Macro Risk Removals Clears Up Forex Puzzle

The developments from last week cannot be underestimated as the fact that the market can finally look beyond Phase One in the US-China trade deal, not to mention how much of a relief is to think that we can soon look past the withdrawal agreement phase in Brexit, has major consequences for FX dynamics. Find out where we stand by reading today's report.

The Daily Edge is authored by Ivan Delgado, 10y Forex Trader veteran & Market Insights Commentator at Global Prime. Feel free to follow Ivan on Twitter & Youtube weekly show. You can also subscribe to the mailing list to receive Ivan’s Daily wrap. The purpose of this content is to provide an assessment of the conditions, taking an in-depth look of market dynamics - fundamentals and technicals - determine daily biases and assist one’s trading decisions.

Let’s get started…

Quick Take

The main takeaway of last week's eventful trading activity, as we head into the final adjustment of portfolios before the year-end, is the settling of a new reality. Granted, in spite of all the wax and wane, we are weeks away from welcoming a new decade with the two most important macro risks of 2019 (Brexit, US-China trade war) to be stared through the rear mirror. It doesn’t mean this 2019 staple for news-watchers can be abandoned, far from it, as the market will remain sensitive to follow up headlines as Brexit and trade headlines will swiftly transition, both in tandem, into phase two. However, it certainly provides breathing room to divert the focus more decisively into central bank monetary policy divergences, liquidity actions, and in what looks likely to be an environment that unless major shockers, is setting the stage to be dominated by lower vol conditions. If this view holds true, and as the overall flows in the G8 FX indices indicate, we may see the perky Pound, the revitalized Aussie and the flying Kiwi continue to be firmly anchored based on the improved 'risk on' sentiment. I’d personally add the Canadian Dollar into this basket as another potential currency to take into account for a shift in order flow to a more positive bias. Should the groovy vibes in risk dynamics extend into 2020, watch for the Yen, Swissy and the US Dollar to be the candidates to suffer a continuation of the steadiest sell-side flows. When it comes to the Euro, it won't be an easy ride, but if more evidence gathers that Germany growth slowdown is bottoming out, I wouldn’t be surprised if the Euro keeps showing a relatively benign outlook, all within a context of restrains in performance that comes with a negative rates' currency.

The indices show the performance of a particular currency vs G8 FX. An educational 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, Institutional Bank Research reports.

US-China phase one deal done: The US and China announced that the first phase of a trade deal was agreed, with the Chinese counterparts noting that the first phase of trade negotiations achieved major progress. The agreement, only on text, with a signature ceremony set for early Jan, has resulted in the US not going ahead with the Dec 15 tariffs, with China also canceling tariffs scheduled for Sunday. China has agreed to ramp up the purchases of wheat, rice and corn within quotas, with both sides talking now about timing, place and details of the signing deal.

The trade deal contains nine chapters: According to Chinese moutth-piece the Global Times, “the text includes nine chapters, including #IPR, technology transfer, food and agriculture, financial services, exchange rate and transparency, expanding trade, bilateral evaluation, dispute settlement and final agreement.”

Trump boasts how great a trade deal this is: US President Trump tweeted: “We have agreed to a very large Phase One Deal with China. They have agreed to many structural changes and massive purchases of Agricultural Product, Energy, and Manufactured Goods, plus much more. The 25% Tariffs will remain as is, with 7 1/2% put on much of the remainder. The Penalty Tariffs set for December 15th will not be charged because of the fact that we made the deal. We will begin negotiations on the Phase Two Deal immediately, rather than waiting until after the 2020 Election. This is an amazing deal for all.”

Market sells the US-China trade deal news: It must be said that as part of the Phase One trade deal, the market sold the fact after being busy buying the rumor of the leadup to the actual announcement. The main detail that led to a disappointment is the fact that the roll back in tariffs by the US of 50% will only apply to a smaller quantity than thought worth $112B of goods. As a result, we saw a sell-off in the Australian Dollar even if the market structure looks solid, while on the flip side, the USD and the Yen were favored as the market readjusted the pricing of the trade deal outcome.

Two key macro risks of 2019 have now been removed: In the grand scheme of things, the short-term removal of the two most important risks for financial markets this year, that is, a hard Brexit and an escalation in the US-China trade war, means the path gets cleared for markets to return to cleaner dynamics, not constantly distorted by positioning adjustments based on macro tail risks but rather a recalibration back into monetary policy divergences and the narrative around keeping ample liquidity in the system.

Fed heavyweights have nothing new to add: Williams and Clarida, two of the heavy-weights at the Fed, made remarks about the US economy, with the net result uneventful as both policy-makers stuck to the script. Williams said the US economy is on a strong footing and good growth, while Clarida detailed that he sees no signs of the US consumer pulling back, adding that on aggregate the US consumer is in great shape, and that the Fed's baseline for the outlook in 2020 is 'more of the same'.

US retail sales data underwhelms, market shrugs it off: The US November advance retail sales came at +0.2% vs +0.5% expected, with the important control group component also disappointing at +0.1% vs +0.3% expected. The data runs the risk of resulting in a downgrade in the next US GDP release even if the reaction by the US Dollar was counter-intuitive last Friday as the currency appreciated, driven by the trade deal headlines.

Manufacturing data abounds today: The readings of manufacturing/services PMIs out of Europe, the UK and the US, will continue to help us shape up the narratives about the state of the economic conditions in these regions. Of special interest will be the German data sets following the tentative evidence, outlined by the last ECB meeting, that the growth slowdown in the country and in the continent overall, may be in the process of bottoming out.

If you found this fundamental summary helpful, just click here to share it!

Recent Economic Indicators & Events Ahead

Source: Forexfactory

Professional Insights Into FX Charts

The indices show the performance of a particular currency vs G8 FX. An educational video on how to interpret these indices can be found in the Global Prime's Research section.

If you found the content in this section valuable, give us a share by just clicking here!

The EUR index has established a well defined range in the daily as we approach year-end. On the downside, buyers are still showing interest to intervene with conviction around multi-year lows, with the currency finding more macro evidence to get support, predicated on the basis of a slightly more constructive ECB on growth and the removal of hard Brexit fears. If markets continue to suppress volatility, which promotes carry trades, the EUR may continue to find grateful sellers on rebounds though, as the negative swap carried is still very significant.

The GBP index saw significant profit-taking on the back of the majority achieved by the Conservatives as the market looks beyond the Brexit withdrawal process out of Europe. After Friday’s spike, which is one of the most aggressive one-day rallies in the currency this year, there is no reason to believe the outlook will shift anytime soon to anything other than strategic longs in the GBP, although pragmatism and nimbleness is required to engage at reasonably priced levels rather than blinding reinstating longs at too rich levels. Awaiting for some measure of retracement intraday before adding longs as part of one’s strategy is definitely wise. Don’t chase this market higher unless you know what you are doing as part of a short-term strategy.

The USD index has erased most of its Friday losses, even if such abrupt reversal does nothing little to revert the well-established bearish trend, fueled by a FOMC keeping the status quo, the successful story of the Conservatives in the UK election, and a very weak seasonal trend in Dec. It would be reasonable that the index, technically speaking, sets its sight on the next target at the double bottom printed back in July this year (~0.6% below).

The CAD index is on the cusp to a shift in order flow that could take the currency to much higher levels as my view of an exhaustion on the bearish cycle hints a shift in market structure. My observations about a lesser commitment by sellers judging by the magnitude of each downside extension remains a valid case, and the printing of a sizeable bullish pin bar candle off the lows last Friday, if anything, only reinforces this view. My outlook on the CAD is a tentatively bullish one that will follow with keen interest, even if always ready to scratch this stance in a heartbeat.

The JPY index shows a clear bearish trend still playing out. Based on the location in the chart, I wouldn’t be expecting a reversal of the bias around these levels, in other words, I still believe selling the currency on rallies is a sensible strategy. The big bottom side wick on Friday helps to re-adjust the oversold conditions to eventually see follow up supply returning. As stated in the previous report, long positions in the JPY remain terribly dangerous as the macro environment continues to improve on the removal of hard Brexit and US-China trade war escalation.

The AUD index has shown renewed fortitude with the break of the previous swing high a precursor of what I’d expect to be the onset of a shift to a more constructive price action for the interest of buyers going forward. I continue to see this price action as a communication that the market will be actively seeking out further buying opportunities in the Aussie, hence why a stance of buying the AUD at fair or discounted prices seems a sensible move. The fact that the market came lower early in the week, tapped into liquidity, only to see the mark-up phase in a very explosive fashion, tells me this has the footprint of smart money aiming for a shift in trend.

The NZD index remains on a solid uptrend as the higher highs and higher lows clearly depict. It won’t be easy, barring any fundamental shocker in New Zealand, to revert this trend as the currency is now further anchored by the US-China trade deal. The only view I continue to support is to retain a long-sided bias outright. The Kiwi continues to offer one of the cleanest trends as the overall flows in G8 FX have been steadily seeking out longs.

The CHF index saw fresh multi-month lows after a dovish SNB on Thursday, only to see strong buy-side pressure, in a move that continues to reinforce the notion that the market certainty has appetite to keep buying the currency every time it gets overextended. The failure to elongate the price structure beyond each bearish breaking point is a pattern that keeps on giving for those patient enough to await for oversold conditions in CHF as a precondition before engagement. The Swissy, very much like the Euro, remains quite weak, but the slow-paced decline at a macro level is far from encouraging to keep a permanent bearish view.

Important Footnotes

  • Cycles: Markets evolve in cycles followed by a period of distribution and/or accumulation. To understand the principles applied in the assessment of cycles, refer to the tutorial How To Read Market Structures In Forex
  • 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.
  • 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
Read the next post
Img Footer Open a demo account Open a live account
Open a demo account
Open a live account

Contact us

Feel free to get in touch with us to find out more about our service.