This is probably one of the least sensitive meeting outcomes in recent times, which should see vol in the USD or stocks well contained. Interestly, with risk aversion hitting hard the markets, which led to an exodus into US bonds (lower yields), the market now sees a Fed rate cut in September this year according to the Fed funds futures versus the previous expectations for November. Also worth noting is the latest developments in the US 3-month-to-10-year yields spread, which happens to be once again on the brink of inversion for the first time since October last year. This is the Fed’s favorite measure of a recessionary signal. So all things considered, the outlook for the FOMC looks a bit more bleak to maintain a neutral stance, even if the US data keeps roaring ahead and argues otherwise. 

US data keeps the positive tone: One of the comforting developments the Fed can lean against to stand pat on policy includes the positive inputs in US fundamentals. Tuesday portrayed a good example of that, with across the board upbeat readings on durable goods orders for December, the Case-Shiller November US 20-city house price index, the Richmond Fed manufacturing index for January, or the US January Conference Board consumer confidence. Without exception, the data came better-than-expected and that helped to keep the bid tone in the USD. 

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Recent Economic Indicators & Events Ahead

Source: Forexfactory

Insights Into FX Index Charts

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 idea of this analysis is to complement one’s daily bias by accounting for this holistic analysis. 

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The EUR index continues to be a firm candidate to be overwhelmed by sell-side flows based on the price structure and the positioning of the smart money trackers via the monitored moving averages. The higher the currency goes amid this technical background, the more appealing the opportunity is potentially going to be to become a seller as the context of a well-anchored broad bearish trend from a daily perspective remains as true this Wed as it did in the last 24h. Technically, it should represent a major challenge for buyers to retake much higher levels, hence my base case is holding a short EUR bias, which is reinforced by the fact that the down-cycle dynamics are still at play until the 100{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} proj target is met. The projected move lower in the EUR to end the week would also be in line with the negative seasonals the currency faces in Jan.

The GBP index is starting to be a tricky one to trade. Even if the technical outlook remains bullish when analyzing the price structure and the set of moving averages depicting the smart money flows, there is only a 24h window for technicals to rule before the market trades at the mercy of the BOE policy decision (a rate cut this week is a con flip with 50/50 priced in), which would cause more erratic vol. Based on technicals, the main bias remains to buy on weakness as the core approach, this hasn’t changed. Remember, by measuring the next projected symmetrical target (100{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} measured move), there is a juicy ~ 1.5{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} of topside potential in the GBP from current levels. After Wednesday’s trading is over, remember to be lightening up exposure on GBP ahead of the BOE, definitely a sound measure to control risk.

The USD index keeps charging higher, but at this point, there is a caveat. The currency, after attracting steady consistent flows, has made it to the 100{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} proj target. What this means is that near-term, there might be a re-adjustment of positioning to the downside at this level. This prognosis will largely depend on the outcome of the FOMC today, despite the fact that the market is expecting a rather dull and uneventful outcome this time. Technically, despite the topside may be contained based on how mature this trend is near term, the long bias is indisputably still the main case. The bullish view continues to have the backing of the price structure, coupled with the smart money tracking moving averages all pointing higher. Therefore, by waing of the maturity in the cycle, take it for what it is, just a heads up in the context of a market with risks well skewed to the upside. Remember, the support of seasonals for the USD during January is undeniable as it represents the best month of the year.

The CAD index has surged to a very interesting location in the chart where sell side pressure may re-emerge as it retests the backside of a broken range. I personally hold a short bias, reinforced by the notion that we are now at a key juncture a much higher prices while the overall bearish outlook based on the price structure and smart money MAs pointing lower. These are the areas in an index chart where you want to be trading from conditional to finding the best match to trade the CAD against and obviously getting a signal via your own setups. Besides, this is a market that if short would be backed up by the 180-degree tuaround orchestrated by the BOC hinting a cut may be coming in the next few months. All in all, I am monitoring CAD shorts.

The JPY index has respected the technical script envisioned 24h ago, when I stated that the currency had landed at a critical inflection point in the form of a macro horizontal resistance and we were likely to see the bullish momentum stall heading into Tuesday. Well, that’s exactly what’s happened as an unwinding of JPY longs plays out as the market keeps assessing how bad the coronavirus outbreak will be. My base hypothesis here is that we’ve entered a dangerous juncture in which risk-off episodes may be more protracted in nature given the lingering uncertainties for global growth that the virus is going to cause for another few weeks. This means that we are far from out of the woods, and so from here is where it gets very interesting technically-wise, as follow-up demand in the JPY may see a breakout of structure in the index. Once that happens, I will anticipate further sustainable strength in the currency.  

The AUD index has rebounded off a major level of horizontal support as depicted by the two circles drawn in the chart, which is the level used as reference to have expected the relief. One thing must be clearly stated though, the Aussie found a resolution of its multi-month broad range, which in itself is a clearly bearish development. The key question now becomes. Will the low found in the last 24h become the new bottom-side of a slightly broader range or is the index in the midst of developing a more protracted bearish bias? I am inclined to think, until price structure proves me wrong, that the Aussie may remain on an ongoing selling bias, but the following caveat also applies; I think the current levels to see the currency are awfully non-attractive. If anything, this is an area in the index to be fading further downside. The fall in the Aussie has reflected a currency very fragile to the current news driving markets but in my opinion, we’ve gone down too extensively in a relatively short period of time, so be aware. 

The NZD index found a resolution outside of its short-term range, therefore, I’ve tued bearish on the currency near term until the first phase of the sell-side cycle completes by price reaching the 100{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} proj target. Until that materializes, a rebound in the NZD would be considered an opportunity to sell on strength as the backside of the broken range gets retested. Based on the 100{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} proj measurement, I am looking at around 0.5{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} of downside potential. Notice, the moving averages tracking the intended directional bias by the smart money also validates this sell-side bias, as does the overall risk-off dynamics dominating markets.  

The CHF index has increased its choppiness by starting to bounce back and forth from two critical areas in the chart. To the upside, the symmetrical 100{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} proj target continues to prove an area where supply via market makers, profit-taking activity and contrarian traders keeps emerging. To the downside, the index is anchored by a key horizontal support line. Whenever a cycle runs its course by meeting the 100{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} proj target, that’s the area in the chart that carries the most risk for a tentative shift in order flow/market structure, which is precisely what we are seeing in the CHF after a very puchy movement to the upside in the CHF the first few weeks of January. Fading the edges of what looks like an established new range starts to make for a solid case. 

Important Footnotes

  • Market structure: Markets evolve in cycles followed by a period of distribution and/or accumulation. To understand the principles applied in the assessment of cycles, refer to the tutorial How To Read Market Structures In Forex
  • Horizontal Support/Resistance: Unlike levels of dynamic support or resistance or more subjective measurements such as fibonacci retracements, pivot points, trendlines, or other forms of reactive areas, the horizontal lines of support and resistance are universal concepts used by the majority of market participants. It, therefore, makes the areas the most widely followed and relevant to monitor. The Ultimate Guide To Identify Areas Of High Interest In Any Market
  • Fundamentals: It’s important to highlight that the daily market outlook provided in this report is subject to the impact of the fundamental news. Any unexpected news may cause the price to behave erratically in the short term.
  • Projection Targets: The usefulness of the 100{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} projection resides in the symmetry and harmonic relationships of market cycles. By drawing a 100{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} projection, you can anticipate the area in the chart where some type of pause and potential reversals in price is likely to occur, due to 1. The side in control of the cycle takes profits 2. Counter-trend positions are added by contrarian players 3. These are price points where limit orders are set by market-makers. You can find out more by reading the tutorial on The Magical 100{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} Fibonacci Projection