Oil Rout Spills Over To Broader Risk Aversion
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Oil Rout Spills Over To Broader Risk Aversion

22 Apr 2020
Authored by Ivan Delgado

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.

Let’s get started…

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.

At the epicenter of the dial back in risk sentiment as a major influence to push the S&P 500 over the cliff and roll over (~-3%) we find the ongoing high vol rout in the Oil market. The June CL futures has effectively become the front-month contract, with more dramatic falls sub $10.00 seen following the unprecedented slaughter on Tuesday.

Allow me to remind the readership of a citation from yesterday’s report: “Anyone who holds the view that today’s plunge into negative territory in the front-month oil futures contract is a one-off and can’t happen again would be solely misleading himself. The backdrop, unless the fundamentals revert, is looking extremely dire…”

The desperation in the Oil industry is palpable as Oil implied volatility has gone absolutely parabolic as this chart shows. Besides, Bloomberg notes, “Oil ministers from the OPEC+ coalition held an unscheduled conference call on Tuesday to discuss the collapse in Oil, though a closing statement signaled they didn’t settle on new policy measures.”

Even news that the US Congress has agreed to a fresh spending bill to stem the economic fallout from the shock of the pandemic, this has barely had an impact on markets. A tweet that Trump is bailing out the Oil & Gas Industry didn’t move the needle either.

The renewed sell-side pressure in equities as Oil keeps imploding has had immediate spillover effects in the outperformance of the USD, JPY, but also a stubborn EUR and CHF (all risk-off friendly), while on the flip side, currencies most sensitive to risk-off dynamics (AUD, NZD, CAD, GBP) have gone through a rough patch, especially GPB.

We now find ourselves in an environment primed for equities to potentially resume the downward tendencies in line with the macro COVID19-inspired bearish trend, which would have major ramifications for the interest of currency flows.

Why is that? Because that is most likely to be accompanied by a period of USD fortitude. Be reminded that the USD analog long endorsed weeks ago (macro call ) is still very much a valid case.

Not only that, but by checking the above updated chart, it looks as though the structural breakout through the breach of a sticky resistance area is now being retested. For those buying into this view, this is a formidable level to be looking to turn more constructive in the USD.

If you want to find out the main difference of this proprietary USD index vs the mainstream DXY, I invite you to check my recent video, where I shared with viewers a look under the hood in my USD index. You will notice the merit it has to build a relationship between the aggregated USD flows and your USD-denominated markets.

So, where do we stand in the grand scheme of the Forex domain? Well, first let’s get out of the way the yawning fest markets, which include the EUR/USD and USD/JPY, both still trapped in well defined ranges. Until there is a resolution outside the upper/lower boundaries, it’s a game of patience. In the EUR/USD front, however, the USD index is screaming that topside discounts exist.

We then have a number of markets where we are finally starting to see the light at the end of the tunnel as fresh flow imbalances ensue. That’s been the case in the GBP/USD, with selling on weakness my default view now based on technicals/intermarket. The same can be said in the AUD/USD, although there is a caveat, as the daily still suggests we might be morphing into a range.

The USD/CAD market, with Oil under severe pressure and the USD strong as equities fall, the way bias is up. One must be mindful, however, that a very relevant resistance area between 1.4250-1.43 is preventing a more aggressive mark up in prices for now. Nonetheless, it really is the perfect bullish storm for the pair to keep showing upward tendencies as the lay of the land stands.

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Insights Into Market Flows

This analysis complements one’s view by accounting for multi timeframe biases. Ultimately, it is the traders’ call, via a set of entries thoroughly backtested, to enter a position. This analysis 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