As we head into Tuesday's busy European session, the lead to be taken from Asia is one where caution is warranted, not only because of the miss in the Chinese PMIs (both official and Caixin), which has led to some spells of 'risk off' and a timid return of JPY buying...
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The Daily Edge is authored by Ivan Delgado, Market Insights Commentator 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 in order to determine daily biases and assist one’s decisions on a regular basis. Feel free to follow Ivan on Twitter & Youtube.
As we head into Tuesday's busy European session, the lead to be taken from Asia is one where caution is warranted, not only because of the miss in the Chinese PMIs (both official and Caixin), which has led to some spells of 'risk off' and a timid return of JPY buying but also due to the upcoming Fed's SOMA day. What this means is that as part of the Fed's QT program, April 30th marks the day when the Central Bank will shrink USD liquidity by 28.1bn in its balance sheet. Whenever liquidity is withdrawn via these redemptions, there is a pattern of US Dollar strength, which more often than not, is accompanied by a greater apprehension towards risk-seeking strategies. The miss on revenue by Google does not help the case either, even if by the close of business in NY the conditions look rosier than the picture I am painting. The Aussie is the worst performer after a rapid decline on the back of the underwhelming Chinese data, while the Euro, Pound, and Yen, in this order, are performing with a firmer footing. The Canadian and the New Zealand Dollar, as part of the commodity bloc, were dragged down by the negative news out of China. Big day for CAD traders too as the Canadian GDP is due ahead of BOC Poloz Speech.
Narratives In Financial Markets
The USD continues to retreat into month-end, even if the macro bullish trend remains firmly bullish after last week’s stellar performance. According to Citi's month-end FX hedge rebalancing model, moderate selling of USD on Tuesday, 30th April, is expected, “predominantly driven by equity investor rebalancing needs, which is is due to the positive US equity market performance leaving foreign investors under hedged on their equity assets.”
USD liquidity will shrink by 28.1bn on April 30 with the same net impact on liquidity as part of the Fed’s SOMA redemptions, according to Nordea. Find the information in the following link table 2. SOMA is the liquidity shrinkage in the Fed’s balance sheet. By analyzing the maturity profile of the Fed’s bond portfolio (the SOMA portfolio), one can identify when these negative liquidity impacts take place. These redemptions tend to coincide with US Dollar strength.
US consumer confidence keeps underwhelming after the latest US March PCE core release, which came at +1.6%y/y vs +1.7% exp y/y. The softness in the price of goods and services purchased by consumers reinforces the notion of low price pressures so deeply established all over the world, with the US no exception. Last Friday’s US GDP showed a low deflator too, so essentially we haven’t learnt anything new. Additionally, as part of yesterday’s US data, consumer income was also soft but personal spending saw a tick higher than exp.
Google’s advertising business missed expectations in Q1, denting revenues and eroding over 6% from its parent company Alphabet’s share price in after trading. Raoul Pal, Founder at Realvision, makes a very legit point about the late state cycle in the US economic growth -> "Google is a media company almost wholly reliant on advertising. Advertising is massively leveraged to GDP. Advertising is slowing fast. Google is a cyclical, not a tech secular play."
The USD faces a multitude of tests to prove its resilience this week, with the Fed’s monetary policy meeting on Wednesday (FOMC), including a Powell presser, followed by US ISM as one of the market’s preferred barometer of the economic health and US payrolls on Friday.
The latest set of inflation data makes this week’s FOMC meeting an interesting as the Fed’s mandate on its inflation target is clearly falling behind the curve as is the RoW. The most prudent course of action is likely to be a stance of data-dependency through the summer, taking aim at not miscommunicating any new policy signals. The market pricing remains consistent with the view that the next move will be a rate cut towards year-end.
US and China negotiators meet again in Beijing to resume trade talks before the Chinese travel back to Washington next week. US Treasury Secretary Mnuchin told the press that he hopes a deal can be finalized after next week’s round of talks. Mnuchin sounded optimistic, saying that the enforcement mechanism is nearly done. Ultimately, it will be down to Trump to decide if enough progress has been made to start preparations for a signing ceremony with China’s Xi.
According to the Guardian Political Correspondent, as part of the Brexit saga, the talks between members of the UK government, including PM May, and Labour, have taken a positive turn. It’s been reported that the tone is markedly different with clear grounds to continue talking over the next few days and weeks, even if still far from a breakthrough.
China’s Manufacturing PMI, both the official government number and the Caixin series, came below market expectations, with the Aussie suffering the consequences as a China proxy. The official PMI retreated to 50.1 vs 50.5 exp while the Caixin came at 50.2 vs 50.8 exp. From a policy perspective, it suggests a period of cooling down in Q2 as activities of PMI likely peaked in March, that a recovery is underway much slower in impetus, and that further targeted easing in certain areas of the economy is still necessary even if less intensive.
A very busy day in the European calendar should see a pick up in EUR flows. The French, Spanish and the Eurozone flash GDP reports, alongside Germany’s preliminary CPI release for the month of March, are the top tier events traders will pay the most attention.
Recent Economic Indicators & Events Ahead
RORO (Risk On, Risk Off Conditions)
There has been a pick up in risk appetite conditions as the dual rise in US stocks and bond yields clearly reflects. The decline in the DXY and Yen index was another sign that we were supposed to be headed into Tuesday with an open mind when it comes to risk. However, the Chinese PMIs have clouded the landscape. Besides, a huge dose of prudence is warranted because even if the micro slopes (25HMA) have turned ‘risk on’ in the last 24h, in 3 out of the 4 primary markets monitored to evaluate risk dynamics (S&P 500 the exception), the macro slopes (125HMA) are still pointing towards the recovery in the long maturity bond yields, DXY, JPY as corrective in nature. Moreover, I must reiterate that it’s a big SOMA day on Tuesday, which essentially means that USD liquidity will be removed from the market, with the net daily impact in most cases positive for the currency. Whenever that’s the case, and if recent market dynamics prevail, it tends to increase the sense of risk aversion, keeping commodity-linked currencies subdued.
A lesson from last week’s ebbs and flows should be that one cannot be overly dependant on just equity movements alone to determine the direction of risk-sensitive currencies such as the Yen but rather always try to find compelling evidence by syncing up the direction of equities and bond yields, as was the case on Monday, where a ‘true risk on’ environment evolved as a function of the increases in the value of equities, bond yields, coupled with a USD on the backfoot. Always remember, these days we can separate currencies in 3 different packs, the risk-sensitive group (USD, JPY), commodity-linked (AUD, CAD, NZD), and the European block (EUR, GBP, CHF). The influx of activity in a particular currency will, therefore, be determined by RORO conditions, episodes of liquidity withdrawals, driven by fundamentally-motivated events, that’s why it’s always emphasized to treat the market as a mechanism of autoregulation based on fundamentals, Intermarket, and technicals.
Latest Key Technical Developments In FX Majors
Interested about downloading today's key levels in the major pairs? Find the MT4 templates, updated daily, by clicking the link.
EUR/USD: Mother Of All Confluences Reached
"While anything can happen, if you are looking for a pristine area where a compelling amount of technical confluence can be found, the area between 1.1185 up to 1.12 offers an absurd amount of technical confluence in the form of the 50% fib retrac of the last leg lower, 100% proj target hit through the 1.1166 breakout, horizontal resistance levels, 3rd touch of a descending trendline, and to top it off, USD liquidity will be pulled from the market as part of the Fed's SOMA day. Note, the impulsive correction has created a new cycle up in the lower timeframes, so it’s going to take potentially a few attempts before the current buyside tide can turn in favor of sellers again. That's why we usually see M or W formation before a change of behavior that aims to change the current motion/dynamics. The European data today will play an important role to dictate the next directional move, one that if it pans out higher, should be met by sellers ready to engage in what looks like an incomplete bearish cycle, having run only 2 legs down in what’s usually a move that evolves in a 3 legs down before a distribution/accumulation."
GBP/USD: Consolidation Into Descending Trendline
The inability of the Sterling to make further headway above the 1.2945 resistance area has led to a double rejection, with a subsequent retracement to retest 1.2910-15 support, creating a tight range. A resolution beyond the edges of the box is needed to see the next directional bias play out, with the well-defined target at 1.2960-65 ahead of 1.2975-80 (ADR limit, 100% proj target, horizontal resistance). On the downside, 1.2895-1.29 is the next area of liquidity that ma be exposed ahead of 1.2875-80 (ADR limit, 100% proj target, horizontal support). A break above 1.2945 resistance would be technically damaging as it will violate a descending trendline coming from April 12 high.
USD/JPY: Range Established Within Bearish Structure
The selloff above 112.00 achieved a change of dynamics in the exchange rate that should still be considered the dominant bias even if the lack of follow-through selling in the last 2 days allows us now to draw a range with the extremes found at 111.90 and 111.45 with 111.65-70 the midpoint. The release of the disappointing Chinese PMI in Asia has led to an influx of the JPY bids, reverting the ‘risk on’ profile slightly to the downside, hence potentially exposing the next area of support. Remember, activity around the JPY is much thinner than usual, especially during the Asian session, due to the week-long Golden week in Japan.
AUD/USD: Knocked Down By Weak China PMI
The AUD was marked down immediately after a poor set of Chinese PMI numbers, taking the rate towards its next area of support at the 0.7035, which also aligns with an intraday 100% proj target. If the Aussie gains further momentum from here (be warned the extension looks overstretched), the next destination upon price action maturity looks set to be 0.7020-25, where an area of horizontal support meets the ADR limit for the day. Ultimately, the target, if price accepts below 0.7035, appears to be a retest of 0.7010, which would coincide with the broader 100% proj target.
Risk model: The fact that financial markets have become so intertwined and dynamic makes it essential to stay constantly in tune with market conditions and adapt to new environments. This prop model will assist you to gauge the context that you are trading so that you can significantly reduce the downside risks. To understand the principles applied in the assessment of this model, refer to the tutorial How to Unpack Risk Sentiment Profiles
Cycles: Markets evolve in cycles followed by a period of distribution and/or accumulation. The weekly cycles are highlighted in red, blue refers to the daily, while the black lines represent the hourly cycles. To understand the principles applied in the assessment of cycles, refer to the tutorial How To Read Market Structures In Forex
POC: It refers to the point of control. It represents the areas of most interest by trading volume and should act as walls of bids/offers that may result in price reversals. The volume profile analysis tracks trading activity over a specified time period at specified price levels. The study reveals the constant evolution of the market auction process. If you wish to find out more about the importance of the POC, refer to the tutorial How to Read Volume Profile Structures
Tick Volume: Price updates activity provides great insights into the actual buy or sell-side commitment to be engaged into a specific directional movement. Studies validate that price updates (tick volume) are highly correlated to actual traded volume, with the correlation being very high, when looking at hourly data. If you wish to find out more about the importance tick volume, refer to the tutorial on Why Is Tick Volume Important To Monitor?
Horizontal 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, the horizontal lines of support and resistance are universal concepts used by the majority of market participants. It, therefore, makes the areas the most widely followed and relevant to monitor. The Ultimate Guide To Identify Areas Of High Interest In Any Market
Trendlines: Besides the horizontal lines, trendlines are helpful as a visual representation of the trend. The trendlines are drawn respecting a series of rules that determine the validation of a new cycle being created. Therefore, these trendline drawn in the chart hinge to a certain interpretation of market structures.
Correlations: Each forex pair has a series of highly correlated assets to assess valuations. This type of study is called inter-market analysis and it involves scoping out anomalies in the ever-evolving global interconnectivity between equities, bonds, currencies, and commodities. If you would like to understand more about this concept, refer to the tutorial How Divergence In Correlated Assets Can Help You Add An Edge.
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.
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