Bearish Reversal In the US Dollar, More Weakness To Come?

The EUR index shows the potential to be targeting higher pools of liquidity after the abrupt reversal on Friday, while the USD index is at risk of an extension back down as the price poked unsuccessfully into an area rich in liquidity at an index level. Find out the most relevant thematic in Forex and the outlook in G8 FX 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.

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Quick Take

The month of November can now be stared from the rare mirror. It was a month that saw the New Zealand, the Pound and the US Dollar as the indisputable outperformers, with the latter displaying a steady bid tone since half way through the month, while the former saw more volatile moves, especially the Pound as poll sentiment ruled. The clear underperformer by the end of a rather lethargic month in the overall G8 FX volatility picture was the Aussie as disappointing domestic data combined with a more dovish stance by the RBA in its minutes + RBA Lowe speech did the rest to keep the sell-side pressure unabated. The risk-off associated currencies (Yen, Swissy) did poorly in a month that saw fresh record highs printed in the three benchmark indices in the US (Nasdaq, Dow, S&P 500) as the market sees the US-China trade sage as a glass half full. Lastly, sandwiched in the middle of the performance chart for Nov we find the Euro and the Canadian Dollar, even if my technical analysis suggests the fortune of the EUR might look brighter as we head int December. Find out more about my outlook by checking the chart insights section. 

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.

Chinese data upbeat: China’s weekend official PMIs for Nov were a pleasant surprise, lifting the AUD and NZD at the open of trading in Asia. The manufacturing PMI showed a reading of 50.2, which represents the first expansion since April this year, while the services (non-manufacturing) stood at 54.5 vs 53.1 expected, marking the highest since March this year. The important private survey (Caixin / Markit) PMI on Monday also came upbeat at 51.8 vs 51.5 expected, marking the fouth consecutive reading above 50

Oil under the cosh: Oil suffered a major fall of over 5% on the back of Russia's Novak reluctance to make a decision regarding the OPEC+ supply cuts extension until April, which means expectations to announce an extension when they meet this week have been upset now. Media is also reporting that Saudi Arabia would not be in a position to commit either to reduce its own production in an effort to offset the breach of agreed thresholds above-quota production levels from others in the group.

Canada's Q3 GDP solidifies BOC rate on hold: Last Friday’s Canada Q3 GDP came bang-on expectations at +1.3%, which should reinforce the notion that this week’s BOC policy meeting will not offer any major surprises in the way of an unexpected rate cut. The market has been walking back a rate cut odd this Dec.

A bullish story line in the Sterling: GBP has opened gaping down a new week as weekend polls point at a narrowing lead by the Conservative. In four out of the five publicly available polls, the Labour has gained marginal ground, even if the price action in the Sterling is clearly telling us, alongside last week’s UK Gov poll, that the core view remains this is an election with a clear risk of Labour obtaining a majority. By following the trend in GBP, the market is telling us the real verdict so far.

The Kiwi remains on fire on positive local news: NZD, on the contrary, has gaped up after interbank bids overwhelmed temporarily following news that NZ Finance Minister Robertson signals “significant” fiscal package. The Finance Minister flagged extra spending in infrastructure in the short to medium term as part of his speech to the Labour Party's annual conference in Whanganui. "We are currently finalising the specific projects that the package will fund but I can tell you this - it will be significant."

Forex back to business as usual post Thanksgiving: The liquidity machinery is set to return to normal ‘Monday’ levels following the rather subdued activity seen over the last 48h due to a long weekend in the US markets due to Thanksgiving. Volatility was nonetheless overserved in the Greenback and Euro market to end the month, with the former hitting a six-week high at an index level before sellers stepped in. Overall, November was a solid performance month for the interest of those long the USD.

Merkel's coalition government in shaky ground: In Germany, Merkel’s Coalition party is under threat as the newly elected SPD leaders are pondering to no longer support the coalition. Both, Norbert Walter-Borjans and lawmaker Saskia Esken, the new party leaders, are known to be critics of the government’s policies. A position that was once again reflected in the victory speech, after Walter-Borjans asked Merkel that it was time to review the government’s balanced-budget policy stance. A vote will be cast next weekend to decide if the SDP remains in government as part of their annual convention.

Key events up next: There are a few events to highlight early in the week, including the Caixin manufacturing PMI in Asian this Monday (released), followed by final EZ PMI readings, a testimony by the new ECB President Lagarge in the European Parliament, and to top it off, we have the US ISM Manuf PMI, expected to still come at a recessionary reading sub 50.00. On Tuesday, the RBA monetary policy decision will be the event set to inject the most volatility, in the case to the Aussie.

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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.

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The EUR index shows the potential to be targeting higher pools of liquidity after the abrupt reversal on Friday. There are a few bullish components allowing to sustain this view. Firstly, the price action itself (bullish outside day) engulfing the last weekly range. Next, the aggregated tick volume on the latest swing low portrays a display of poor commitment by sellers. Also note, the liquidity available at the bottom side was grabbed through the second week of Nov - no longer there - combined with a 100% measured move, an area where a trend reversal may play out.

The GBP index remains in bullish price delivery dynamics with the daily structure backing up this premise, as is the fact that the latest swing low found equilibrium at the 50% retracement, which validates the notion of a market symmetries for an eventual follow up continuation. The two small body candles in the last two days also hints a pick up in vol come Mon/Tues. If the bullish scenario plays out, I am looking at a leg in the tune of 1.3-1.4%.

The USD index is at risk of a reversal back down as the price poked unsuccessfully into an area rich in liquidity where buy stops in USD pairs would have been placed before institutional activity at an order block in a yellow rectangle was tested and sell pressure kicked in. Notice the rejection occurs at the 50% equilibrium area from the last swing low extension, which makes this an ideal area to get a fresh sell-side campaign in the USD underway. Also note, the grinding upward trajectory over the last week was on tapering buying volume (bearish sign).

The CAD index is faced with bearish prospects from an order flow standpoint as the origin of a supply area is now being worked out. I am expecting this bracketed imbalance area to eventually result in the price taken back down to breach the double bottom, which will provide the liquidity pool necessary for the smart money to find enough counterparties to close shorts. Besides, the transition from lows into the supply zone has come on a tapering of volume too (bearish). Remember, we will have the BOC policy decision acting as a price shaker on Wed.

The NZD index shows that its path of least resistance is clearly to the upside with room for another 0.5% appreciation until a level of confluence will act as an impending technical roadblock to most likely deprive buyers from further upside extensions. Until this topside point of interest comes into contact, the rhythmic traction of this market screams buy on dips.

The AUD index is lacking the technical credence to turn bullish even if the sentiment has turned more constructive following the positive news out of China. The index is on the lower end of its broad daily range with liquidity made available to the downside as per the double bottom in Oct. The next directional bias will be set by the RBA, which could act as an excuse to grab the downside liquidity before shorts start a distribution period by closing shorts.

The JPY index is on the brink of breaking through the bottom of its range where plenty of stops in JPY-related crosses are likely to be resting. If enough momentum is found, my projection is for the new leg down to mature once it reaches an extension of about -1% from the breaking point, a level that would align perfectly with the double bottom from May this year.

The CHF index keeps marching lower with speculators most likely to target the liquidity that resides beyond the area of horizontal support outlined in yellow. The index has been selling for more than 2 weeks in a row with little to no signs of life, hence why at this stage I wouldn’t be surprised that sellers keep engaging until the area of support where a re-assessment will occur.

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
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