Posted on: 20 Feb, 2019
The USD continues to trade on the back foot as reports emerge that US trade negotiator aim to target a more stable Yuan as part of the comprehensive trade deal being negotiated. A firmer Yuan is a risk positive event for the likes of EM (emerging markets) and beta currencies (AUD).
To our Market Insights
The Daily Edge is authored by Ivan Delgado, Head of Market Research at Global Prime. The purpose of this content is to provide an assessment of the market conditions. The report takes an in-depth look of market dynamics, factoring in fundamentals, technicals, inter-market, futures and options, in order to determine daily biases and assist one’s decisions on a regular basis. Feel free to follow Ivan on Twitter & Youtube.
A familiar theme continues to pan out in financial markets. By looking at the charts, and represented in the table above, we can clearly see how the environment remains aggressively USD negative. The next wave of selling has finally produced an inflection point in the macro flows as depicted by the downward slope in the 125-HMA (5-DMA). From a market structure standpoint, the selling in the DXY has opened up further downside after achieving a successful rotation lower.
The USD weakness is also manifested via lower US yields and a much higher Gold, closing at nearly $1,340.00. As part of this excess of USD supply, US equities keep pushing higher, which is obviously helping the likes of the beta currencies such as the Aussie, the Kiwi, the Loonie. As part of this context, even the Euro or the Pound have also made significant gains following the strength in the Chinese Yuan.
The outlook for the Euro in the next 24h is unambiguously bullish. The dashboard above represents the positive outlook, with both technicals and intermarket flows converging to expect further demand imbalances. What’s also important is to acknowledge that in the scenario that the EUR/USD trend really takes off, we are just coming out of a macro trend as per the prolonged downward slope of the 5-DMA (125-HMA), which means that from a risk-reward perspective, this could be a potentially attractive period to build long positions in order to capitalize on the broad-based USD weakness. The chart, from a technical perspective, is a thing of beauty. We’ve validated a new swing high by finding acceptance above 1.1330, which means we can now draw an ascending trendline. Besides, most of the volume transacted in the last 24 (POC) has been trapped behind the close. Talking about the close, the currency pair has finished at the very high, which speaks volumes of the lack of supply. Allow me to also remark that the 125-HMA slope has finally turned north, while the German vs US yield spread, which has been playing a greater role in the carving of the bottom, did spike yesterday. Overall, this is a market that has all the credence for buy-side strategies to do well.
The outlook for the Pound looks quite bright. The move in the Pound has been by far the most aggressive in the last 24h, which puts us in a difficult position to find good opportunities to engage in buy-side action unless your strategy is based upon momentum or some type of scalping that gets you in and out of the market fairly quickly. The reason I am saying that is because we are quite overstretched by any measure you deploy. We’ve run over 300 pips to the upside in just 3 days, so with such an average of 100p/day, it’s difficult to find value. The technicals and intermaket flows are definitely in alignment for further upside, but I personally think that some air must first come out of the GBP balloon before considering to buy and hold strategies. Anything can happen, and the combination of positive Brexit headlines alongside the Yuan strength story dragging on can further expand the momentum, but when all things considered, this market needs some type of correction before the risk-reward becomes relatively attractive. Just my 2 cents.
If you are looking to be a buyer on this market, extreme caution is be required, as the broad-based USD weakness has resulted in both the DXY and long-dated US yields trending lower from both a micro and macro flows standpoint. In the vast majority of cases, unless aggressive buy-side action is seen in equities to offset this negative input, any USD/JPY recovery should be met with grateful sellers at what would be perceived as discounted prices. If the scenario doesn’t play out, note that the renewed dovish commitment by BOJ Kuroda may be an extra layer of short-term weakness for the Yen one must account for. The greater the base money in an economy via the expansion of a Central Bank’s balance sheet, the more detrimental for the currency on excessive supply in circulation. That said, the Yen is still very much a risk-on/risk-off & DXY/US yields story, so as the picture stands, don’t hold your breath for the upside to be as exploitable as other G10 FX vs USD.
If you revisit yesterday’s dashboard, you’d notice the short-term flows were in complete alignment for the Aussie to be a buy on weakness market. Fast forward to today’s price action, and we are still presented with an even improved picture as technicals and intermarket flows stay in agreement. The dashboard above is an absolute sea of green, and while anything can happen intraday that may alter this view, the way I can only go about these analyses is to take the 5pm NY close as reference, and the chart is giving us all types of hints that the path of least resistance should be higher. The validation of the new leg higher in prices allows us to draw an ascending trendline, which should serve us well as a visual representation of the constructive outlook for this market. Judging by the close in highly correlated instruments such as the Yuan or equities, don’t be surprised if strategies look to exploit this market via shallow pullbacks. A retest of the 25-HMA as guide would be an ideal starting point, with other discretionary elements based on one’s own preferences to be applied before entry.
Analogous to what we are seeing in the Aussie market, although not as intense the imbalance, the Canadian Dollar is also flying higher against a battered US Dollar. Based on technicals and intermarket flows, there is only one way I’d personally be playing this market if the idea is to get the most bang for one’s buck, and that’s to the downside. Look to short from areas that make technical sense to you and if you are looking to engage in buy-side action with you trade duration short-term, be aware that you’d be swimming upstream against strong currents as Oil continues to fly higher and the DXY is dethroned from the best-performing currency just days ago to outright selling. On the latter, that’s a testament of how short-term flow driven these markets are, the USD can go through a stellar 2-week bull run only to revert and sell-off quite aggressively for days.
If there is a market that expresses like no other the depressed state of affairs in the performance of the USD, look no further, Gold is the answer. The yellow metal has been catapulted to fresh yearly highs, capitalizing like no other asset class the weakness in the USD. Even yesterday I mentioned that the run higher on Monday felt overstretched based on the lagging DXY/US 2yr yields. Notwithstanding we find ourselves with a much more elevated gold valuation, the impulsive nature of the bear run in the US yields alongside the DXY has managed to build up an awful lot of momentum that is dangerous to fight. Testament of that is the extension of gains in Asia as I type. This market is a buy on weakness as the intermarket flows stand but as in the case of the Pound, we should be aware that the expansion in prices is not likely to be sustainable as the demand is likely to dry up under normal circumstances. If you are an intraday momentum trader, I can understand why you’d be inclined to potentially exploit this market at every opportunity you spot.
Soon you will be able to subscribe to receive ‘the daily edge’. In the meantime, feel free to follow Ivan on Twitter.
Feel free to get in touch with us to find out more about our service.