Posted on: 15 Nov, 2019
The Yen and the Swissy, emboldened by the re-distribution of orders at levels of weekly demand at an index level, end the week as the top performers. The struggle by the US and China to seal a Phase One trade deal has further fueled the interest to bid the currencies, with the AUD succumbing as it gets caught up in a negative loop. This info and much more can be found 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 Australian Dollar is by far worst performer as the week comes to an end with the market realizing that the big miss in the Australian employment report, alongside soft economic activity in China and struggles to seal the US-China trade deal, is a setback for the RBA to remain on hold as the odds of another rate cut soar by early next year. In stark contrast, the Yen and the Swiss Fran keep attracting the most buy-side flows as the macro picture remains supportive with weekly demand levels in control. The decline in global yields in the last 24h as the US and China hit a snag in the prospects for a quick resolution of the trade truce has fueled further demand for these funding currencies. The Pound continues to trade at a steady pace as longs build up after the sentiment-driven spike after Farrage's Brexit party decision not to contend Conservatives-controlled seats led to a re-pricing of the UK election outcome in favor of the Tories. The New Zealand Dollar, after the RBNZ shocker, has lost a tad its mojo dragged by a combination of downside pressure in the Aussie, the RBNZ leaving the doors wide open for further easing early next year and the US-China hitting an impasse in the trade negotiations. Lastly, the Euro and the Canadian Dollar, have been notoriously underperforming this week, even if the Euro appears to be carving out a bottom as I explain in today's chart 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.
* The Information is gathered after scanning top publications including the FT, WSJ, Reuters, Bloomberg, ForexLive, Institutional Bank Research reports.
AUD caught on a negative loop: The Aussie has been caught up in a bearish storm as negative news for the interest of longs keep cascading through. The depreciation accelerated on the back of disappointing jobs numbers in Australia (big miss by any measure), followed by softer than expected activity data from China (retail sales, fixed asset inv and industrial production). To make matters worse, the US-China Phase One trade negotiations remain stuck in an impasse.
RBA rate cut odds soar: As a result of the heightened risks of a fall back in Australia’s growth prospects as higher unemployment equals less consumer spending, the implied probability of a further 0.25% cut to the RBA rate by February 2020 has gone up considerable to just over 70% vs 50% pre-release.
US-China trade truce news not encouraging: The latest we’ve learnt as part of the US-China Phase One trade deal saga, with negotiations ongoing but stuck in a cul-de-sac road, is that the Financial Times now reports that the US and China are struggling to compete of phase 1 deal to hold their trade war as senior officials still jostling over intellectual property provisions, agricultural purchases and tariff roadblocks. The FT adds that “Trump officials are frustrated that China has not offered enough concessions to justify a reduction in US tariffs on Chinese goods.” The article notes the action by China to delay the truce are “jeopardizing the chances that a final agreement could be reached in coming days.”
China lifts the ban on US poultry meat imports: In what should be some silver lining as part of the US-China trade saga, China has officially lifted the ban on US poultry meat imports, an agreement that had been pre-announced as part of the truce currently negotiated but now officialized. It could be interpreted as a positive sign that the trade talks are progressing in the right direction, hence China ready to offer further gestures of goodwill, but in the grand scheme of things, this is minuscule compared to the high-stake issues still unresolved such as tariffs or the US' demand for agricultural purchases.
Germany avoids technical recession: The German economy managed to avoid a technical recession by printing a marginal gain in its Q3 GDP print on Thursday, even if the numbers are not precisely hot per se. The 0.1% gain offers two takeaways. Firstly, the manufacturing recession is not yet intoxicating other sectors of the economy as badly as feared. Secondly, Germany may hold any hasty decision on fiscal stimulus and allow things to improve as prospects for a rebound in Q4 growth remain.
Fed's Powell brings nothing new to the table: Fed’s Powell took the stage for a second day in a row, updating a committee about the state of the US economy with the end result in terms of the impact to markets being a fall in US yields. The culprit of the move seems to be as a combination of renewed pessimism that a quick resolution in the US-China trade deal may not happen, alongside the comfort zone the Fed appears to be not to keep easing in the foreseeable future despite the risk that exist. Powell said “there is nothing in today's economy that is booming,'' adding that “the US economy offers a sustainable picture”, and that “we are very committed to Fed’s twin goals.”
Stocks & bond yields go different ways: The appreciation in the Japanese Yen and the Swiss Franc is congruent with a deterioration in the level oF global yields as safe-haven bids return to the fixed-income market amid the lack of sufficient evidence that the US and China will resolve its trade difference for a phase one truce in a timely manner. The stock market, meanwhile, continues to move to the tune of its own drums, rebounding towards its record highs once again as per the performance of the S&P 500.
Mexico cuts its rate as anticipated: The Mexican central bank cut its overnight rate to 7.5% from 7.75% as expected. There were 2 members that did vote for a 50 basis point cut. The growth forecast for 2019, 2020 was adjusted lower than previously forecast, while reiterating prudent monetary position.
US/China trade teams keeps working on a deal: According to US-China trade insider FOXBusiness' corresponder Lawrence, “there has been another deputy level trade talk between US/China trade teams today, with talks progressing as both sides try to get something done that can be put on paper.” The poor data out of China earlier today, with some of the data points such as retail sales at its lowest level since 2013 makes a deal for China as important to address the weakness in the economy as for the US.
NZ data, RBNZ rate call keeps NZD in demand: Earlier this Friday morning in Asia, the New Zealand dollar saw renewed demand after better PMI data as the BusinessNZ manufacturing PMI for October came at 52.6 vs 48.4. On the flip side, the Reserve Bank of New Zealand Governor Orr reiterated that “interest rates need to remain low for a long time”, which is an old comment the market has already discounted.
US data eyed: US retail sales will be the last relevant event to take place before the end of business for the week, with a rebound in activity expected after the negative headlines in September. There are other 2nd-tier events, including industrial production which is seen falling by 0.4% for the second month in a row or the empire state manuf index.
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Earlier this month, I explained to the audience of my LIVE show, why I believe the EUR/USD appears to be facing upside risks in the coming months. My reasoning is based on a combination of order flow, price action and market structure. Today, I want to elaborate further on this, sticking my neck out to the view that the pair could be in a bullish cycle to build up from here.
Firstly, as a reminder, in the show titled “ The Power Of The Monthly”, I noted that ever since the GFC of 2008, the EUR/USD shows a clear tendency to revert its flows whenever an outside candle is printed. This is what happened in Oct and why I believe that this formation, which if you think about it, is the market inducing early sellers to take the wrong side of the market before what eventually turns out to be a major reversal in flows, is a bullish signal.
Now, what we’ve seen up to this point is a retracement in the lower time frames within the context of this bullish outside candle in the monthly. If you look at the price action on the lead up to the penetration of 1.10 that we saw yesterday, what do you notice?
This pattern is often referred to as a ‘compression’. Shorts are starting to re-distribute orders by closing positions on breakout of new lows, which causes failure to see follow-through as the closing of sell positions results in buy orders triggered. Besides, macro longs aiming for minimal slippage tend to engage as these breaks into new lows too.
Whenever we see this pattern, if followed by a breakout of the market structure (in this case to the upside), as what we’ve seen, it communicates that the market has reached a potential inflection point… If we then marry this price pattern with the higher timeframe context of a bullish outside monthly candle, alongside the trigger point occurring at a very psychological level as 1.10 is, the preponderance of technical evidence hints there are risks of a turnaround in fortunes.
Next, I want to bring to the reader's attention something that I touched on yesterday’s LIVE show. I am referring to the ability we have as traders to gauge the macro flows by identifying levels of supply or demand at an index level. If we step back to the weekly, the JPY, CHF, CAD indices have all given us in recent times some tremendous opportunities to anticipate a potential shift in order flows based on the retests of these areas of imbalance. Judge by yourself.
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