Low Vol FX Ahead Of Jackson Hole

The currency market remains confined in tight ranges this week as we await today's FOMC minutes, but most importantly, the Central Banks' Jackson Hole Symposium, in order to clarify where Fed's Chair Powell stance in terms of monetary policy guidance.

The article is authored by Ivan Delgado, Market Insights Commentator at Global Prime. This content aims to provide an insightful look into topics of interest for traders. Feel free to follow Ivan on Twitter & Youtube. Make sure you join our discord room if you'd like to interact with Ivan and other like-minded traders. You can also subscribe to the mailing list to receive Ivan’s Daily wrap. Also, find out why Global Prime is the highest-rated broker at Forex Peace Army.

Quick Take

The Sterling was the main winner, and even the move occurred in the blink of an eye, in an otherwise lackluster Tuesday. The light calendar and low market participation as the summer doldrums settle in were certainly not helping the proceedings to get some directional inspiration. The currency market remains confined in tight ranges this week as we await today's FOMC minutes, but most importantly, the Central Banks' Jackson Hole Symposium, in order to clarify where Fed's Chair Powell (due to speak on Friday) stands in terms of monetary policy. The chart below clearly shows how dead vol has been in the last 48h. But the compression, one would think, is set to be followed by fresh directional movements as the market gets a much-needed update about the intentions of the Fed, which as of now, is expected to cut rates by another 25bp in September.

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.

The Italian government dissolves: The Italian government has officially collapsed after PM Conte handed over his resignation to the President. The move follows the decision by the coalition partner Salvini (deputy PM and leader of the far-right), to no longer be willing to work with the current government in a political maneuvering that has the signs of wanting to capitalize on the higher ratings. As a result, risk came off with Italian stocks falling more than 1% as it forebodes yet another political crisis in Italy, now having to come to terms about whether fresh elections are triggered or a new coalition government can be formed. Consultations on the government to start tomorrow afternoon.

Trump mulls tax cuts: According to the Wall Street Journal, US President Trump has tasked the White House into examining various proposals to keep the economy in its record-growth path by looking at possible tax cuts. Trump added that the government must be 'proactive', which includes further easing by the Fed , something that “should have happened a long time ago,'' he said. One wonders if he is strategizing to apply added pressure for the Fed to cut rates more aggressively.

The broad trade-weighted US dollar index hits a new all-time high: The index (see annex 1) has finally taken out its 2002 high to print a fresh all-time high which is set to weigh on the economy, especially exporters & corporate profitability. There are reasonable concerns that the higher the USD in trade-weighted terms goes, the more it will impact corporates’ buy-backs of US stocks at a time where debt levels are very elevated.

RBA minutes sticks to script: The RBA published its latest minutes from the August meeting, keeping a similar script to what was expected. There wasn’t much room for a surprise as the latest update on policy was given last Friday by the attendance of Governor Lower before a parliamentary committee. The RBA board still remains on the camp of considering further policy easing if needed as it continues to assess developments in domestic and global economies. Once again, they reiterated to be reasonable to expect "extended period" of low-interest rates, adding that risks to economy tilted to the downside in the near term, more balanced further out. The RBA also made it clear they have no interest in a higher currency by stating that the “recent depreciation of the Australian dollar was expected to support further growth in service and manufacturing exports.”

EU-UK going around in circles: UK PM Boris Johnson reiterated his hard-line stance to deliver Brexit by 31 October by tweeting "Jeremy Corbyn wants to cancel the referendum and argue about Brexit for years. I am committed to leading our country forward and getting Britain out of the EU by October 31st. We are ready to work with our friends and partners to get a deal. But if you want a good deal for the UK, you must simultaneously get ready to come out without one.” To which Donald Tusk, the President of the EC, replied “the backstop is an insurance to avoid a hard border on the island of Ireland unless and until an alternative is found. Those against the backstop and not proposing realistic alternatives in fact support reestablishing a border. Even if they do not admit it."

Merkel gives the Pound a boost: The Sterling was given a late-day boost after German Chancellor Merkel showed a more amicable approach on the backstop, saying that we will ‘think about practical solutions’, adding that Britain must decide ‘which way it goes as we have made our offer to work closely.”

Morgan Stanley shares gloomy research on global manufacturing: The bank has published a research paper unveiling, via a comparison table, the current levels of global, European, US PMIs vs those pre-GFC. Each and every indicator of the 20+ sample shows it is now worse than back in Sept 2007 (see annex 2). However, it’s prudent to take this data with a slight pinch of salt for two main reasons. Firstly, perception does influence data and back in 2007, few were looking for a recession whereas now a lot of people are calling for one, which feeds into the manufacturing data. Secondly, manufacturing accounts for about 12% of the US economy, hence some may argue this might be just a sector recession as opposed to an overall economic downturn.

Jackson Hole Symposium key risk event: The key event this week comes on Friday at 14:00 GMT, when Fed Chair Powell is scheduled to speak at the Jackson Hole Economic Policy Symposium in a speech titled "Challenges for Monetary Policy". It’s likely to be a major market mover as the market will have an opportunity to re-adjust its outlook towards the Fed’s Sept policy decision. For now, there is a 100% chance for a 25bp rate cut, while a 50 bps rate cut has been priced out.

Annex 1

Annex 2

Recent Economic Indicators & Events Ahead

A light calendar ahead with only Canada CPI and US Existing Home Sales as events with the potential to inject volatility. The US FOMC meeting minutes will follow the same Wednesday but late on the day. Then we have a bunch of Eurozone PMIs on Thursday, including Germany, France and the EU flash manufacturing/service PMI, while also the US flash manufacturing PMI, with the New Zealand and Canadian retail sales on Friday, alongside the mentioned Jackson Hole economic policy symposium (runs for 3 days).

Source: Forexfactory

A Dive Into The Charts

Looking at the currency strength model (weight is equally distributed among G8 FX), the bullish dynamics in the USD remain valid as the index preserves its constructive structure above the 13-d ema baseline, which is what the model refers to in order to determine the directional bias. The breakout of the resistance on Monday, which came on low volume, as pointed out in yesterday’s note, run the risk of exhausting. But, as said, it doesn’t change the bullish outlook. The Euro index has been consolidating for over a week below its baseline, which makes the overall bias bearish. The Sterling index, bolstered by Merkel’s comments on the backstop, displays a combatant profile, being exchanged at an area that makes it bullish and bid with the aggregated tick volume data also showing an increase in buy-side participation. The index is on a roll as reflected by the 7 consecutive days of gains printed, even if I reiterate that it should get much harder to keep extending gains from these current levels as a key resistance still holds. The Canadian Dollar index is bearish and offered but it should find pockets of demand considering where the index has landed, that is, an area of support rejected multiple times. To short the CAD with any conviction, one should consider to see a break and close below the support line. The Australian Dollar index continues to flirt with its baseline in what looks like might be a transition into bullish territory in the next 24h with the indicators (fisher transform and cci) pointing higher. The NZD, on the contrary, remains vulnerable to further downside risks. Lastly, the risk-off currencies (JPY, CHF) see its respective indices still floating in bullish territory with a bid regained in the last 24h in response to the declines seen in stocks and bonds.

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.

A market where my short exposure is so far not paying off is the NZD/USD, with the excessive time of consolidation right underneath a breakout point in the 8h chart making me play my position more conservatively by moving the stop to breakeven. The correct application of one’s hard-rules when managing a position is as, if not more important, than the entry trigger itself.

It has not been easy at all to find developing trend earlier this week as the low market participation in August coupled with the light calendar has not encouraged directional flows. However, by drilling into the 8h chart, which essentially allows you to scan for opportunities once per session, a market that did catch my attention since earlier this week and fortunately I managed to capitalize on includes the USDTRY, which triggered a long signal last Friday.

Another market, through the H8 chart that looked ripe for a downside extension was the EUR/AUD, but again, as in the case of the NZD/USD, it never got off from 1st gear. It has now confirmed the formation of a range as the bollinger band narrows and a double rejection occurred, which is all I need to see to call this 8h timeframe as range-bound, hence why I’ll be looking to exit my short entry trigger at break even on a retracement back down.

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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