Posted on: 12 Aug, 2019
As August reaches its midpoint, with US-China further apart in trade relationships, the Fed will before we know it caught between a rock and a hard place, having to make up its mind between a much higher USD or an aggressive easing cycle. In either outcome, looks like higher volatility prospects should continue on the rise.
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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.
In the last 24h, we've learned that the appetite to keep a bid on funding currencies continues to be the most profitable way of expressing the fluid risk-averse environment, as the market comes to grips that the weaponization of the Yuan is a sign of a fresh new chapter in the escalation of US-China trade tensions. It implies that as the flooding of capital back into bonds, gold, bitcoin, and funding currencies (JPY, CHF, EUR) keeps pouring in, the global growth slowdown (risk of recessions) may intensify as supply chains get disrupted and trade activity affected in large scales, just as corporates mull to overhaul decades of an infrastructure intended to capitalize on a globalized world as opposed to an era of deglobalization. Even if one can rest assured that Central Banks will be watching closely from their fences to act as volatility suppressors, the market is walking a tight rope if it buys into the perpetual notion of Central Banks acting as price stabilizers. Should markets start to envision with higher certainty that even the US faces solid chances of suffering a major bump in its economic growth, we may quickly transition into a stage where the Fed must step up to the plate by shifting its message to 'aggressive dovishness', hence injecting further vol into the market. It will, therefore, be the combination of recessionary woes, which cements risk aversion dynamics, alongside the caving by the Fed to ease much more aggressively, that may hopefully guarantee the steady pick up in volatility that we are seeing. As August reaches its midpoint, with US-China further apart in trade relationships, the Fed will, before we know it, be caught between a rock and a hard place, having to make up its mind between a much higher USD or an aggressive easing cycle. In either outcome, looks like higher volatility prospects should continue on the rise.
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 Information is gathered after scanning top publications including the FT, WSJ, Reuters, Bloomberg, ForexLive, Institutional Bank Research reports.
Trump implies more trade talks unclear: Trump said that Sept talks with China could be canceled, adding that the US is still engaged in negotiations even if Trump does not see the case to make a deal right now. Don't forget, Trump's rhetoric can be very disconnected from reality as what he makes it sound as if the chances for a deal to occur are still possible. The reality is that after the PBOC let the Yuan depreciate beyond 7.00 vs the US Dollar, a new order with deep ramifications in their relationships is validated.
US trade representative touches on sticking points: Shedding further light into the trade disputes, Peter Navarro (US trade representative) was featured on CNBC last Friday, outlining 7 acts of economic aggression by China, which include cyber intrusions, forced technology transfer in exchange for access to the Chinese market, intellectual property, dumping products below costs into our economy, manipulating its currency, massive subsidies to state own companies, fentanyl that is killing 100 Americans a day.
Trump reveals 100bp of Fed cuts preferred scenario: In an interview with Reuters, US President Trump said he would like to see the Fed cut rates by a full percentage point (100bp), which is the type of aggressive easing the market has discounted in 12 month’s time. However, one needs to make the distinction that the market has reached this consensus not by what Trump thinks but by the prospects of a slowdown in growth combined with protracted low inflation in the US economy.
Business w/ Huawei a hot topic: On the dealings with Huawei, US President Trump’s latest position is that there will be no business conducted with the Chinese tech giant even if he left a door open (needs ‘leverage’) by saying that things could change if there is a US-China trade deal. For now, the US is not permitting to issue licenses for US companies to restart business with Huawei on federal departments, even if special licenses are still being issued. The renewed impasse with Huawei has recently been seen as yet further evidence of the escalation in trade tensions, even if the weaponization of the Yuan by breaking and holding above the 7.00 handle in USD/CNH is the key topic.
Watch unfolding Italian political risks: Italian bond yields are on the rise and the spread between the Italian and German bond yields is starting to widen as a function of fresh tail risks that the Italian government will implode, which would result in a snap election once the summer is over. Italy's Deputy PM Salvini has admitted that working with the current coalition government in its current format is not viable, adding that parliament members must "get off their bums" for a no-confidence vote. If the Italian PM Conte calls for politicians to reconvene from their summer breaks this coming week to proceed with a no-confidence vote, the pressure on the Euro may build up quite quickly.
Germany's trade from bad to worse: Germany's latest trade balance data came quite poor at €16.8 billion vs €19.5 billion expected, but what’s even worse after deconstructing the details is the yearly falls in both exports and imports, which stand at -8.0% y/y -4.4% y/y respectively.
RBA Lowe sticks to the dovish script: Reserve Bank of Australia Governor Lowe spoke before the House of Representatives' Standing Committee on Economics, reiterating that rates are set to remain low for an extended period, adding that the board is prepared to ease monetary policy further to meet inflation, employment goals. Interestingly, Lowe said that there are no implications for the RBA from the RBNZ 50 point rate cut, noting that the RBNZ is responding to the same forces as the RBA is. Lowe also said that if other global central banks go to zero we'll have to consider that as well, which portrays perfectly why we are in a currency war and the race is straight to the bot
UK PM Johnson builds credible threat around no-deal Brexit: On the Brexit saga, the UK Times reports that MPs are planning to force UK PM Johnson to seek a Brexit extension. As of late, as the price action in the Sterling clearly reflects, the pessimism around the Brexit headlines have dominated as Johnson consolidates a credible message to leave the EU without a deal, with the government preparing a public information campaign for no-deal preparations which will only solidify the threat to the EU to get concessions or an extension. The next big date to learn new insights on Brexit will be August 25 and 26.
In terms of the currency indices and where we stand, the funding currencies, after a brief pullback from the 100% proj targets, appear to be back on the driving seat as the ‘risk-off’ backdrop does not seem it will go away anytime soon. The Japanese Yen index had a close beyond its symmetrical 100% target, which bodes ugly for risk dynamics. Similarly, the Swiss Franc index, while still capped below its 100% proj target, is back attacking, while the Euro index lags behind as the Italian political woes is a risk being factored into the price. The USD index remains in a bullish phase, and quite frankly, no other currency looks better priced to potentially attract new buyers after the decent pullback seen (still in a bullish context). The Sterling has re-ignited quite clearly the appetite by sellers as UK PM Johnson makes it look as though a hard-Brexit is a credible threat to the EU. Meanwhile, both the AUD and the NZD still look bearish, with the improvement in the pricing of the currencies still perceived as a potential opportunity to sell on rallies as both indices remain well below its baselines. A currency that is sandwiched in between is the Canadian Dollar, so far putting on a decent performance, even if the latest 3-day rebound has come on decreasing tick volume, hence why I think that any pick up in risk aversion will also bring with it a resumption of the sellside pressure here.
After going through last Friday’s movements, coupled with the aggregate low tick volume, it tells me that from a daily timeframe, the latest price ation formations are non-conclusive, which is why today’s update will have a more retrospective spin. Patience is a priceless virtue to have and nurture when trading financial markets!
The first pair to cover is the GBP/CAD, which did validate and complete the short squeeze I warned in last Friday’s note. After breaking through its prior low, an avalanche of sell side order far outweighed the buy-side pressure, leading to a new successful rotation to the downside.
The next market where a very similar setup has popped up after the break of the prior candle’s low is the AUD/CAD. However, note that in this case, there are two impending factors making this squeeze play less than ideal. Firstly, the pair has already completed a 100% proj target, which saw a major high-volume candle rejection, which suggests the amount of buy-side pressure off 0.89 poses clear risks for the bearish trend resumption to play out amid these info inputs.
A pair that, once again, is yet to provide a clear daily statement of intent but definitely one to be on the watch as the area it has reached couldn’t be more relevant is the NZD/USD. Not only the fundamental backdrop for the NZD has worsened markedly since the RBNZ dovish turn, but the technical chart tells us a critical juncture at 0.65 is likely to be defended with the confluence present out of question (round number, horizontal level - prior double bottom -).
Lastly, I did warn that if you are carrying gold longs and your timeframe horizon to keep your holdings is adaptable based on the daily market structures, this is a great time to start taking a few chips off the table in this market, especially if the inside bar formed breaks to the downside. Until that occurs, it makes sense to still hold tight one’s position, just be aware that the market has reached its 100% proj target at the 1,500.00 round number.
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