Posted on: 06 Sep, 2019
The market is currently undergoing an aggressive repricing in risk-sensitive instruments as the perception is that through the course of Sept, the most critical underlying risks having worried markets the most in recent memory, without exception, get systematically reduced in seamless synchronicity.
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There is no doubt that the revitalization of the carry trade is back in vogue as high-beta currencies thrive at the expense of plummeting funding currencies, especially the JPY and the CHF, while the EUR is also under pressure even if trading dynamics in the latter will be determined by adjustments ahead of next week's ECB meeting on Sept 12. Even the jaw-dropping pool of negative-yielding global bonds has come down significantly as we see the flourishing environment lift both stocks and fixed-income, which is a clear testament that the quadfecta of positive developments all compressed within the last 24h has shaken the grounds of the market in what has the risk of turning into a major reckoning moment in the re-adjustment of positions this Sept. You don't often see that the underlying risks having worried markets the most in recent memory, without exception, get systematically reduced in seamless synchronicity. The market is currently undergoing an aggressive repricing as the perception is that through the course of Sept, there will be a relaxation of the chaos seen in HK, the political instability in Italy, the prospects of a hard Brexit, or a full-blown trade war with no intention to talk. It should be, therefore, not surprising that the market is coming to grips that as valuations stand, reversals back to the mean in risk instruments must eventuate to adjust to the new reality.
The indices show the performance of a particular currency vs G8 FX. An educational article about how to build your own currency meter can be found in the Global Prime's Research section.
* The Information is gathered after scanning top publications including the FT, WSJ, Reuters, Bloomberg, ForexLive, Institutional Bank Research reports.
Rampant risk appetite: The dynamics are characterized by true ‘risk-on’ as the quadfecta of positive news in the last 24h of trading (withdrawal of HK extradition bill, Italian government formed, delay in no-deal Brexit, US-China high-level trade talks confirmed in early Oct) sees a run to the exits off safety assets. The combination of rampant rises in both equities and stocks bodes well for follow-through ‘risk-on’ demand, with the high-beta currencies poised to see further interest, while the likes of the JPY and the CHF may struggle the most as seen during Thursday.
US NFP up next: There was a solid run of US data on Thursday, which brightens up the fundamentals landscape even further ahead of this Friday’s US Non-Farm payrolls, which in August tends to be a miss. If we look at the past 22 years as a sample of data large enough, the August jobs report has been missing its expectations nearly 80% of the time, with an average miss of -48K. The consensus for today’s report stands at +160K with some last-minute adjustment after the huge ADP report from this Thursday, where 195K new jobs were added, even if the ISM employment component does not paint the same rosy picture. As usual, average earnings will too influence the USD.
Fed's Powell speech eyed: It will also be important to keep an eye on the appearance of Fed Chair Powell in Zurich where he will deliver a speech titled "Economic Outlook and Monetary Policy" by 16.30 GMT at an event hosted by the Swiss Institute of International Studies. Audience questions will be expected. The market now prices only one rate cut for the Sept FOMC meeting, with odds for a 50bp vanished after the resurgence of risk appetite. The market will be on the lookout for clues that may cement the notion that the current Fed funds rate pricing by the market is at fair value. The speech comes just ahead of the phase where no further official commentary is permitted.
US manufacturing contraction not spreading: The ISM non-manufacturing (Aug) overwhelmed expectations at 56.4 vs the 54 exp, which is the strongest reading since April and it appeases concerns that contagion from a contracting manufacturing sector will trickle down into the broader economy. When analyzing the components, orders came very strong at 60.3 up from 54.1, while the business activity reading was also at a hefty 61.5, up from 53.1. On the flip side, the employment index came at its weakest level in more than two years, which coupled with the ISM manufacturing employment index, it suggests the outlook for further steady job creation in line with the average is at risk.
Default optimistic scenario unless Trump messes things up: Lower-level officials from both the US and China are scheduled to continue discussions over the coming weeks on the lead up to the resumption of talks by the big guns in early October. I wouldn’t be surprised if the positivism of the latest developments on trade drag on as it’s unlikely China will revisit the topic during Sept since China is now fully immersed in the preparation of its 70th anniversary of the founding of the People's Republic of China. The lack of further news from here on out, should be, barring another round of harassment by Trump towards China that prompts them to change their minds, the default optimistic scenario that markets will most likely latch on to keep risk bid.
Even the Global Times sounds more upbeat in its tone: Global Times editor Hu Xijin, who’s become a sounding board for the Chinese government, and whose tweets tend to radiate an aura of pessimism, said there's a greater possibility of US-China trade breakthrough. The tweet read: “China and the US announced a new round of trade talks and will work to make substantial progress. Personally I think the US, worn out by the trade war, may no longer hope for crushing China's will. There's more possibility of a breakthrough between the two sides.” The fact that “substantial progress” has been highlighted by the Ministry of Commerce in China makes this meeting especially relevant. There has been chatter that the US may rethink the mid-December tariffs in exchange for more agricultural buys.
No breather in Germany's poor fundamentals: Germany’s July factory orders continue to be in a slump, coming at -2.7% vs -1.4% m/m expected, as manufacturing and factory activity stays weak. The data reinforces that the ECB may have to resort to a bold easing package when they announce its next set of policy settings on September 12th in order to keep the engine of growth in Europe afloat. Remember, the ECB meeting will be followed by the FOMC on the 17th-18th and the BoJ on the 18th and 19th.
The market keeps pricing out no-deal Brexit risk: The Pound continues to be the top performer, emboldened by ‘risk-on’ market and the fading prospects of a no-deal Brexit. Media reports that the necessary legislation that will allow to halt a no-deal Brexit will be completed by this Friday, a round of votes aimed at calling for an early election scheduled for next week, right before Parliament is suspended until October 14th.
The EUR index continues to respect its technical levels near perfection. If you remember from the prior daily notes, I mentioned that the index could face some buy-side pressure as a key horizontal line where an impulsive reaction had been seen in late July. That’s precisely what we saw, with the rebounding effect taking the index up to retest yet another critical technically-rich area to consider sell-side action on the confluence of the baseline and horizontal resistance. The outlook for the next 24h will be dependable in large part to the market’s reaction to the US NFP, although the technicals analysis is not encouraging for the bulls here.
The GBP index has completed a successful rotation to the upside, which essentially enhances the bullish case technically speaking going forward. Any pullback in the index are seen as a potential buying opportunity, with the immediate area of daily support at the breakout point. There is no indication of exhaustion in the pricing of the GBP either, as Thursday’s rise was achieved in the context of high aggregate tick volume and a close at the highs of NY (acceptance).
The USD index has revisited and so far rejected what’s referred to in the real of volume profile analysis as the POC (Point of Control), which is the area on the chart where the highest concentration of volume existed before the breakout of a balance area. The lower shadow rejection candle carries elevated tick volume activity, which is congruent with a location where buyers may have a stronger interest to regroup in order to resume the uptrend, which for now remains with a bullish structure of higher highs and higher lows. Also notice, the breakout of the baseline (13d ema) came on lower volume, which indicates not enough conviction.
The CAD index remains in an overall bullish context after the admission by the BOC of not yet ready to lay the ground to restart an easing campaign, which makes Canada stand out amongst the majority of Central Banks actively immersed in the application of stimulatory policies. The base case for the CAD to strengthen further from here is also underpinned by the ‘risk-on’ environment, which tends to be supportive of high-beta currencies as investors look to increase leveraged positions in higher-yielding currencies (carry trade). Today’s fluctuations in the CAD, however, will be determined for the most part on the outcome of the Canadian jobs number.
The AUD index ascendency has stopped in its tracks where it was expected to, that is, at the macro breakout point of a swing low, now turned key resistance. The technical merit of the level alone argues for some potential pullback, but I doubt it can sustain as the positive mood is likely to see trend-following/momentum strategies to look to pile into longs the AUD. Overall, the technicals for the Aussie are challenging but the context remains conducive of higher levels.
The NZD index is retesting its baseline, which one would argue is a pristine location to consider reinstating shorts in the currency vs G8 FX of one’s choice. The problem here is that the context is just wrong to hope that the NZD will act as sluggish as it did in recent times judging by the firm establishment of risk appetite dynamics, which tend to be a ‘booster’ for AUD, NZD. The index has room to appreciate further, should the baseline be cleared, until the next line of resistance, which can be found around 0.4% above its closing price on Thursday.
The JPY index has been the most punished, alongside the CHF as risk trades perpetuate. The higher tick volume activity on the way down below the baseline is a reminder that this is a market with still enough gas in its tank to find lower ground. The two days of deleveraging away from the JPY into riskier currencies has violated the bullish structure, which suggests there should be rising interest to keep the JPY offered on any rally as the lay of the land stands.
The CHF index, akin to the move down seen in the JPY markets, has been hammered lower as investors find less need to stick with the protective nature of the CHF in their portfolios. Note, the CHF market has limited room to keep declining before faced with a huge level of daily support, which refers to the breakout point (swing high) from late June. I’d be expecting profit-taking in CHF to ensue, but unless the optimism dissipates, I still find any rebound in the CHF to face the prospects of being quite shallow in nature before sellers re-group.
The GBP/AUD checks all the boxes of my model to expect follow-through demand, barring, of course, Brexit news that may distort the technical proceedings. The AUD index should find some sell-side pressure based on the area it reached, while there is further room to appreciate by the GBP if the index is our primary indication. In terms of market structure, we’ve been forming higher highs after a triple bottom though July-Aug, with the separation to play a long position before facing a wall of resistance ample enough. The indicators (fisher transform and CCI agree), with the buy-side participation (seen through tick volume) on the rise. The close of the candle also found equilibrium near the highs by the close of NY, which is another positive element to account for. The price is not overextended in the daily as we are still comfortably within the region between the baseline and the upper 1x ATR and the candle itself is within the ATR limits too. In terms of risk events, we don’t have any major high-impact news, although when trading the Pound, that assertion must be taken has to be taken with a huge bucket of salt at times.
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