Cracks In Trade Rhetoric Sinks Risk Appetite

Markets are rapidly losing any sort of hope that the US and China will make much progress in this week’s trade talks. The preponderance of evidence via the non-cooperative headlines, ratified this time by convincing price action in key risk assets as stocks in the US fall sharply and global yield also suffer the unnerving outlook, does imply that the market sees slim chances of a truce agreed.

The article is authored by Ivan Delgado, Market Insights Commentator at Global Prime. This content aims to provide an insightful look into topics of interest for traders. Feel free to follow Ivan on Twitter & Youtube. Make sure you join our discord room if you'd like to interact with Ivan and other like-minded traders. You can also subscribe to the mailing list to receive Ivan’s Daily wrap. Also, find out why Global Prime is the highest-rated broker at Forex Peace Army.

Quick Take

As a large Chinese trade delegation readies to catch a plane en-route to Washington, the US administration is not setting the stage for the most optimal collaborative environment, a view that this time was unquestionably vindicated by the risk averse flows hitting stocks and bond yields. This demoralized outlook ahead of the trade talks took its toll on those keeping short-side exposure on funding currencies the likes of the JPY or CHF, this time both enjoying rampant demand in tandem. On the flip side, the Sterling was absolutely annihilated in early European hours as it finally transpired, via the horse's mouth (UK PM Johnson) that a Brexit deal is 'nearly impossible' following a disastrous telephone call on Tuesday morning with German Chancellor Angela Merkel. The USD held firm following a neutral speech by Fed's Chair Powell in which no hint was given that the Central Bank will be lowering interest rates again at the end of this month, despite this view plays against the market pricing. The Aussie and Kiwi have recently been characterized as stubbornly firm currencies, immune to the bad omen of this week's trade talks. One would think these currencies are set to suffer the most from the poor prospects of a 'no trade truce' with China. What's interesting is that the latest actions by China, be it via sending the largest trade delegation out of all trade talks so far, or a stronger Yuan fixing today, is sending a message to the US that they have a genuine intention to find some middle ground for both nations to find a compromise. Lastly, price action in the Euro and the Canadian Dollar was desperately uninspiring, with the former still finding solid resting offers on strength. 

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 not setting stage for cooperative trade talks: Markets are rapidly losing any sort of hope that the US and China will make much progress in this week’s trade talks, scheduled on Thursday and Friday in Washington. The preponderance of evidence via the non-cooperative fundamental headlines, ratified this time by convincing price action in key risk assets as stocks in the US fall sharply and global yield also suffer the unnerving outlook, does imply that the market sees slim chances of even a truce agreed.

Chinese companies blacklisted, restrictions in investments? The news that the US added 8 China technology companies to a growing blacklist list, with over 20 Chinese security bodies also part of the banned list, has added fuel to the fire. Besides, the are renewed reports about efforts being underway by the US administration on a plan to limit US investments into the Chinese equity markets. The details are still rather obscure at this point. This is not helping to set the stage for an environment of camaraderie and cooperation ahead of the talks. China’s Ministry of Commerce urged the US to remove the Chinese entities from its blacklist, warning that retaliation may follow.

One silver lining from the Chinese... As the Global Times reports, which plays into the view that China is sincerely hoping to achieve something good out of the talks, the Nation is sending one of the largest delegations: “Observers said that the composition of the Chinese delegation, one of the largest teams among the 13 rounds of trade talks, signaled that China is sincerely looking to reach a comprehensive trade deal with the US. Although it is not sure whether the US will hike tariffs on Chinese imports, which it is scheduled to do on October 15, some headway could be made this time concerning industrial policies and intellectual property rights (IPR) protection, they predicted.”

Fed to boost balance sheet to address USD funding: The Fed is set to expand its balance sheet, but not via the conventional QE format markets of recent years. Fed’s Powell said “the time is now upon us to expand the balance sheet”, clarifying that “growth of the balance sheet for reserves purposes should not be confused with QE”. The announcement came after sporadic episodes of USD funding pressures in recent weeks, with the Fed aiming for a longer-lasting solution than the temporary short term open market operations conducted up until this point by the NY Fed. The outright purchase of Treasury Bills will be the method chosen by the Fed to increase the circulation of USDs into the system.

Fed's Powell not sounding too dovish: As part of Tuesday’s Fed Chair Powell speech, we learnt that the policymakers continues to retain the view that the Central Bank will act as appropriate based on the fundamental outlook on a “meeting by meeting” basis. Powell reiterated that global risks are the major sticking point for the Fed to err on the side of caution in policy in an otherwise constructive domestic outlook, even if there was an acknowledgement of lower business investment, manufacturing and trade activity because of the global woes. There has been further evidence, via the US NFIB small business index, that spending intentions by enterprises keep falling. After Powell’s speech, the market sees the chances of a Fed cut in Oct 31st at 77%, although much will still depend on what way the balance tilts this week, as part of the trade talks ‘showdown’.

GBP buyers give up hopes of a Brexit deal: The Sterling is the weakest currency as UK PM Johnson describes the possibility of any deal with the EU as part of the Brexit negotiations as ‘nearly impossible’. The bold statement follows an early morning phone call with German chancellor Angela Merkel, which according to media reports, went really bad with Merkel hard-lining a view in which Northern Ireland must stay inside the EU Customs Union, which is an unacceptable proposal in the eyes of the UK PM.

Is the risk of a no-deal Brexit on the rise? Despite the sell-off in the Sterling, the risk of a no-deal Brexit on October 31st has not increased dramatically, with the base case still an extension of the Brexit deadline and early elections. Nonetheless, the market appears to also be wary of the rise by the Conservatives in the polls, which makes the prospects of a no-deal Brexit not such as distant outcome if the Tories were too retain a majority or form a pro-Brexit coalition majority.

FOMC minutes today likely a non-event: This week’s FOMC minutes of the September meeting is likely to be a redundant event of little relevance that the market will look from the rear mirror given the major disappointments in the US ISM manuf and non-manuf readings from last week, which has obviously altered the market’s perspective on where the Fed should stance regarding policy, hence treating the prior meeting as a rather obsolete outlook.

Recent Economic Indicators & Events Ahead

Source: Forexfactory

A Dive Into The FX Indices 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.

The EUR index is trading in a narrow 0.3% range with both extremes tested, with sell-side forces the ones showing the most conviction at this point as the latest successful rotation off a tested level of horizontal resistance in the H8 illustrates. With the daily structure still overall bearish and the hourly cycle now in alignment following 3 topside failures, it looks as though sellers may now have a slight technical advantage. The valid levels to engage from, can be found at the top of the established range which led to a break of the micro-structure, while on the downside, a daily horizontal support is identified not far from the tested hourly level.

The GBP index has tumbled dramatically as bids off a daily horizontal support were overwhelmed by the offers coming through the European session as BOJO’s Brexit plan collapses. The index sold very aggressively until it encountered its 100% proj level, from where a bounce ensued. The best levels to engage in GBP sell-side action can be found on a retest of the breakout point, which comes at around 0.30-.35% above Tuesday’s close. The downside should be rather limited by the symmetrical 100% proj target reached, although if broken, it will likely act as the key resistance from where momentum strategies will look to reinstate offers from.

The USD index is starting to build higher highs after a double bottom formation in the hourly, with the price action originating off a daily demand area. The latest shot up in the USD valuation has managed to absorb offers at an 8h resistance level, further reinforcing the notion that the index is poised to find growing buy-side interest on dips, with a new area of demand ff the 8h now created along the double-bottom line. The intersection of the 13d ema around the same level only makes the level a stronger candidate for buyers to hold the ground. Overall, it’s not a good idea to be a USD seller based on the structure of the market at this stage.

The CAD index saw inconclusive price action through Tuesday’s flows, keeping the pricing of the currency still below the 13-day ema, even if there is tentative technical evidence that buyers are starting to emerge to take control of the price structure on the hourly an 8h charts. The successful rotation on Monday is still a valid backdrop to speculate on long positions off a newly found 8h horizontal support level around 0.25% below the current price. Above, the CAD index will find an 8h resistance level at exactly 0.25% away too, which tells us that the market is currently in no man’s land, stuck right in the middle of the two relevant SR levels.

The NZD index shows a constructive structure as depicted by the higher highs achieved in the last 24h of trading, with the price now en-route to test the most recent highs, while above the 13-day ema, which only strengthens the buy-side case. The market has found a new wave of buyers just a hair away from the anticipated hourly demand imbalance. Looking to sell the NZD remains a risky proposition judging by the absence of technical backings in the hourly, with the added benefit for buyers that there are no resistance levels of enough credence nearby as none of the recent swing lows seen have managed to violate the bullish structure on the hourly.

The AUD index has found residual demand out of a fresh hourly support level despite a very poor Westpac consumer confidence index. There is room for the Aussie to appreciate further up until it faces its previous swing high, which comes around the same level as the 13d ema. Be mindful that the short-term rebound in the Aussie is against the bearish structure in higher time frames, where a daily resistance area has now taken control of the technical proceedings. In other words, I’d expect the recovery in the currency to be rather limited in nature unless we have some type of U-turn in the US-China trade rhetoric that suggest a truce can be achieved.

The JPY index trades with an overall bullish structure as the pricing stands well above the 13-day ema with a positive structure on higher timeframes. The index found strong demand the moment that the 13d ema got tested, which was within close proximity of a daily support. The price has now reached a confluence resistance level formed by the 100% proj target and an hourly resistance after the last successful down swing, where a rotation into lower prices has occurred as one would expect when we have an overlapping of relevant reactionary levels.

The CHF index torpedoed into a level expected to be rich with offers in CHF pairs following a solid bullish run on the hourly time frame, where a pullback has eventuated as the area represents a fresh daily resistance. I wouldn’t be surprised if the index now retraces all the way down towards the next fresh hourly support as depicted in a green line, which has the extra backing of an additional level of buy-side interest about 0.2% lower. Any retest of the upper resistance level won’t hold as much weight as the area is no longer considered fresh. This stance may chance if in the hourly a break of structure transpires in the coming sessions.

Important Footnotes

  • 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. 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.
  • 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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