Yen Strength & Risk-Off Prevail
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Yen Strength & Risk-Off Prevail

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

Quick Take

As risk-off returns wit a vengeance, the Japanese Yen and the US Dollar were the best performers in a day that saw US equities down to the tune of around 4% while bond yields also imploded. With the Western world, especially the US, in the eye of the storm, playing catch up due to the slow response it had, a somber Trump warned of up to 240k deaths estimated with the worst yet to come, so it’s no wonder that the sentiment was shot to pieces. Trump said “this could be a hell a bad two weeks and maybe three weeks”.

Amid this environment, the buy-side campaign in the Pound stays the course, as the currency holds up rather steady to the treacherous environment out there, shrugging off the daily UK death toll reaching record highs. The Euro and Swissy traded in a disjointed manner as it related to risk dynamics, which reinforces the notion that whatever unwind of carry trades has is now completed and a new paradigm of trading has ensued, with the market probably taking the pulse of fair valuations based on the evolution of COVID-19 in the Eurozone area.

Special mention deserves the Aussie. At Global Prime, we were asked by some clients what the heck happened to the currency as a sudden 100+ pips spike came out of the blue. I too struggled to understand that mysterious volatile move which carried  no catalyst. As i dug deeper, I noticed it wasn’t a single move overwhelming sellers, but rather it built up over a span of a few minutes, which suggests the combination of a strong buy-side campaign by ‘unknown forces’ amid some massive liquidity problems, as if all market makers had vanished at once. A similar move occurred on March 31st during the Tokyo fix, but that was related to fiscal year-end 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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NOT THE IDEAL START FOR RISK DYNAMICS

It’s been a very poor start to the second quarter in financial markets as both heavyweights (US equities and US bond yields) dropped simultaneously as the market keeps pricing in the utter destruction of economic activity in a world fully engulfed by the COVID-19 crisis. The average declines in US main indices was to the tune of -4%

BRACE FOR ANOTHER DISASTROUS US JOBLESS CLAIMS

Economists are calling for yet another set of extraordinarily high  unemployment data released this Thursday. It is said that the numbers could exceed last week’s blockbuster report. As Business Insider reports, “estimates range from about 3 million to as many as 5.5 million jobless claims for the week ending March 28.” To make it worse, economists anticipate upward revisions to last week’s number.

TAKE ECONOMIC DATA WITH HUGE PINCH OF SALT

Especially in these treacherous COVID-led crisis, be overly cautions to treat economic data at face value. Most if not all the data is not up-to-date or reflective of the decay in economic destruction we are going through, which is why the market is most likely going to see through it. Therefore, do not attach too too much, if any weight, at better than expected’ economic data from the US, China or other major nations. Improved US ISM on Wednesday got easily ignored, with a similar reaction to the recent upbeat Chinese PMI earlier this week.

SOMBER US OUTLOOK AS COVID-19 SPREADS

The overarching theme and playing the key role as the driver for financial markets is the rate of deaths/new cases as part of the COVID-19, what we understand as the distribution curve. With the Western world, especially the US, in the eye of the storm, playing catch up due to the slow response it had, and a somber Trump warning of up to 240k deaths estimated with the worst yet to come, the sentiment was shot to pieces. Trump said “this could be a hell of a bad two weeks and maybe three weeks”. It appears as though we are still far from the death toll curve peaking in the US with markets finding little comfort.

WHO WOULD HAVE THOUGHT THIS? (SARCASM)

US intelligence has come forward to make an official case, submitted to the White House, in which it stats that China under-reported virus cases and deaths, which is hardly a surprise based on the number of urns delivered at the time and the activity in crematoriums. The report, obtained by Bloomberg, notes that “reporting on the scale of the virus was intentionally incomplete and concludes the numbers were fake.”

A LONG AND WINDING ROAD TO NORMALITY IN CHINA

As China aims to progressively return back to more normal conditions with lock-downs being lifted, the experiment appears to be backfiring as some venues that had reopened were told by the government to close yet again amid fears of a re-emergence of the virus. Fear of second wave is real and authorities are taking no chances. In fact, as the SCMP notes, “authorities ordered residents of Jia county to stay home after reports of cases linked to the area’s hospital resurfaced.”

HUGE SPIKE IN THE OCEANIC CURRENCIES

I struggled for answers on the AUD spike as there was no catalyst, which makes you think ‘fat finger’ even if i have a hard time thinking that’s the case. As i dug deeper, i noticed it wasn’t a single move overwhelming sellers, but rather it built up over a span of a few minutes, which suggests the combination of a strong buy-side campaign by ‘unknown forces’ amid some massive liquidity problems, as if all market makers had vanished at once. This is a very rare move in the AUD. A similar move occurred on March 31st during the Tokyo fix, but that was related to fiscal year-end flows.

FED ANNOUNCES CHANGE TO LEVERAGE RATIO RULE

The Fed announced that to ease strains in the Treasury market resulting from the coronavirus and increase banking organizations’ ability to provide credit to households and businesses, it will establish a temporary change to its supplementary leverage ratio rule, which would exclude U.S. Treasury securities and deposits at Federal Reserve Banks from the calculation of the rule for holding companies, and will be in effect until March 31, 2021. What this translates into in less technical terms, as Zero Hedge explains: “The Fed has effectively granted banks some 2% in balance sheet capacity to use as they see fit, as long as it is not for buybacks, eligible capital which they can – and likely will – use to buy more Treasurys knowing they can then just flip those Treasurys back to the Fed with a profit. Sure enough, Treasury yields immediately dumped after the news.”

EMERGING MARKETS RISKS ACCELERATING

FX moves in the exotic pairs are going parabolic in several of the big EM FX pairs as the investment worlds continues to price in a deep recession globally, which tends to hit the hardest emerging economies. The ZAR, MXN, TRY, BLR are all falling hard vs the USD as the epic exit to safer harbors runs its stead and unstoppable course. Reuters reported that the International Monetary Fund officials said on Wednesday that “the coronavirus pandemic is putting major strains on emerging market economies, but are confident that the Fund has sufficient resources to meet their needs.” The fund is “quite a bit away” from exhausting its $1 trillion in total lending capacity and is working to identify new sources of funding and liquidity for member countries, the officials told a conference call with reporters.

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!

Insights Into Forex Majors

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

The pair has transitioned into lower levels but the quality of the structure printed for the interest of sellers is far from encouraging as every breakout into new lows gets rejected. This is understood as ‘compression’, which could be a precursor for a buy-side campaign. This potential scenario is reinforced by the location price has landed, a previous resistance now turned support.However,  with the structure and momentum still pointing lower, it is far too premature to venture into longs at this stage as it’s still a premature decision. Note, the daily and weekly are still overall bearish, which doesn’t clear up the picture.

GBP/USD technical analysis

It’s a tough call to call the next direction in the pair as it navigates through a period of price confinement. A resolution in either direction is necessary for new committed capital to enter. The recent inertia has been to the bullish side, hence in the 4-hour the context includes a consolidation as part of a bullish cycle. However, as one step out to higher timeframes, the sellers are the force in control, making the confluence lower/higher timeframes not ideal. Await a breakout, and then, based on your style of trading, look to engage if warranted.

USD/JPY technical analysis

We are firmly in bearish territory both in the 4-hour and daily timeframes now, with an alignment of momentum as well. Therefore, the path of least resistance, as I see it, is to the downside. Ever since the breakout of structure to bearish in the 4-hour (24h ago), the notion endorsed in these analysis to ‘sell on strength’ has paid off. I see sufficient technical evidence to still support this stance, with the trigger to enter the market a whole different topic as it’s largely dependent on one’s personal style. Your setup, nonetheless, requires to trader under a specific context I’d imagine, and that’s what this analysis facilitates.

AUD/USD technical analysis

The breakout of structure and momentum through the 4-hour chart suggests the tide has turned in favor of sellers. We even had a major spike in the AUD, with the sizable upper shadow a technical admission that the market is loading up sell limits above price. My view is that unless the 4-hour chart closes above the 0.6140-60 area, the sellers are now the group exercising the most control of price action, hence why I’d expect the downward pressure to potentially continue.

GOLD technical analysis

The case to sell gold on rallies continues to play out rather successfully. I highlighted a red box 24h ago as the area most sensitive to see the bulk of sell orders return for a potential resumption of the downtrend in the 4-hour chart, and that’s what’s transpired so far. I would expect the sell-side campaign to struggle once $1,550.00 is reached (green area) but with the 4-hour and daily re-aligned to the bearish side, I have some serious reservations about the outlook of gold near-term.

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