Vol Picks Up In FX, USD Still In Trouble
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Vol Picks Up In FX, USD Still In Trouble

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.

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.

The last 24h of trading were characterized by springy movements as the waxing and waning in order flow made it a challenge to stick with one particular intraday direction.

Remember, we are right in the middle of that tricky window where month-end re-balancing flows are going to have an impact as portfolio managers adjust heading ratios back to neutral. This results, at times, in fairly punchy moves that don’t necessarily have neither a technical nor fundamental logic but rather is all about tweaks in currency risk.

However, there is indeed, aside from the overarching theme of COVID-19, an emerging narrative gripping financial markets’ attention. I am referring to the geopolitical instability between the US and China as the latter edges closer to strip out HK from its autonomy.

US Secretary of State Michael Pompeo has condemned the actions by China to regain legal power and strip HK from its freedom. Pompeo said can no longer certify Hong Kong’s autonomy from China. “No reasonable person can assert today that Hong Kong maintains a high degree of autonomy from China given facts on the ground.”

After all said and done, there are quite a few takeaways:

  • Equities keep charging higher, both in Europe and the US, sweeping under the carpet the deterioration in the US-China relationship to instead find comfort in the European Commission (EC) fiscal stimulus proposal worth up to €750bn, comprised of €500bn in grants to EU member states and €250bn of loans.
  • The daily bullish continuation engulfing candle in the S&P 500 is yet another crushing blow for the interest of sellers. It reinforces the notion that the pain trade remains to short equities as systematic strategies follow the path resonant with what’s working.
  • You have one camp who would argue that these two assets (AUDUSD & SP500), which have been intertwined almost 1:1 for months, are no longer as connected due to the frictions in HK and the expected restrictions to coal imports by China from Australian taking a bite out of the Aussie appeal even as ‘risk’ flourishes.
  • I am on the camp that the near-term decoupling of the Aussie correlation with equities keeps offering opportunities to buy AUD at discounted prices. Whenever the Aussie trades low into decision points with positive divergence in equities, regardless of what the media portrays, systematic strategies return to the bid.
  • The rising tensions in Hong Kong and the ongoing tit-for-tat retaliatory war of words between the US and China has led the Yuan to come under renewed downward pressure despite the attempts by the PBOC to weaken CNY-CNH at the fixing.
  • While you may hear that the Yuan is the asset most important to monitor when trading AUD, I disagree as the correlation coefficient is below 0. You will be better off if, as usual, you keep an eye on the aggregated Aussie/US Dollar.
  • The EUR/USD market has, at last, broken through its 2-month range by printing a close above the 1.10 round number. This means the pair may now set its sight towards more ambitious levels circa the 1.11 round number (100% proj target). The bearish structure in the USD prop index is in agreement for the rally extension.
  • GBP’s recent setback, attributed to the political scandal by Dominic Cummings and calls to fire UK PM’s chief strategist, alongside renewed negatively-charged Brexit headlines, provides a technical value trade amid a major disparity with the USD index.
  • The Canadian Dollar has taken the spot as the darling in FX this week, shrugging off the dip on Oil, as trend/momentum traders look to capitalize on the technical breakout in USD/CAD. As pointed yesterday, this has opened the doors to 1.35-36 now.
  • Risk sensitive pairs the likes of AUD/JPY or CAD/JPY remain bullish across the relevant time scales to monitor (4h/daily), reinforcing the notion of an environment where risk remains at healthy levels, which caps the appeal towards USD & JPY, despite the bid caught by the former mid-day in the US yesterday.

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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