Posted on: 20 Nov, 2019
The Canadian Dollar was knocked down in the North American session as BOC Wilkins telegraphs lower rates may be in the horizon. The Oceanic currencies head in the opposite direction, emboldened by positive vibes from a Bloomberg report that the US is still considering rolling back tariffs to China. Find out all the key drivers and some trade setups I am considering in today's report.
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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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The order flow in the FX market continues to shift in favor of EUR longs, as the last 3 days worth of data in the currency indices below demonstrates, while the Swissy, one of the outperformers through the course of last week, has seen its momentum tampered quite abruptly. The Canadian Dollar was the main mover after BOC Senior Deputy Wilkins said “there is still room to maneuver”, which was immediately interpreted as another hint that lower rates may be looming near. The recovery in the Oceanic currencies, with the Aussie shrugging off a clearly dovish RBA minutes, seems to communicate an adjustment to better prospects of the US and China sealing a deal. There have been conflicting reports in this front, with the Global Times outlining clear discrepancies still at play, while Bloomberg keeps a silver lining by reporting that the US is still toying the possibility of a removal in Chinese tariffs as far back as May or even earlier, which would be massive to reinvigorate 'true risk appetite'. Meanwhile, the US Dollar and the Yen, are off to a rocky start this week, under performing against the majority of G8 FX, excluding the Swissy and the Canadian Dollar.
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.
* The Information is gathered after scanning top publications including the FT, WSJ, Reuters, Bloomberg, ForexLive, Institutional Bank Research reports.
CAD hammered as BOC rate cut odds increase: The Canadian Dollar has experienced strong sell-side pressure as the market keeps discounting the prospects of an ‘insurance’ rate cut by the BOC following the admission by BOC Senior Deputy Wilkins that “there is still room to maneuver”. The market, right off the bat, interpreted the remark as more evidence that the Central Bank is laying the ground for an easing cycle. Besides, the strong decline in Oil exacerbated the pain for CAD longs on Tuesday.
Chatter US-China discrepancies still abound: A report from the Global Times notes that “big gaps remain in China-US trade talks", even if no official sources were cited, but rather it’s attributed to people who attended a US-China Entrepreneurs Roundtable. "If the business roundtable was any indication, the trade negotiations still face major obstacles to reach a deal," the report says.
A sliver lining in the US-China trade saga? According to a report by Bloomberg, which carries a more positive spin, the US is still pondering the removal of tariffs as far back as May or even earlier, which if true, would be a major boost for risk sentiment. The discussions now centered around the size and the extension of a possible tariff rollback, with the reference to the preliminary terms set in the deal that failed in May. The article by Bloomberg cites two people familiar with the matter. At the bare minimum, the report notes, a deal would include removing the Sept tariffs and cancelling the planned Dec tariffs.
Trump keeps ambivalent position on China: The most recent headlines on the US-China trade deal conundrum by US President Trump continue rather ambiguous, saying “we will see what happens on China. If there's no deal, I'll raise tariffs higher”, which is the type of commentary the market won’t get reassurance from.
UK polls show Conservatives expand the lead: A new UK election poll showed the Conservatives continue to extend the lead vs the Labour party. The poll was commissioned by Kantar and showed Conservatives at 45% and Labour at 27%. What matters though is that the lead of the Conservatives in this series of Kantar poll has now expanded by 8 points, which is a major leap. Despite the positive news, the Sterling acted counter-intuitively by selling off and pairing some of the recent gains.
The calendar remains light: By scanning through today’s calendar, the only event of note comes in the form of the Canadian CPI m/m. Looking at Tuesday’s Canadian data, manufacturing sales came negative at -0.2% even if not as bad as anticipated, while Canada October Teranet house price index popped up to +1.0% vs +0.7% y/y prior.
US housing data off to a good start this month: The US building permits for October came at 1461K vs 1385K estimate. Meanwhile, housing starts stood at 1314K versus 1320K estimate. The next data point that the market will be fixated on includes Thursday’s existing home sales which accounts for about 90% of the US home sales released. So far, the data shows a solid trend in the housing data.
Fed's Williams sticks to the script: The Fed member, thought to be alongside Powell and Clarida, one of the most influencer policy-makers at the Fed, spoke on Tuesday, failing to reveal new clues. Williams said they are watching more for some of the downsides to the outlook, reinforcing the notion that near term, the Fed is sidelined by noting that “the stance of monetary policy seems appropriate”, adding that “in coming months, the Fed has to make sure it is not overreacting to individual data.”
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I keep my short-side exposure on the GBP/USD after Monday’s mark-up in price reached my entry level of 1.2980, where I was expecting the price to really struggle. I’ve now moved my position to break even and will be nimble to take profits circa 1.29 as I am well aware that this is a trade that is clearly counter-trend, so I will be mindful of that by not overplaying my luck. The rationale that made me come to that decision has been synthesised below:
Another market I am looking to gain short exposure if it can re-tests the 74.50 is the AUD/JPY as I really like the market structure in the H4 chart, which happens to be in alignment with the price action story in higher timeframes. Note, this report will only elaborate on the entry rationale, which is only one component. The management of the trade is even more critical.
The NZD/USD is a great example of what a level of confluence is like, which as the readership knows, these are the areas I am constantly looking to identify to gain exposure if the context agrees. Below is the deconstruction of my thoughts that led me to place this short limit order.
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