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. You can also subscribe to the mailing list to receive Ivan’s Daily wrap. 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.
The Daily Edge is authored by Ivan Delgado, Head of Market Research 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, futures and options, in order to determine daily biases and assist one’s decisions on a regular basis. Feel free to follow Ivan on Twitter & Youtube.
The equity market has shown some credible technical cracks, and since the pendulum was in a transition from ‘risk-on’ dynamics into cloudier terrains, that’s all it took for the likes of the Yen and the USD to top the leaderboard.
The rise in the US Dollar portrays a disturbing theme, that is, there is ample demand for the currency in part as a function of the very limited alteatives to diversify one’s currency portfolios. That’s one way to rationalize how the US Dollar keeps strengthening amid the constant bleeding in US yields. Spoiler: All economies show the same gloomy tendencies.
Make no mistake, the yield curve trends in developed economies are absolutely terrible. It essentially communicates that in the grand scheme of things, there is a firm conviction by bond traders that the slowdown in China and the expected deceleration in US growth (ongoing in the EU) is spreading out to affect the outlook for growth and interest rates across the globe. This week, the admissions by the RBA prove my point, with horrible ramification for the Aussie, as the Central Bank finally comes to grips with the new reality in the Australian economy, one characterized by falling house prices hitting the real economy (consumption, business conditions, credit tightness, …)
The script, ever since the Dec Fed Put (hint at ending QT) has followed its course, with the ECB next to cave in by acknowledging its poor outlook, and this week, it’s been the tu of the RBA. On the background, you also have the PBOC injecting aggressive amounts of liquidity into the system.
There are 2 key drivers keeping markets afloat this year. One is the prognosis that excessive liquidity will ultimately be maintained into the system, while in parallel, the US and China must keep the hopes high that a trade deal will ultimately come to fruition.
The gravitation towards risk aversion on Thursday harbingers that the market is assigning way more question marks to an eventual trade deal than previously anticipated. Reports that Trump won’t meet Xi ahead of the March 1st tariff increase deadline has definitely moved the needle. It’s far from being baked in the cake and that’s translated in the behavior of financial markets.
The German trade balance alongside industrial production figures in the EZ peripheral countries may provide further evidence, even if the trend is as clear as it gets, over the state of the Eurozone economy. I’ll be especially interested in the composition of the German trade (imports/exports) as it can shed further light on the global slowdown situation.
In Canada, we get the Jan jobs numbers, with both the headline change and the jobless rate expected to deteriorate. If expectations come true, there is going to be no incentives for the Bank of Canada to shift its ‘wait and see’ rhetoric unless wage growth picks up momentum, which helps drive further consumption activity in order to achieve the Bank’s 2% inflation mandate.
We’ve transitioned quite rapidly from a ‘weak risk-off’ profile into a full-blown ‘true risk-off’ as both US equities and US yields drop in tandem. The market is clearly growing impatient over the lack of progress in the US-Sino trade negotiations, with the Trump-Xi meeting cancellation a bad augur. The microdynamics via the slope of the 25-HMA are finally all in alignment to classify the current movements as part of a clear risk-off context.
It could get worse if another negative day in the S&P 500 eventuates, as it would take the macrostructure into ‘true risk-off’ conditions. We are not there yet but that’s the final straw to break the 2019 risk rally in the markets. Once the micro and macro converge together, it won’t be time for complacency but to play defensive and expect the JPY to fare better performances.
What’s interesting about Thursday’s risk profile is that even as the USD strengthened across the board (exc GBP), the price of gold managed to eke out decent gains, which is even more conceing. It means that not only we have all the clues via the combination of risky assets telling us that the risk conditions are on the decline rapidly but gold performance reinforces this notion as well.
If one is after further evidence that the risk-off environment is well and alive, our prop yield curve quadrant model should leave little room for doubt. We are in a context predominantly dominated by a bull flattening phase, which translates in bonds yields across the globe depressed as the flight to safety accelerates. Bonds are starting to attract increasing flows as the deleveraging away from equities gathers momentum, especially in light of the uncertainty surround a US-China trade deal.
This quadrant tells us bond traders clearly signal the global growth story keeps deteriorating. The fact that long-dated bond yields are dropping at a faster rate than short-dated it’s telling us that it’s primarily a story of discounting the growth outlook vs inflation, which is also set to stay well under Central Banks’ mandated levels but within contained levels. The US and Canada, unlike the rest of the countries boxed in a bull flattening phase, exhibit bull steepener, which occurs when bond traders trade under the conviction that interest rate should be cut to calibrate the demand and supply of money. The behaviour in the market remains all tied to US-CH trade negos and hopes that a deal may see a potential reinvigoration into H2. Even the risk rally in Jan has occurred amid very depressed yields, mainly orchestrated by the promises that CBs (ECB, FED) will keep the liquidity hose open.
Wonder what’s the yield curve in a bond? It’s really critical to understand what the market is pricing in terms of Central Bank policies going forward. Lea the basics in this article.
EUR/USD: Bearish Momentum Increases Volatility
When a downtrend increases its vol, it tends to be a double-edged sword. On one hand, it allows an acceleration in profitability as the moves are more expansionary in nature. Prove of that is the breakout of the channel bottom-side during the last European moing. However, notice that the rebound has been equally vol and impulsive before liquidity dried up? Whenever we see this occurrence, it raises a red flag about a potential trend reversal conditioned to price action in agreement, which for now is not. The path of least resistance, judging the renewed strength in the DXY (magenta), from which the Euro/US Dollar pair accounts for 57% of the basket, it’s still too premature to anticipate a sudden change in trend, with 1.13 as the next clear target for sellers. The first indication that the market may technically start to show some cracks is by a retake of 1.1360 (horizontal resistance + descending channel trendline). The German vs US yield spread shows such a divergence from the actual price that is hard not to anticipate value in becoming a potential buyer once the sell-side campaign lands at 1.13 and level below. This is by far the widest divergence between the bond yield spread and the DXY/EURUSD we’ve seen for months.
GBP/USD: Strength In USD Poses May Keep Upside Limited
The spike post-BoE has broken above the most pronounced downward trendline, helping to alleviate the technical bear-side pressure, even if the appreciation in the GBP failed to find acceptance above the level of resistance at 1.2975–80. Those filled long on the breakout came to an unpleasant bull trap realization as the 1.30 psychological level snapped the price right back down as ample pockets of supply remain present (the hourly pin is a testament). Nonetheless, the breach of the most recent high allows for a slightly more constructive outlook, with buyers now expected to take control of 1.2930 horizontal support (potential inverted H&S) in order to keep making progress, with the real inflection point a recovery above the 1.30 round number. Should sellers find equilibrium sub the mentioned level, 1.29–1.2890 would be the next logical target for the sellers ahead of 1.2855–60 (yesterday’s low). Cross-referencing correlated asset classes (DXY, UK-US 5y bond yield spread) I still can’t envision how GBP gains enough fortitude, knowing how tightly correlated the pair has been to both instruments as of late. The unpredictable Brexit landscape is yet another conce weighing.
USD/JPY: Risk Off-Led Selling Capped By Rampant USD
The fortitude of the US Dollar has kept the pair in a relatively tight range. If the same risk profile stays in place, it’s hard to envision how the pair can sustain at these hefty levels. It was only yesterday that I speculated on a scenario in which the rolling over of equities would have an immediate impact in exposing the downside as divergences were already in existence between price and US yields. Now that equities and US 30y yields are alienated with the same bearish dynamics, any hiccups in the DXY should be the last straw needed to break down the range. By running a correlation coefficient of the last 2 days (48-period in the hourly), we are starting to see how the pair is finally decoupling from the DXY as the US yields and the SP500 exert sync downward pressure, Amid such market structure, there is a lot of intraday noise unless engaged at the edges 110.00–109.50–60. One can also use as reference the midpoint of the range at 109.80 to gauge what side has been most recently in control.
AUD/USD: Perfect Bearish Storm
The Aussie is caught in a negate loop that is hard to ignore. By running a correlation coefficient we can understand that the market is currently driven by 2 main factors: 1- Aussie vs US bond yield differentials, which keep falling further as the market prices in an eventual RBA rate cut. 2- The ample demand for US Dollars even as the Fed mulls the possibility of an end to QT (no better alteatives). Technically, we can draw a descending trendline to help us to visually understand the type of order flow behind the market. For now, it does look quite regular and non-volatile, with impulsive sell-offs countered by corrective pullbacks. These are clear dynamics for a trend continuation, with the correlated instruments (DXY, Aus-US yield spread) alienated to see follow-through. The area marked in a green rectangle is where one may expect the next pocket of demand should 0.7065 give in.
GBP/AUD: Bullish Momentum Play
Barring any Brexit headline that distorts the current price action, the pair looks poised to be a rather interesting proposition to play the long side. As we can observe, in the last 48h, volume has been trapped to the downside, which further vindicates what side is most in pain (those caught short). In terms of valuations, the rampant move in the UK-AU bond yield spread legitimizes higher levels too. Besides, as the correlation coefficient demonstrates, this week is all about tracking Aussie yields, hence why looking to join the bid for an eventual target of 1.84 or beyond seems a sensible strategy.
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