USD Funding Crunch Eases, Quater-End Flows Behind
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USD Funding Crunch Eases, Quater-End Flows Behind

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.

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. You can also subscribe to the report. The purpose of this content is taking an in-depth look at market dynamics – fundamentals and technicals – to assist trading decisions.

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Quick Take
Narratives in Financial Markets
Recent Economic Indicators
Technical Insights Into Flows
Educational Material

Quick Take

The outperformance of the Pound continues to standout in the forex market, with the Yen joining the party as we leave behind the month/quarter-end rebalancing flows. In contrast, the US Dollar still trades on a rather soft note despite the latest ebbs and flows kept the currency better bid. A special mention goes to the Canadian $ on Tuesday, as it saw an impressive spell of buy-side pressure as hedges and benchmark fixings kicked in through early hours of US trading.

The launch of yet another Repo Facility by the Fed (read ‘swap lines’) to help support the smooth functioning of financial markets and further ease the USD funding pressures and avoid further liquidation of USD-denominated assets by international actors (Central Banks/Int’ monetary authorities) seems to be working. The USD Libor-OIS spread is progressively adjusting lower, which means the cost of borrowing USD via EUR/USD and USD/JPY FX swaps decreases.

The end of the month was not kind to the Oceanic currencies, with selling flows hitting both the AUD and NZD since the Asian hours without a particular catalyst, unlikely to be found on such a flow-driven day. The peculiarity of the relaxation in the USD liquidity crunch crisis is the significant reduction in volatility, not only in the Forex market overall, but especially through the EUR and the CHF flows.

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.

Narratives In Financial Markets

* The Information is gathered after scanning top publications including the FT, WSJ, Reuters, Bloomberg, ForexLive, Twitter, Institutional Bank Research reports.

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MONTH/QUARTER END RE-BALANCING PLAYS KEY ROLE

Month/quarter end flows cause whippy moves in the currency market by the end of London without a fundamental basis as a driver but rather it was all about the benchmark fixings to re-balance books.

MIXED SIGNALS IN EU/US EQUITY MARKETS

The signals from European and US equities were not consistent as the key benchmark indices in the former ended higher while in the US, it was a softer affair, not even the talk of a push for a $2trn infrastructure package by Trump nor the deferral of tariffs did the trick. On a quarterly basis though, the performance in the Stoxx Europe 600 index, down 23%, beats the 20% slide in the S&P 500.

FED LAUNCHES FRESH SWAP LINES WITH INT’ CREDITORS

The US Federal Reserve announced the establishment of a temporary FIMA Repo Facility to help support the smooth functioning of financial  markets. In other words, this is yet another liquidity measure aimed at providing US dollar funding to a larger number of foreign central banks and international monetary authorities in exchange for US Treasuries.  The measure is intended to slowdown the selling of USD-denominated assets by these foreign entities needing. Lyn Alden, Founder of Lyn Alden Investment Strategy, said “consider that the U.S. is helping its creditors not do disorderly fire-sales of its assets. The U.S. is the net debtor rather than the net creditor in this scenario.”

USD LIBOR-OIS SPREAD EASES FURTHER

All the constraints about the increased difficulty to get USD funding, which can be analyzed via the USD Libor-OIS spread, continue to progressively ease even if still at elevated levels. The expectation for coming quarters is that the spread will keep adjusting lower. As the Research Team at the National Australian Bank notes, “the cost of borrowing USD via EUR/USD and USD/JPY FX swaps continues to fall, in a further sign that funding pressures are abating.”

LOCKDOWN PERIODS IN EUROPE SET TO EXTEND

Europe is headed for an extension of COVID-19 lock-down measures for another 4 to 5 weeks. Besides, the deaths and new cases in countries such as Spain or Italy remain too high, in the case of the former, the deadliest day yet. As Bloomberg reports, “European governments doubled down on efforts to maintain rigid lockdowns amid tentative signs that the infection rate is slowing.” Italy’s PM was the most direct by noting that the government may extend the lockdown restrictions until May 1 with a gradual opening afterwards.

US HEADED FOR THE SAME PATH AS EUROPE OR WORSE?

In the US, COVID-19 cases remain on a steady climb as New York reports largest daily jump in hospitalizations. That said, Dr Fauci, the director of the National Institute of Allergy and Infectious Diseases, noted that “we’re starting to see glimmers … just the inklings” about the effectiveness of social distancing measures to limit the spread. Dr. Fauci was prudent to say “we’re not seeing a turnaround yet.” This follows the decision by Trump to extend social distancing guidelines across the US by up to the end of April for now.

AUSSIE/KIWI SOCIAL RESTRICTIONS HERE TO STAY

In the Oceanic region, with Australian PM Morrison making it very clear that Australia is in for a long battle warning the population to be prepared for six-month of major restrictions, a similar heads up was given by NZ Health Minister David Clark, saying “some coronavirus restrictions are going to be in place for a long time”, adding that “tight border controls may persist.” Make no mistake, this is a global phenomenon, as such, this grim outlook pretty much applies to many other countries hit hard by the COVID-19 pandemic.

TRUMP NOT DONE YET IN ITS STIMULUS SPREE

Trump is calling for an extra $2 trillion infrastructure bill as part of the government’s emergency response to the coronavirus pandemic. As CNBC notes, “it remains to be seen if Congress will be comfortable passing another mammoth spending measure after approving the emergency $2 trillion coronavirus relief bill last week.” If more momentum is gathered around this idea, it could be another impulse for stocks, even if a constant reconciliation is required as the market may be underestimating the length of time the economy is frozen.

US SET TO APPROVE DEFERRAL OF TARIFFS PAYMENT

U.S. President Donald Trump has given the green light and approved a proposal spear-headed by some businesses to delay payment of certain tariffs by three months, according to people familiar with the matter. Bloomberg notes that the order would give the Treasury Department the authority to direct Customs and Border Protection to delay collecting tariffs on those imports for 90 days.”

JAPAN GOES FOR ITS BIGGEST ‘BANG’ YET

In Japan, the ruling party proposed the biggest-ever stimulus package worth 60 trillion yen (S$789 billion) as the country is headed into a recession. The package would be destined towards cash handouts, subsidies to households, with the largest chunk to provide financial assistance and funding to firms. “Quite a few in the party hold the view that this still isn’t enough,” the party’s policy chief said.

PUTIN & TRUMP AGREE TO SET UP OIL CONSULTATION

The Kremlin said Putin and Trump agreed that there should be consultation on oil market, despite no date agreed. As Reuters notes, “top energy officials will discuss slumping global oil, the Kremlin said, as Trump called Russia’s price war with Saudi Arabia ‘crazy.’ The Oil market trades at an 18-year low around $20.00/barrel. “Huge inventory builds, potentially exhausting spare storage capacity, will mean that market balance requires an unprecedented output shutdown by producers,” Standard Chartered Plc analyst Emily Ashford wrote.

MACRO-WISE, NOBODY KNOWS HOW IT WILL TURN OUT

This article by Sven Henrich via NorthmanTrader.com was especially refreshing due to its brutal honesty, which I wholeheartedly share. Sven notes that “nobody truly knows how any of this will turn out and I think this point needs to be driven home more clearly.” He makes the point that for the technical-oriented traders, since focus is primarily on market technicals “that’s an ever evolving picture that offers us pivot points to decide when and where to get engaged in.” But on the macro? Sven’s view is “everybody is just guessing.” Good read.

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!

Technical Insights Into Flows

This analysis complements one’s view by accounting for multi timeframe biases. Ultimately, it is the traders’ call, via a set of entries (watch my setups) thoroughly backtested, to decide if a market meets the prerequisites to enter a position. This analysis is mainly intended as a way to educate traders in upping their analytical skills.

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EUR/USD technical analysis

Keeping the limited upside potential in mind, as per the multiple failures best visible through the weekly chart, the buy-side commitment is still present in this market as a liquidity grab (green area 4-hour) saw a strong pocket of demand, so far invalidating a bearish structure. Instead, the market is in a potential transition to range-bound conditions even if a resumption of the 4-hour uptrend up to 1.1170-1.12 should not be ruled out if the 1.1070-75 area is re-taken. Daily volatility levels of about 100 pips is the bare minimum to expect.

GBP/USD technical analysis

The base case put forward in yesterday’s report that supported the notion of dip-buying still warranted based on the positive confluence of the 4-hour structure and momentum worked out well. The market is currently sandwiched in a 100 pips box between emerging interest by dip-buyers circa 1.2340-50 and a cluster of offers through 1.2450-80. Once either side is taken out with a 4-hour close above/below, only then we will get further clarity, even if the inertia remains to be a buyer on the lower 4-hour timeframe, a picture that is supported by the momentum off the daily as per the smart money tracker and the fact that there is still ample room until the next key resistance at 1.27+.

USD/JPY technical analysis

To sum up the annotations in the chart below, the sellers have re-taken control of price action in the lower 4-hour timeframe, with a break of Monday’s low through 107.10 to expose a deeper setback. This bleaker picture for the pair is supported by the turn in the smart money tracker to bearish off the daily timeframe too. The rise in the pair on Tuesday, breaking the structure was not backed up by the momentum as the slope was still pointing down, reinforcing the notion that only when both structure and momentum are in alignment, the best directional plays come about as one side truly exercises the most control. Daily volatility in the pair is averaging just over 100 pips.

AUD/USD technical analysis

The pair has entered a consolidation period through the 4-hour chart, which means a resolution through one of the extremes is necessary to clear up the outlook to anticipate the next directional play. Based on the daily chart, the momentum is bullish but the structure doesn’t aid this positive backdrop, hence not enough clarity. In terms of levels to target, there remains available leeway to the upside until the next level of horizontal resistance circa 0.6290-0.63 comes into play. As in the case of the USD/JPY, daily volatility to expect minimal is 100 pips.

gold technical analysis

The gold market is rolling over with sellers the side in control in the 4-hour chart as I explain in the chart below. This setback originates off a strong supply imbalance marked in a horizontal red box. I see the most compelling case to be positioned for sell-side action on strength into the overhead red box I’ve marked above the current price. This bias is supported by the daily bearish structure (not the momentum). The volatility in the shinny metal has oscillated between $35-$50 last week.

Important Footnotes

Market structure

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.

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