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The Daily Edge is authored by Ivan Delgado, Market Insights Commentator at Global Prime. The purpose of this content is to provide an assessment of the market conditions. The report takes an in-depth look of market dynamics, factoring in fundamentals, technicals, inter-market in order to determine daily biases and assist one’s decisions on a regular basis. Feel free to follow Ivan on Twitter & Youtube.
It’s all about the Euro as Friday gets underway. The ECB was utterly and without any ambiguity much more dovish than the market had anticipated after it revealed a trifecta of EUR-negative measures (lower growth forecasts, push out of the forward guidance and a new TLTRO program).
One thing is to speculate on the ultimate outcome of what appears inevitable, that is, that sooner or later the ECB would fully cave in by recognizing there is no way in hell they can exit their unorthodox policies. Another thing very different, and that’s what makes trading financial market such a challenging endeavor, is timing when the domino pieces will start falling. Judging by the reaction of the Euro – lowest against the USD since mid-2017 -, the market was caught by surprise not expecting such boldness in the ECB rhetoric.
After the dust settled, we face a Euro battered, a Pound unable to find renewed demand on lack of Brexit breakthroughs, a USD and JPY being the safest houses as micro/macro ‘true risk off’ conditions settle in, while the commodity complex suffers fundamentally gloomy times, especially the AUD and CAD.
The Euro got hammered on the back of what’s coined in some reports I’ve been reading this moing as Draghi’s triple, that is, the admission that an exit from its negative rates settings won’t occur in 2019, the downgrade in growth and a new TLTRO. Meanwhile, on the other side of the spectrum, the Japanese Yen and the US Dollar were propelled to much higher levels on the combination of EUR weakness (by default DXY positive) and ‘true risk off’. Sandwiched in relatively confined ranges were the commodity currencies, while the Sterling also came under pressure as pessimism over a breakthrough in the UK-EU Brexit talks reign.
So, where does the latest fluctuation in currency prices leaves us from a trend-generation standpoint? Right off the bat, we can see the Euro is joining the Canadian Dollar in macro bearish dynamics as the thick lines in the 2nd chart below exhibit. Interestingly, the Pound has also lost enough steam to show bearish tendencies at a macro level (measured by the 5-DMA slope). On the contrary, the USD and the JPY have risen victorious courtesy of the latest deleveraging spell by projecting bullish dynamics, both from a micro and macro perspective. Lastly, we see the Oceanic currencies, finding enough pockets of demand, especially the Kiwi, to keep its micro and macro outlook mildly bullish.
The pronounced downward angle of the 25-HMA slope states a clear fact, that is, the microenvironment has firmed up its ‘true risk off’ nature. But it gets worse, as we’ve also permuted into a macro ‘true risk off’ backdrop following the aggressive movements in equities (down), US bond yields (down) and the DXY (up). To top it off, gold has found very strong buy-side interest to counter-balance the strong rise in the DXY and keep the precious metal in a tight range.
As a reminder, a ‘true risk off’ environment is characterized by a market that is in fear mode, deleveraging off riskier bets. Traders will be looking to buy two currencies above all others (JPY and USD), keeping an offered tone in commodity currencies unless other currencies get hit by negative fundamentals/politics, as it’s the case of the Euro on the ECB dovish tuaround or the GBP on Brexit. This has caused the European currencies to suffer greater losses than commodity-linked currencies even in a ‘true risk off’ context.
EUR/USD: Massive Mark Down As ECB Reveals Dovish Trifecta
GBP/USD: DXY Strength Offsets Improvement in Yield Spread
USD/JPY: Low Vol Gyrations As ‘True Risk Off’ Dominates
AUD/USD: Accentuated Divergence W/Yield Spreads Amid Risk-Off
USD/CAD: Running Risk Of Long Liquidations After 3 Cents Rally
Gold: Low Interest As Conflicting Signals Emerge
AUD/JPY: Perfect Bearish Storm This Week
EUR/AUD: Follow The Yield Spread As True Leading Indicator
NZD/USD: Risk-Off Dictates Bearish Direction But Value Higher