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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.
Today’s explosion in volatility in the Forex market right off the gates comes after an incendiary tweet by US President Trump, taking the whole market by surprise at a time when based on the price action across various asset classes since the beginning of the year, a trade deal between the US and China had been fully discounted. The 180-degree tu by Trump, now formally threatening China to hike tariffs to 25% on $200bn by this very Friday, it gives a market with highly committed capital into equities sufficient reasons for a macro re-think, which is currently being manifested by a serious unwinding of positions in the S&P 500 futures, the Shanghai Composite and the rest of equity indexes. The rampant buying on the Japanese Yen or the aggressive selloffs in the Aussie reflects the new state of conces about the outlook for global growth if China doesn’t buy into Trump’s threats. The fate of the market hinges on whether or nor China confirms the rumors circulating around about the cancelation of this week’s trade talks by Liu He and his team of representatives. Be prepared for a tumultuous week as each unfolding scenario will have ramifications with one common theme to be expected, a volatility pickup.
Unless China comes forward to calm the markets with some type of bona fide intention to completely ignore the latest threats by US President Trump, the environment is set to remain hectic. A wildly lower Yuan and Aussie as a proxy to play the Yuan short trade in inteational markets has been the play most aggressively manifested. On the contrary, long the Japanese Yen and bonds is paying off handsomely, especially the former as the Yen index depicts. Goes without saying, there is currently a major unwind in the US equity market, where the S&P 500 futures are down by over 2%.
The picture is even uglier when it comes to the Chinese stocks, selling by as much as 4% at the open of the Shanghai Comp. The VIX is also set to torpedo towards its highest levels in months. Remember, the next VIX short futures outstanding has recently overtaken the VIX Feb ‘18 highs. It is a perilous terrain to be trading FX with the same risk dynamics. Be aware that the volatility looks set to to pick up further this week, contingent to China’s response, so be prepared to expand your usual stop loss placements while allow to be more generous with targets as these are the type of volatile environments that tend to promote outsized movements that may eventuate in higher risks to reward.
EUR/USD: Not Budged By ‘True Risk Off’ As Structure Improves
The pair is a sea of relative tranquility when cross-checked against the volatility seen elsewhere in FX. The exchange rate has managed to contain its move in a rather limited range, which has been confirmed after the Bollinger band tued flat. Whenever you see a market with the exteal Bollinger band going from directional to flat, that’s telling us the market has entered a consolidation phase. A break above the 1.12-1205 resistance area, which happens to be the 100% proj target of last Friday’s US NFP extension would expose the next level of resistance at 1.1220-25, ahead of the 1.1235 target. On the downside, breaking 1.1175-80 with acceptance below suggests 1.1165-60 as the next stepping stone in the form of Friday’s POC, ahead of 1.1145-50. Note, the breakout of the descending trendline in the exchange rate, coupled with a double distribution up where the POC got trapped behind, tends to be a recipe for sellers to experience further setbacks, especially judging by how impulsive the shift in flows was on the upside break from last Friday.
GBP/USD: Supply Ensues After Double Rejection of 100% Target
The exchange rate, which has been on an absolute tear as of late, met one of its possible 100% proj targets to the pip on the back of last Friday’s US NFP, coupled with positive Brexit headlines. A more ambitious upside target that is still pending to be reached would be 1.3220, a 1:1 full extension through the 1.2985 – 1.31 breakout extension. At the open of markets in Asia, the pair appears to be losing some of its strong bullish momentum after the double rejection of the 100% proj target and the increased pockets of demand in the USD we are seeing as the US-China trade deal is in jeopardy. The first area of engagement by buyers should be on an approach of the 1.31 liquidity-rich area, followed by 1.3075-80, which happens to be the 50% fib retrac of Friday’s US NFP-led rally. Even if the GBP setback extends all the way to 1.3040-45, which I see as the next critical support, that won’t damage the bullish structure in the price of the exchange rate. For that, A break and hold sub 1.3020 (Friday’s POC) is necessary, which tells you a lot about how insane the rise in the Sterling has been, judging of course, by recent standards or much more compressed volatility in the Sterling.
USD/JPY: Sold With Eaest On Trump Tweets
The weekend tariff spat by Trump against China has reinvigorated the demand towards the Yen as the risk profile tus aggressively ‘true risk off’ as the value lines on the 2nd and 3rd windows demonstrate. Not only the S&P 500 and bonds, especially the former, are imploding, but the USD has failed to draw much demand interest so far, hence fueling the downside momentum. The inability of buyers to fill out today’s ample gap in Asia before a 2nd leg was found is a testament of how fluid the situation has become. Despite the ADR limit for the day has been hit, the relevance of today’s news that a US-China trade deal might not happen after all has the potential to see far greater vol, which is why the next sellers’ target at 110.00-110.10 still stands as a realistic prospect today. Technically, the major barrier to break on the way up can be found at 110.70-75, which happens to be the violated 200% proj target measured from the range breakout last Friday. As the market dynamics stand, and even with the moves so overstretched, the downside is certainly the path of least resistance as long as the risk profile, which can be monitored through the formula in the 2nd window, remains bearish.
AUD/USD: Acceptance Sub 0.70 On Trump’s Incendiary Tweets
Asia flows were quick to adjust the pricing of the Aussie back sub 0.70 as fears of a major setback on the US-China trade talks took effect. The Aussie is hyper sensitive to any fundamental news emerging out of China, therefore tends to pretty much be pegged to the fluctuations in the Chinese Yuan in many occasions as the best way to inteationally express one’s view on China. Today’s selloff in the Yuan, sharpest fall since Aug ‘15, has been a major burden leading to the unfilled wide gap at the open. The moment that news broke out of the Chinese mulling not to attend this week’s trade talks in Washington, a 2nd leg transpired, revisiting the proj 50% target, which must be utilized as our first level of reference to find a level of activeness by market makers given the ample 0.7025-0.6985 extension used to measure the first symmetrical target. With the value line, which accounts for the Chinese Yuan + DXY, deeply on the red, it’s hard to expect strong flows making it back into the Australian Dollar unless China tries to calm the waters. The next 100% proj target can be found at 0.6945-50, level where the next cluster of bids is expected to be concentrated, as market makers, contrarian traders and profit takers step in, conditioned to vol moves.