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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.
The uneasy truce, for lack of a better word, between Trump and Xi at the G20 summit to avoid a potential full-blown trade war, has led to the extension of the ‘risk on’ tone with the likes of the commodity currencies, as the indices performance chart illustrates, the most benefited. The interbank adjustments in forex quotes (gaps) ahead of the retail open in Asia, do feel overstretched on the preconditions of an event largely priced in since last week, with the addition that the temporary truce, at this stage, is simply an agreement of intentions. Nothing has been achieved yet on all the sensitive issues that remain on the table even if one can argue that the avoidance of further tariffs and rolling back some restrictions on Huawei are acting as a driver. So, one must question how much fuel is left until we see a meaningful reversal? Are we in a buy the rumor sell the fact? For now, there is no reason to be too defensive if looking to exploit momentum trades intraday the likes of AUD/JPY or AUD/CHF as the trend should be your friend. It is, however, when one steps back to take a bigger view off the daily, where the overcooked nature of certain currency movements start to become more obvious, which leads me to think there are no clear cut daily signals of note. That said, I do find fading strength in the USD/JPY to offer solid merit while awaiting the market to show its hand post the G20 in the conglomerate of currency crosses. While the G20 meeting outcome is positive for the AUD/USD, the RBA must decide tomorrow if it cuts the cash rate further, and with trade strifes not really part of the RBA’s justification on its current easing cycle, there is understandably cautioun that the RBA will go for another rate cut following the June one. Pricing for a cut to 1% stands around 65%, only marginally lower than the 70% on Friday. Even if an eventual comprehensive trade deal remains elusive and a far-fetched outcome given the major discrepancies still standing in the way of both superpowers, one consideration to let it sink in too is the fact that the Fed cut expectations are likely to see a sustained trimming in the immediate future (July 31st) while the dovish prospects over the next year should barely budge. This Friday’s June payrolls (Jul 5), alongside other key releases this month such as CPI (Jul 11), retail sales (Jul 16) and Q2 GDP (Jul 26) will also be key.
* The Information is gathered after scanning top publications including the FT, WSJ, Reuters, Bloomberg, ForexLive, Institutional Bank Research reports.
Risk assets have opened in Asia with a bid tone as the US and China avert the worst case scenario by agreeing to resume trade talks. Now, I’d argue that as the bearish breakout in the JPY index below the daily baseline (13-EMA) or the performance in the Shanghai Composite (bullish), USD/CNH (bearish) can technically attest, the ‘truce’ trade has been, at least partially, if not fully, running its course by being priced in since last week. The gaps undeniably communicate the mood to bid risk is positive, while the lack of any details beyond the vague promises of both parties coming back to the drawing table, in what’s a ‘risk on’ move that had its initiation last week, do make a case for the gaps to be potentially filled before finding out whether or not ‘risk on’ buyers will continue to dominate the ebbs and flows. I wouldn’t be fighting the trend, which means overcommitting capital against the likes of the Aussie, Kiwi or the Loonie in this environment remains a dangerous proposition as the momentum on the China-US news has the pedigree to potentially last for days if not weeks, if history on how Trump can manipulate markets is any indication. The Japanese Yen or the Swiss Franc are two clear candidates to attract increasing selling interest amid this improving background.
For those calling a positive path in the EUR/USD going forward, I can definitely see the merit behind defending such view even if the price looks awfully restrictive to engage from a risk-reward perspective when analyzing the daily chart. Why am I saying that? Because we are trading significantly above the 13-EMA baseline, which after tonnes of testing, is the newly adopted delimitation that I am using to determine if we are in an uptrend or in a downtrend on the daily chart. Other popular measures include the 5-EMA for shorter-term trend identification or the 21-EMA to adopt a longer horizon view. So, the current status in the EUR/USD is acceptance above 1.1350 in what’s become the narrowest trading range since 2004! That’s quite an eye-catching stat, but not the only one must take note, as the pair has achieved a successful bullish rotation with equilibrium found above its prior swing high. This is a very constructive technical occurrence that had not transpired in the daily chart since Sept of last year. What this bullish structure makes me anticipate is that bulls are definitely the force to be in control in July until proven wrong, which would include as an initial precursor a retake sub the 13-EMA with volume increasing, but even more important, sellers to be staring at the ascending trendline from the rear mirror.
If one is looking for some inspiration in the GBP/USD, I am afraid you won’t find any conclusive technical clues that may tilt the balance in either way out of the daily chart. Yes, the price is mildly above the 13-EMA baseline, but Friday’s bullish candle came on a rather poor volume below the average, not to mention that the area of liquidity around the 1.2750 as marked in red rectangle continues to prove a major nut to crack. That said, by checking the intermarket analysis, and unless any Brexit headlines distort this view, there continues to exist value to be a buyer on weakness.
Moving into the USD/JPY, just as the US-China trade truce appears rather vague in nature at this point, so does the attempts by this pair to break a key liquidity area at 108.50. One, which I will remind the readership, originates after a successful rotation lower, in other words, there is technical value to engage in shorts, especially on a gap higher amid the clear risk of an overcooked move as the US-China trade truce had been factored in since last week. Sell the fact, anyone? What’s more, by anchoring the DXY and US30Y bond yields (main drivers of USD/JPY), both assets trade significantly lower at a time when the pair is testing prior resistance. This means the higher it goes to retest the 108.50 vicinity and above, the greater the discount in price it offers.
What can we lea from the AUD/USD daily chart today? Firstly, the current bullish momentum is the most meritorious seen, based on the impulsivity of the leg, since late January this year. In favor of bullish continuation flows not only we find the fundamental support of the US-China soft breakthrough, but the close of Friday’s candle above the prior swing high is a testament that sellers are not as prolific in their conviction as they used to. If we throw into the mix, the positive flows in equities, the Chinese Yuan and the Aus-US bond yield spread, one can clearly make the case why I am of the opinion that looking for reversal shorts are not a trade that the technical status would suggest. On the flip side, I see two potential negatives. Firstly, the distance to the 13-EMA baseline does warrant caution as price tends to struggle to extend much further until a correction back to the mean. Secondly, as the move creeps higher, volume is stagnant below its average, which is what eventually leads to a movement exhausting and reversing. Overall, this is still a market to play long but at the right levels, which would have been about a week ago not at the current price.