FOMC Up Next As Oil Takes A Hit

Oil has retraced sharply by more than 7% after Saudi Arabia’s full oil production capacity is expected to be restored within 2-3 weeks. The FOMC will now command the market’s attention, with the possibility of a 25bp rate cut around 85%. Interestingly, both high-beta and the risk-sensitive currencies lost value in absolute terms in the indices, with the European currencies taking up the slack.

The Daily Edge is authored by Ivan Delgado, Market Insights Commentator at Global Prime. The purpose of this content is to provide an assessment of the market conditions. The report takes an in-depth look of market dynamics, factoring in fundamentals, technicals, inter-market in order to determine daily biases and assist one’s decisions on a regular basis. Feel free to follow Ivan on Twitter & Youtube. You can also subscribe to the mailing list to receive Ivan’s Daily wrap.

Quick Take

As the price of Oil adjusts lower on the appeasing words by the Saudi Arabia energy minister that the Kingdom is set to return to full oil production capacity within 2-3 weeks, the market is in the transition period to accommodate and expand its focal point to the FOMC. The market sees the possibility of a 25bp rate cut as almost baked in the cake, even if Chair Powell has definitely earned time to take it easy as the US economic data has firmed up and the expectations for another US-China trade truce build up. Ironically, with a squeeze in the short-term USD funding market as the spike in the repo rate reflects (shortage of USD supply), which has caused the Fed to step up by injecting liquidity into the system, there is even talk that given how tight the liquidity pool is to have sufficient USD liquidity in the system, considerations may be given to a light return of QE. Interestingly, it was a day when both the high-beta and the risk-sensitive currencies lost value in absolute terms in the indices, with the European currencies taking up the slack of gains. The CAD felt the damage of a falling Oil, as did the AUD to a dovish RBA minutes outcome. The NZD appears to be playing more catch up with the AUD here. The JPY and CHF were not in high demand as the risk appetite remains supportive, especially in equities even if no backing from global bond yields in the last couple of day.The GBP and the EUR can be found on the other side of the spectrum as said, both rising with conviction, while the USD loses its shine a bit ahead of the Fed verdict on policy. 

The indices show the performance of a particular currency vs G8 FX. An educational article about how to build your own currency meter 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.

Oil prices out protracted Saudi disruption: Oil has retraced sharply by more than 7% after Saudi Arabia’s full oil production capacity is expected to be restored within 2-3 weeks. Reuters front-run a story about oil production in Saudi Arabia back online at full capacity by the turn of the month, which was later confirmed by Saudi Energy Minister Salman, noting that production will reach 11m barrels per day by the end of September and full capacity of 12m barrels will be restored by the end of October.

Geopolitical tensions remain high: The US appears to have identified the exact locations in Iran from where the aggression via a joint attack of drones and missiles took place. VP Pence said the US military is ready after Saudi oil attacks and that the US is ready to defend their interests and that of the US allies. The VP said the best course of action is being assessed in the days ahead. Due to the escalation in geopolitical tensions, it justifies that Oil still carries a higher risk premium.

Spike in the repo market: An important event occurred in the repo market where rates spiked as high as 10% from just under 4% at the open, which forced the Fed to take action by providing around $53bn in additional liquidity via the overnight system repo. It’s the first time in a decade the Fed intervenes in the repo market, with another operation scheduled for Wednesday capped at $75b. There is a myriad of reasons that may have caused the spike in the short-term dollar funding market, from corporate debt issuance, quarterly tax payments, low reserve levels in the banking system, or even the Saudis pulling cash out of US markets to support their economy.

The FOMC to command the market’s attention: The market sees the possibility of a 25bp rate cut around 85%, with even some talk of a light return of QE given the issues with liquidity given the tightness in the Fed funds rate market. Another key focus will be the dot plot and obviously the type of rhetoric by Chair Powell in the press conference to get an update on whether the Fed still sees the cuts as part of a mid-cycle adjustment or a more long-lasting easing cycle.

US data prints solid numbers: Despite the US economic data published was of a second-tier nature, it reinforced the notion that the US economy remains in a firm footing outside the manufacturing sector. The US Industrial Production came stronger than expected in August at +0.6% m/m vs 0.2% expected. The NAHB housing market index also came on the bright side with a print of 68 vs 66, including an upward revision to 67 in the prior release. 

German ZEW not getting worse for now: In Germany, the ZEW survey came better than expected with the expectations component at -22.5 vs -38.0 expected, even if it must be read from a negative context. As Morgan Stanley’s Economist Markus Guetschow notes: “Current conditions continued to drop to a new post-crisis low. Industrial weakness is increasingly felt in the labor market, as the economy prepares to enter a technical recession in 3Q. The Ifo business climate is expected to fall further.”

RBA minutes imply the risk of near-term cut: The Australian Dollar was sold after the RBA minutes came more dovish than expected. While there was no real surprise but rather the confirmation that the RBA is going to be lower for longer. In the last paragraph, the reference to "accumulation of additional evidence" was dropped as the Central Bank focused on international as well as domestic conditions, most of all the labor market. Its forecasts seem to imply further easing will be necessary to support growth.

Recent Economic Indicators & Events Ahead

Source: Forexfactory

A Dive Into The Charts

The indices show the performance of a particular currency vs G8 FX. An educational article about how to build your own currency meter can be found in the Global Prime's Research section.

The EUR index managed to lean against a relevant level of daily support from which a fresh buy-side campaign was initiated to fully rotate the price and find acceptance through a critical level of resistance while cutting through the baseline with increased aggregate tick volume. The prospects to see follow through demand are on the rise with potentially as much as 0.8% of compounded gains in the index available to be exploited in the coming days. 

The GBP index keeps pressing higher way above the upper end of the dynamic 1-time ATR as measured from the baseline (13d ema), which essentially means that this is a market still fully dominated by momentum strategies but far from providing any value for swing traders. Entering blindfoldedly into longs at these levels can, more often than not, be a rather suicidal strategy unless one clearly aims to exploit gains in the very short term or else, a trader is better off to have the patience necessary to wait for a meaningful retracement first. What’s more, the index has now reached its 100% proj target, which makes playing longs, unless charged by fresh positive Brexit headlines, a very dangerous proposition to embark on.

The USD index looks rather bullish in its technical outlook as the initiation of a buy campaign off a key level of support outlined through the week continues to play its course. Note, the FOMC will cause a major injection of vol later today, which will make the near-by technical levels fairly irrelevant as liquidity is pulled out of the USD pairs around the even, which is what causes the oversized movements during the time that the FOMC updates the market on its rate decision and at the time of Chair Powell speaking to the press right afterward. Traders will have to reassess the stance in the USD after the dust settles post FOMC to gain more clarity.

The CAD index has been knocked down as this week’s main proxy of the mayhem experienced in Oil, with the latest sharp correction in the energy instrument dragging with it the index. The behaviour of the currency index in the last 24h holds sufficient technical relevance to make me think that further downside is available, even if part of today’s directional bias in the CAD will be determined by the release of this month’s inflation data in Canada. For the technical type traders, continue to follow Oil + Canada’s CPI today to stay in tune with the main drivers.

The NZD index continues to show clear bearish tendencies as the chart is about to rest its previous trend low in what would then confirm a successful rotation. It will be critical to understanding if sellers have sufficient gas in the tank to find acceptance into fresh yearly lows. There is 0 technical evidence to be a buyer of the NZD until the index tests the next support level, which is just a stone’s throw from the current level. Once/if the price lands at this support, traders may start to consider longs NZD should one’s system trigger an entry, but beware the trade would certainly be a rather risky proposition judging by the bearish context.

The AUD index keeps rolling over from what’s been emphasized since last week as a critical level of horizontal macro resistance in the chart. The inertia of price action after a double failure to break the mentioned resistance appears to be a price en route to test the baseline, which allows for 0.30-0.4% worth of losses in the next 24h before more impetus from the buy-side. The fundamental landscape for the Aussie has also worsened after the dovish RBA minutes.

The JPY index keeps its bearish dynamics intact even if some bullish price action may not be far once the macro support as highlighted in red in the index chart is tested. It essentially still allows for about a negative performance of about 0.2% before a potential reversal. Note, we get the BOJ monetary policy decision on Thursday Asian morning, which is going to influence the price action with chatter on the rise that the Bank must step up its efforts to stimulate inflation.

The CHF index is another chart that, like the JPY, shows bearish price action well below the baseline, which was precisely the critical point where CHF longs eventually pivoted away from the currency right on the aftermath of the ECB only to see the underlying bear trend resume. There is still some more room before the index makes it into a confluent structural area of support represented by the 100% proj target and the midpoint of the last successful rotation.

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.
  • Correlations: Each forex pair has a series of highly correlated assets to assess valuations. This type of study is called inter-market analysis and it involves scoping out anomalies in the ever-evolving global interconnectivity between equities, bonds, currencies, and commodities. If you would like to understand more about this concept, refer to the tutorial How Divergence In Correlated Assets Can Help You Add An Edge.
  • 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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