Posted on: 17 Jan, 2020
The Sterling and New Zealand Dollar attracted the most demand in a week that remains characterized by the suppression in volatility. Neither a fairly vacant weekly economic calendar nor the US-China trade deal ceremony acted as catalysts to increase the hype and subsequently we are left with tight market ranges to contend with. What's going on as we head into Friday? Keep reading to find out.
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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 New Zealand Dollar and the Pound were the top performing currencies. The former was boosted by an upbeat ANZ inflation indicator, leading to calls for the RBNZ to cement its neutral bias for the foreseeable future. Too premature to think the language may shift to hawkish though, even if the jump by 0.8% q/q is above the RBNZ target. The Sterling’s rise, in my opinion, has a lot more to do with the slow money re-engaging in weakness as the weekly trend remains bullish, even if reason to turn more bearish are also piling up with the BoE more likely to cut rates in the next few meetings (pricing of a cut has gone to near 70% for Jan 30). The Euro, the Aussie and Yen were the main laggards for the session. It is especially counter-intuitive to have seen the Euro perform so poorly as the ECB revealed a more upbeat tone in its policy minutes, with the outlook for inflation and growth slightly more constructive. The sell-side pressure on the Yen, for a 7th consecutive day, shows that the ‘trend is your friend’ in this market, one that continues to move in opposite lock steps to record equities in the US. The Aussie’s struggle has more to do with impending technicals at an index level, even if the latest Chinese data dump today should provide interim support as upbeat numbers emerged. The Swissy paused its hot rally after reaching a weekly 100% proj target in the index, while the US and Canadian Dollar saw weakness bought up aggressively through the NA session.
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.
Not so fast Pence… US VP Pence said the US and China “have already begun discussions on a phase 2 deal”, which would be a positive development, if only true. However, judging by the comments from China’ Vice Premier Liu He, who said “we might get nothing if we rush to a second job before the first one is properly done. I don't think it is a wise choice to impatiently launch new stages of talks”, there seems to be little meat in the bone on Pence’s remarks.
The ECB more upbeat on inflation and growth: The most relevant development from the ECB December monetary policy meeting minutes was the remark that “there are some indications of a mild increase in core inflation”, adding that “there had been solid upward movement in underlying inflation, excl. holiday prices.” As per the economic trend, the ECB noted that “data pointing to weak but stabilising growth dynamics.” The remarks on inflation and growth led to an initial rise in the EUR that got fully reverted.
No new clues on ECB strategy review: With regards to clues about the upcoming strategy review the ECB is set to conduct, the ECB minutes read: "Finally, it was also suggested that some broad guidance be communicated about the forthcoming strategy review, including the likely timeline, although it was generally seen as advisable to refrain from public discussions on the strategy prior to the envisaged launch of the review by the Governing Council early in 2020."
US retail sales lift the USD: US December advance retail sales came at +0.3% vs +0.3% expected, however, the core reading jumped to 0.7% vs 0.5% expected, which led to a wave of USD buying, as positive revisions to prior data were also confirmed. Most of the gains in the indicators over 2019 came from 'food and beverage' stores, 'health and personal care' and gasoline stations.
USD anchored by 2nd-tier data too: Adding to the positive tone in the USD, the Philadelphia Fed business outlook for January stood at 17.0 vs 3.7 estimates. The index is the highest level since May 2019 when it reached 17.5 and represents a nice rebound from the depressed levels it sat at in prior months. But as the team at NAB notes, “the Philadelphia region is less exposed to trade with China, such that the strength in the headline and orders readings should not be seen as a harbinger of strong nationwide (ISM) data when released at the start of February.”
Eleven US troops injured in last week’s Iran missile strike: A report has emerged that at least 11 US soldiers were injured in the Iranian missile attack last week on Al Asad Base in Iraq last week. Those injured had to be evacuated to US Military hospitals in Germany and Kuwait to be treated for traumatic brain injury and to undergo further evaluation, several U.S. defense and military officials have confirmed to Defense One.
Fed’s Bowman shows the Fed is unified in its neutrality: Fed's Bowman stuck to the script from the rest of Fed members by reinforcing that there is an across-the-board consensus for the Fed to stay sidelined this year. Bowman noted that “the Fed funds are likely to remain at current levels absent a change in outlook”, adding that she is “encouraged by the outlook for housing, with low rates set to continue to support the industry.”
The US Labour Dpt bans PCs in lockup room: The US Labor Department has decided to ban computers in the lockup room, which as Forexlive reports, “could impact the information dissemination directly to users.” The intention is that they want to eliminate the competitive advantage that algorithmic traders have currently. It is applicable from March and it will lead to delays in getting the information out electronically.
Trump’s impeachment a side show as record highs in US equities prove: The Senate swore in Chief Justice Roberts for the Trump impeachment trial, which is due to start next week, and that in the eyes of the market, it is a non-event. As long as the Senate is controlled by Republicans, this impeachment trial should remain a sideshow, as clearly manifested via the price action in US equities, which keep making record highs.
NZD boosted from ANZ inflation data: The currency rose after the indicator, which happens to be a good barometer for non-tradeables inflation, jumped by 0.8% q/q. The beat on expectations makes further easing by the RBNZ a distant prospect. It has even led to early speculation that the RBNZ may shift its language to a more hawkish stance.
China data shines: China published a raft of y/y indicators today, including the Q4 GDP, which came in line with expectations at 6% for the year even if it marks the lowest read in 29 years. The December activity also included Industrial Production beating estimates at 6.9% vs 5.9%, Retail Sales also coming above estimates by the smallest margin at 8% vs 7.9% and Fixed Assets Investment, which also managed to come above expectations by printing 5.4% vs 5.2%.
What’s ahead in the calendar? Later this Friday, the key releases include UK Retail Sales, the final Eurozone CPI, followed by US Industrial Production, the JOLTS job openings, US building permit and the preliminary January University of Michigan Consumer Sentiment Index.
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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 pulled back further from its weekly high and is retesting once again the origin of its demand imbalance departure from last Monday. The rise in the index was never accompanied by compounded tick volume via the 13ma applied to the OBV, which if positive, would show firm commitment by buy-side accounts, but that’s not the case. The volatility in the EUR-pair, a recurring theme across FX, remains very depressed. January’s EUR seasonal pattern averages over 0.5% in losses since 1982, hence a bullish bias this month is a dubious scenario.
The GBP index has established in a range phase, which disallows the clarity necessary to call for a particular direction based on the index alone. What’s encouraging from the 3-day rise we are seeing is that the sequence of tick volume is higher than the last move down. Add into the mix the solid close, and it won’t be that unlikely to see the range high being retested next. Besides, the compounded volume pressure, with the 13ema applied to the OBV, has now turned positive. Do not forget that GBP does not have the backing of seasonals during January.
The USD index found dip buying activity at the retest of the last resistance line, now turned support, which was an anticipated outcome based on how much volume the breakout had. The sizeable bottom tail tells us the story and I think a breakout of the previous swing high (Dec 20, 2019) is still a real possibility before the end of the month. First off, the acceptance found above the smart money tracker (enhanced moving averages) is the first important revelation and even if the compounded tick volume trend has now turned bearish, I wouldn’t read too much into it as the real money candle from last week overrides that as the key input to account for. Remember, in January, the USD seasonals are looking really good, with gains of +0.5% on average.
The CAD index shows an almost identical picture than 24h ago, with my bullish view still playing out with striking accuracy. I’ve endorsed to be a buyer on weakness and that’s precisely the type of pattern yielding the most dividends if adopted. My base case is anchored by all the key elements I tend to monitor on a daily basis, that is, the price structure is bullish, the acceptance above the prior resistance line reveals a clear storyline, and the smart money flows via the enhanced moving average pointing in the right direction. Besides, the aggregated tick volume supports the trend as it communicates buy-side commitment dominant, with the low volatile trend setting up the ideal conditions. The seasonals for the CAD are positive in January too. What else can you ask for? It could go anywhere, but the objective evidence is to remain a bull.
The JPY index found follow through sell-side commitment to extend its losses for a 7th consecutive day with the outlined macro level of support blown through. As reiterated, all technical elements keep the bearish bias intact, with the price structure bearish and the risk sentiment adding pressure to the Yen as US equities keep printing record highs, and the compounded tick volume slope (13ema to OBV) still pointing aggressively bearish. The only ‘but’ is the tapering of tick volume on the way down, even if in the grand scheme of things, it does not alter the bearish outlook. This is a market where fast money flows are dominating.
The AUD index keeps struggling at the midpoint of its macro range, which for another day on Thursday acted as a sticky resistance where the supply imbalance kicked in from. As long as the market remains below this symmetrically key level, the objective technical call is to retain a neutral to bearish bias with no grounds to be too optimistic unless, as I said, equilibrium is found above the midpoint of the range or support at the bottom of the macro range is tested. Notice, the smart money tracker, even if not as insightful when trading within a range, is nonetheless showing a downward slope cementing the less than ideal outlook for the AUD. The seasonals are positive to the tune of +0.54% in Jan since the early 1980s for the Aussie though.
The NZD index has recently established a short-term range in the broader context of a bullish trend. It is therefore no surprise that the double bottom found led to a rotation back to the other side of the range, where the currency keeps struggling to break past. The overall volume pressure as assessed by the 13ma off the OBV has flattened out, indicating a period of indecision, while the enhanced moving averages tracking the smart money flows shows a bearish slope but the range trading makes the read not as relevant. Overall, the price structure is still bullish as the range occurs as part of a rising market. The volatility to be trading NZD pairs, as the last window indicates, has fallen below the usual monthly average.
The CHF index, after hitting its 100% proj target, has found sell-side flows pick up, even if it remains extremely premature to call this the ultimate top. What’s clear though is that this is a market driven by the fast money with little value to be adding longs at these hefty levels. I mentioned that this market trades out of touch with reality and sooner or later, especially with the positive swap offered to short CHF, it risks mean reversing. For contrarians, value traders or those deploying long-term strategies, this market looks appealing if having the patience needed.
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