Posted on: 24 Jan, 2020
The end of the week certainly ends on a much higher note than its beginning as volatility in certain currencies has jumped significantly on the back of Central Bank-centric movements alongside heightened concerns that the coronavirus epidemic crisis in China may take its toll on the Asian and global growth this quarter as more cities go on lock down. Find out all the latest 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.
The whippy movements in Forex extended on Thursday. The Euro fell miserably amid the lack of hawkish emphasis by the ECB, with the tentative green shoots seen in the Euro area nothing out of the ordinary. The remarks by the ECB statement, later reaffirmed by Lagarde, was an admission that the ECB will be slow to shift its well-anchored dovish bias. An interesting market to trade in the last 24h as volatility certainly did not lack either was the Aussie, initially emboldened by a strong employment report out of Australia, however, since the market is still fixated about an escalation of the corona virus in China and connecting the dots with lower local growth, it weighted on the Aussie later on. As we know, the number one currency to act as a proxy for all things China is the Aussie. While the jobs data was a positive input for the AUD, even to the point of lowering the RBA rate cut odds in February to just 25% from 60%, it clearly isn't the only focus at present. On the contrary, the NZD has enjoyed strong buy-side flows, with more fuel added to the intraday rally following an upbeat in the NZ CPI q/q figures. This should keep the RBNZ powder dry (no cuts) near term, even if the upside may prove still limited as China’s coronavirus plays out. The volatility in the Yen wasn’t too shabby either, with the currency appreciating strongly amid the sharp falls in global yields. The Canadian Dollar, recently battered, finally reverted its exceedingly oversold conditions, even if the BOC dovish turnaround from Wednesday is the type of development that can act as the onset of a prolonged sell-side campaign as technicals and fundamentals are starting to align in favor of sellers. Lastly, the USD and the CHF traded in a stable fashion, with modest weakness on the latter, even if these currencies have only contributed at the margin to the increase in FX volatility since mid this week.
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.
The coronavirus continues to spread in China: More cases are being reported in China, even if the World Health Organization did not declare the disease an international virus alarm. The emergency committee was far from unanimous in its decision, with some noting that the spread of the epidemic and increasing cases warrants a stronger alarm designation, while others were more prudent on the basis that the virus appears to be, for now, largely contained within China and a few other cases in Asia, alongside the efforts by the Chinese government to contain its evolution. The latest figures indicate, via China State TV, that there are now 571 coronavirus cases confirmed, despite Caixin reports that 'local doctors' estimate the total cases may be as high as 6,000. China coronavirus may have come from a snake, researchers say.
Watch impact on Chinese growth, much worse than SARS? Guan Yi, director of the State Key Laboratory of Emerging Infectious Diseases at Hong Kong University, traveled to Wuhan this week, and as Caixin reports, he left with the impression that the disease could be a generational pandemic and that “the epidemic situation was out of control." "I've experienced so much and I've never felt scared before," he said. "But this time I'm scared." There is a video doing the round about the overwhelming crowds at a hospital in Wuhan. Guan Yi said that “my conservative estimate is that this epidemic could end up at least 10 times the scale of Sars [severe acute respiratory disease]," he told Caixin today. If that happens to be true, financial markets will be on the lookout for more details and react accordingly as SARS infected more than 8,000 people globally and killed nearly 800 (death rate of about 10%) with most cases in China, which led to shaving the GDP growth by 1-2%. Therefore, it is extremely likely and a scenario the market is discounting that there will be an impact on Chinese growth in Q1, especially as it coincides with the Lunar New Year holiday.
More Chinese cities to be sealed off: There are talks that China plans to shut down a second city after all public transport in Huanggang were halted. Huanggang is a city of 7.5 million located 70km east of Wuhan. As the team at NAB notes: “Around 26m people in cities or near urban areas that are either on lockdown or have limited travel (Wuhan 11m, Xianning City 2.7m, Huanggang 7.5m, Ezhou 1.0m, Chibi 0.5m, Xiantao 1.2m, Qianjiang 1m, Zhijiang 0.5m and Lichuan 0.7m). Some Lunar New Year Festivities have also been cancelled in Beijing and Macau.”
The ECB not ready for any hawkish surprises: The ECB left its key rates unchanged on Thursday, as widely expected, noting that the rates are set to remain at present or lower levels until inflation outlook robustly converges to target, reflected in underlying inflation. They also announced that the bond buying will continue until shortly before rates are raised. The initial statement did not represent any surprise to markets. The ECB also announced the launch of its review of the monetary policy strategy, expected to be concluded by the end of 2020. It is the first review since 2003. The ECB noted that “low inflation is different from the historical challenge of addressing high inflation", therefore a more in-depth consideration on the best ways to tackle this jigsaw must be addressed.
Lagarde in no rush to veer off the easing course: As ECB’s President Lagarde took the stage, the Euro started to fall after a bleep higher, in what appeared to be a dynamic set out on the grounds of a market disappointed by the lack of any hawkish surprise. Lagarde opening statement outlined that the incoming data are in-line with the baseline scenario, with manufacturing still a drag. On inflation, Lagarde said that “there are some signs of an increase in inflation”, but “that's in line with expectations”, which reaffirmed that the ECB won’t rush to adjust policies due to factors not preconceded. The nail in the coffin for the most optimistic came when she mentioned that “in light of continued subdued inflation outlook, monetary policy has to remain stimulative for a prolonged period of time.” In terms of growth, Lagarde said “near-term growth expected to similar to rates observed in previous quarters”, reiterating that “risks are tilted to the downside but less pronounced.” Besides, Lagarde said that weaker growth momentum is delaying the passthrough of inflation.
Aussie jobs shine, risk of an RBA rate cut lowered: The Australian December employment report came in much better than expected with the unemployment rate dropping to 5.1% (expected 5.2%), while the headline employment change was +28.9K, almost triple the expected 10.0K. In terms of the breakdown of full vs part time jobs created, the full time employment chang was barely changed at -0.3K, with the part time at +29.2K. The participation rate came at 66.0% as expected. The news has suppressed the chances of a rate cut by the Reserve Bank of Australia rate cut on Feb 4 from around 60% to around 25%.
The Kiwi bought after better NZ inflation figures: The NZD jumped after higher than expected inflation data in New Zealand. The NZ Q4 CPI q/q came at 0.5% vs 0.4% expected. Furthemore, according to the bureau of statistics, “The trimmed-mean measures - which exclude extreme price movements - ranged from 2.0 percent to 2.1 percent for the year. This indicates that underlying inflation is higher than the 1.9 percent overall increase in CPI. On a quarterly basis, trimmed means ranged from 0.4 percent to 0.5 percent.” Since the RBNZ mandate is to maintain inflation within 1-3%, the result will likely keep the RBNZ at bay (neutral) near term.
What’s ahead? We have the calendar packed with economic news, aside from the ongoing virus crisis news, that may lead to further unrest. In Europe, the German PMIs will be published, with the focus to be commanded by the developing notion of whether or not further tentative signs of stabilisation exist in the manufacturing sector. The data will be followed by Eurozone PMIs, with the same focal point of understand to what extent there is more evidence of a recovery. The UK PMI will also be released, and as of now, every piece of fundamental data counts ahead of the BoE meeting next week, with markets pricing around 60% for a cut. Also watch more speakers out of Davos such as BoE’s Haskel, ECB’s Largarde and BoJ’s Kuroda, even if none of them are expected to move the markets, especially after the recent policy decisions by the ECB/BOJ.
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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 idea of this analysis is to complement one’s daily bias by accounting for this holistic analysis.
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The EUR index has confirmed the breakout of its range structure, what this means is that the leeway for further downward pressure has now expanded. By measuring a 100% proj target from the last bracketed area, my expectation is for the EUR weakening dynamics to continue to be a dominant thematic until the 0.50% proj extension is reached. All the visual cues via the set of triple fibo-derived moving averages (13, 21, 34), which acts as an even more robust replica of the smart money tracker MAs, point lower, with the price structure in agreement. The move lower in the EUR is in line with the negative seasonals outlined since the start of January.
The GBP index has found a resolution away from its prior range, with the price structure and the set of triple moving averages in alignment, which is what must be seen to cement a bias. So, with the direction (bullish) revealed by the preponderance of objective technical evidence, I am looking to see an extension of the buy-side campaign until the 100% proj target, which is found at around 1.35% from the breakout point. What this means is that the GBP looks likely to be a technical-led buy ahead of Jan 30 BoE meeting. Remember how extraordinarily well the Pound has been holding up this week amid the negative news as of late? That’s always a powerful sign. The volatility in the GBP remains very suppressed below the monthly average.
The USD index continues to show a consolidation pattern with little directional bias of note. Instead, on the back of the poke by price into higher highs earlier this week, the market has found equilibrium around those levels, which is a positive sign. Remember, at this point, the price structure has been validated as bullish because of the breach of the prior highs, which when combined with the all green set of MAs (13, 21, 34 LWMA), it acts as a powerful technical combination that communicates the risks are skewed to the upside. The long bias is what I’ve subscribed to since the beginning of the year and I remain holding this view. As a reminder the move higher in the USD obeys the logic of forex seasonals as January tends to be a positive month for the world’s reserve currency. Actually, it’s proven to be the best over 30+ years.
The CAD index, after a sharp adjustment in its value lower, has finally found sufficient demand imbalance to rebound quite strongly, in what looks like a combination of aggressive profit-taking and bargain hunting following a momentum-led play on the back of a dovish BOC. The outlook for the currency has clearly turned out to be more negative after the breakout of its range, in a move that carries with it the fundamental backing of a surprise by the stance of the BOC, which should prove to be a factor weighing on the CAD as it pullbacks towards the mean. The seasonals for the CAD are positive in January, but the BOC decision overrides that. Sell on strength is the way to go and my newly adopted default view since the last 24h.
The JPY index has extended its rebound, even if it’s starting to struggle at the area of resistance one would have expected, taking as reference the mid-Dec highs. The recovery in the Yen emanates from a key location where I warned it could represent an inflection point amid the tapering of tick volume right into a macro support with the added clue of a compression-like formation by new lows not finding acceptance, which is a telling sign. There is still a long way for the JPY market to validate a bullish trend off the daily as even if the set of moving averages (13, 21, 34) all turn with a higher slope, the price structure will also be a prerequisite. The buying wave in the JPY has occurred on the back of recent record highs in the S&P 500, even if the main driver now appears to be, on ad-hoc basis, the coronavirus crisis and the risk-off as a consequence of it. Technically though, the bulls don’t yet have a case off the daily.
The AUD index has not been able to capitalize on the initial Aus jobs-led up move, in what appears to be a market with limited interest to accumulate AUD-long inventory as long as the coronavirus crisis keeps spreading in China. Why? Because the market is starting to connect the dots between an escalation of the crisis and lower Chinese growth. And as we know, the number one currency to act as a proxy for all things China is the Aussie. The currency, at the index level, is nonetheless approaching its macro support, so be on the alert for any buy-side opportunities in the Aussie to arise if further weakness to the tune of 0.3% occurs. As reiterated earlier this week, the seasonals are positive in January, so that’s an added factor to consider if the index makes it all the way to the outlined area of support where consistent buying emanates from.
The NZD index is a rare exception in which despite the pick up in volatility, we are still confined in a familiar range that has got to first broken before a cleaner directional call can be made. However, since the range occurs in the context of a rising market, my outlook is more inclined to be a neutral to bullish as the dominant flows have been to the upside. From a structural standpoint, buying weakness at support levels makes sense, which if you check the latest action on Thursday, that’s exactly what we’ve seen, the NZD bought off support. Remember, ranges are the trickiest environments to trade as signals can be more conflicting, so I wouldn’t add that much weight to the positioning of the compounded tick volume pressure as assessed by the 13ma off the OBV nor the triple moving averages tracking the smart money flows.
The CHF index keeps exerting downward pressure after the rally run out of steam at precisely the symmetrical 100% proj target, creating stronger supply pockets via market makers, profit-taking activity and contrarian traders. The bullish trend, nonetheless, remains the base case, but once these 100% macro targets are met, a release of the buy-side pressure tends to occur, so one must be more strategic by engaging in key areas of support, which is exactly what we saw on the first pullback, the index coming into a support and bouncing off of it. If you are after getting paid positive swaps, then CHF shorts is the way to go, just remember that you’ll still be in the ‘heros’ camp by looking to fade a strong trend amid limited technical backing. Such bet may be turn out to be a smart one, but tonnes of patience may be required.
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