FX Vol Soars On Month-End Re-Balancing Flows
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FX Vol Soars On Month-End Re-Balancing Flows

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.

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Scan Of The Markets

The indices show the performance of a particular currency vs G8 FX. A video on how to interpret these indices can be found in the Global Prime’s Research section.

Trading the currency market is getting involved in a complex web of intertwined factors that to a lesser or greater degree will determine valuations in a particular currency pair at any point in time. However, as we approach month-end, a special element is at play…

I am referring to month-end re-balancing flows, which is what we saw on Thursday’s 4pm London fix. The result tends to be punchy moves that don’t necessarily have neither a technical nor fundamental logic but rather is all about tweaks in currency risk exposure.

The Euro and the Pound were the major beneficiaries of this phenomenon, which happens by month end as global portfolio managers have the need to readjust their benchmarks for currency hedge ratios amid value variations during the month.

Typically, these FX rebalancing flows are seen at the end of the month and usually their impact is felt most near the 4pm London fix on the last trading day of the month.

But before getting into the technicals in the currency market, where I see the USD still vulnerable, let’s concentrate our attention to equities. Here, stocks in the US ended lower but by assessing the monthly performance (+12.5%), it was the best in 33 years.

Besides, as I conclude as part of today’s video analysis, it is not the time to be a hero and play short equities just yet, unless, of course, that you want to be a hero and defy the bullish market structure off the daily. Much of this opinion though will vary on what timeframe you trade, so here I am giving you my judgement based on 4h and daily flows.

So, with the overall risk sentiment still buoyant, we need to ask ourselves, where does this leave us in Forex? As a starter, let me tell you that while the EUR/USD may look bullish in the 4h, we are getting quite expensive technically as a daily range top is hit. The bull run way past 1.09 saw, unsurprisingly, the 100% proj as the ceiling.

I will open up brackets to briefly touch on the ECB decision, which as in the case of the FOMC, failed to act as a major volatility catalyst in light of all the emergency measures as of late. The ECB made no change to its bond buying programme, which stands around the €1000b mark until the end of the year, even if ECB President Lagarde hinted at the possibility of expanding and shifting its composition when and if necessary.

What to say of the GBP/USD? First, that a couple of days ago it offered an attractive discounting price at a key 4h support circa 1.24 as I explained since 2 days ago and reiterated in today’s video, which set up the stage for what has become a formidable rally beyond 1.26. Profit-taking at the 100% proj target (1.2633) followed.

The Aussie, which is another currency that has my daily attention, succumbed to the influence of FX re-balancing flows, but it doesn’t mean the constructive outlook has changed. I see no reason to believe the tide is turning in favor of the bears. In fact, my assessment of the daily gives me a scenario where an ultimate target of 0.6640/50 is hit.

The USD/JPY has negated my bearish target of 106.00. I must underscore that while it looked prime to keep drifting lower yesterday, the range found on Thursday was a red flag. Eventually, a resolution back above the 106.90/107.00 range top has fully invalidated the 4h chart-inspired 106.00 target even if the daily remains firmly bearish.

In today’s video, I also take a look at Gold. I emphasize the long trap that eventually led to a break of structure in the 4h chart. For those Gold traders out there, this market has now gone into range-bound conditions in the daily, bearish in the 4h chart, although the macro background, for the comfort of perma bulls, still looks very bright.

Note, another focal point where I see tail risks is the confrontational attitude of Trump against China and Saudi Arabia. If further diplomatic fractures occur between the US and China, this could spark a new wave of selling pressure in both stocks and the Aussie, although at this point, this is just mere speculation not reflected via price action.

First, the Washington Post reports that U.S. officials are crafting retaliatory actions against China over coronavirus. The report notes that “Trump has told aides and others that China has to pay for the outbreak and publicly floated demanding billions in compensation.” We also learned more details of Trump’s threat to Saudis; unless they keep cutting oil supply, they are risking to lose the U.S. military support in the region.

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Insights Into Market Flows

This analysis is conducted on a multi timeframe dimension. Ultimately, it is the traders’ call, via a set of entries thoroughly backtested, to enter a position, hence the video is mainly intended as a way to educate traders in upping their analytical skills.

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Recent Economic Indicators & Events Ahead

Source: Forexfactory

If interested in the best ‘free of charge’ News Indicator that displays data on past and future news in the Forex market via MT4, check this YouTube video I produced. The indicator allows you to save time, avoid mistakes. It’s spot on!

Important Footnotes

MARKET STRUCTURES

Markets evolve in cycles followed by a period of distribution and/or accumulation. To understand the principles applied in the assessment of market structures, refer to the tutorial How To Read Market Structures In Forex.

SMART MONEY TRACKER 

In order to assess the market momentum of a particular asset, I’ve promoted for years the idea of using what I call the smart money tracker. The settings and the indicator can be obtained via our Discord room, where traders from all walks of life interact frequently. In this video I lay out the elements I look into to call trend directions.

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, horizontal areas of support and resistance are universal concepts used by the majority of market participants. It, therefore, makes the areas the most widely followed. The Ultimate Guide To Identify Areas Of High Interest.

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. Monitor the event risks via Forexfactory.com & refer to Fundamentals vs Technicals In Forex.

PROJECTION TARGETS

The usefulness of the 100% projection resides in the symmetry and harmonic relationships of market cycles. By drawing a 100% 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% Fibonacci Projection