Major Turnaround As Trump Talks Up Trade

We are far from being out of the woods as the sense is that Monday's risk recovery has little for one to latch on as trade war discrepancies worsen. However, as manifested via recent price action, the risks of greater two-way street erratic vol are on the rise as Trump gets fixated with keeping equity valuations afloat, even if his claims start being highly questionable.

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

US President Trump, in yet another attempt to manipulate stock valuations, managed to single-handily engineer a major disruption to the 'risk-off' conditions that had engulfed the market since last Friday's ramp-up in the trade war escalation. Whether Trump hallucinated (manipulated) the market when saying China wants to return to the negotiating table after receiving a call or not, what's clear is that he still holds the power and has the ability to move the markets by acting as a circuit breaker. The round trip in the Aussie as the primary G10 FX proxy for China left many scratching their head but that's the dicey environment we live in as the volatility of Trump's tweets also ramps up. The Canadian Dollar was another great performer, while the Kiwi lagged way behind. The pullback in funding currencies was especially notable in the Euro as the currency got hit from both angles ('risk-on recovery' + poor German IFO). The Sterling continues its low vol correction after the strong appreciation following Merkel's optimism around a potential backstop solution before the Brexit deadline by end of Oct. Lastly, the USD has traded much more stable, attracting fresh demand flows, sandwiched between the outperformance of high-beta currencies and the underperformance of the funding currencies. We are far from being out of the woods as the sense is that Monday's risk recovery has little for one to latch on as trade war discrepancies worsen. However, as manifested via price action on Monday, the risks of greater two-way street erratic vol are on the rise as Trump becomes fixated with keeping equity valuations afloat, even if his claims start being highly questionable.

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.

V-shaped turnaround in sentiment: There has been an abrupt turnaround from 'risk-off' to 'risk-on' sentiment after US President Trump claimed that China trade representatives had reached out to return back to the negotiating table, adding quite explicitly that China has the intention of “wanting to make a deal”. Even if the news were later disputed by Chinese officials and press as false claims, noting that “top negotiators didn’t hold phone conversations in recent talks”, the market never looked back, ending the day with risk assets recouping all early Asian losses and a large portion of Friday’s.

China questions veracity of Trump's claims: Even though what really matters is price action and not to get into the debate of who’s right and who’s wrong, Hu Xijin, Editor in Chief of the Global Times (China’s government mouthpiece) said: “Based on what I know, Chinese and US top negotiators didn’t hold phone talks in recent days. The two sides have been keeping contact at a technical level, it doesn’t have significance what Trump suggested. China didn’t change its position. China won’t cave to US pressure”.

China seeking a 'calm' approach: What’s factual and objective information is that a big shot in the trade negotiations as is China vice-premier Liu He said that China is willing to resolve the trade dispute with the US in a calm manner, cited in a Chinese newspaper via Reuters, adding that China opposes an escalation of the current trade war.

Trump's sensitivity to the stock market keeps growing: Make no mistake, US President Trump continues to accommodate a narrative based on the valuation of stocks. If he sees big down days in the market, he will not hesitate to do or say whatever it takes to re-invigorate the bullish sentiment. That’s a real possibility. Now, by applying common logic, the worsening in the relationships between the US and China, with Trump ramping up his retaliatory actions, certainly provide little breathing room for either side to compromise on key sticking points without losing credibility back home. Both Trump and Xi need their economies to keep growing, which means they need each other, but at the same time, they won’t allow any action to be seen as an admission of weakness that will make them lose face.

The G7 summit carries a few positive headlines: Helping the risk sentiment is the perception that the G7 summit over the weekend was a rather successful one. Some of the positive highlights included the willingness by Trump said to resume talks with Iran over its nuclear ambitions, which sent the price of Oil down as the market prices in, even if only at a marginal level, that Iranian oil supply may return to the market. We also saw a compromise between France and the US over the French technology tax, with an agreement for the tax to last for two years until the OECD agrees on a global minimum tax. Even more importantly in terms of the relevance it holds, President Trump also said that the US and the EU may eventually reach a fair trade agreement to avoid tariffs on cars. Trump said: “We’re very close to maybe making a deal with the EU because they don’t want tariffs… I think we’re going to make a deal with the EU without having to go that route.”

Germany's data from bad to worse: In a sign that the German economy is increasingly likely to be headed into a recession later this year as the global economy deteriorates further, the German IFO came in below expectations. The IFO saw another drop to 94.3 from 95.8, which is below market expectations of 95.1. The Manufacturing Index, as a result of the Chinese trade activity slowdown, hit its lowest levels since December 2009, while the Services Index finds itself at the weakest point since June 2010. The bleak outlook in Germany should reinforce the notion about the ECB preparing a rather aggressive easing package as well as calls for fiscal stimulus by the German government.

ECB's Weidmann re-ignites hope for stimulus package: Amid the horrendous German data, Dr. Jens Weidmann, President of the Deutsche Bundesbank and a key member as part of the European Central Bank, said that there is "no reason to roll out a large-scale programme to stimulate economic activity", in an interview with the German news outlet Frankfurter Allgemeine Sonntagszeitung. The comments follow the ramp-up in rhetoric by ECB’s Rhem in an interview with the WSJ earlier this month, hinting to the markets that the ECB is getting ready to announce a big easing package, including rate cuts and asset purchases.

US data fails to inspire but acceptable: The US July preliminary durable goods orders saw an upbeat headline of +2.1% vs +1.2% expected, despite the break down of the details offers a poor picture as revisions were negative and key sectors such as capital goods shipments non-defense fell more than expected. It will be key to continue monitoring the appetite of business to invest as the trade war progresses.

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 Euro index was badly hit by the combo of downbeat German data (IFO business climate) coupled with the recovery of the risk environment, which led to a rapid unwinding of longs in funding currencies such as the Euro. The index is currently trapped in a range, having found a solid floor of support from where multiple rebounds have occurred. Given how dicey the main thematic of an escalating trade war remains, I wouldn’t be surprised if the Euro finds renewed buying pressure near-by even if the major bearish price action reversal of high tick volume alongside the retake of the baseline to the downside certainly suggest caution.

The USD index has recovered part of its Friday’s losses, also re-taking the upper side of the baseline on higher-than-usual participation as per the aggregated tick volume. On the downside, I still see Monday’s retracement in the context of a potential bearish developing context after the double top formation followed by the printing of a sizeable bearish outside bar. The fisher transform indicator (in blue), does not suggest a market ripe to storm higher just now, which is why I’d be cautious to gain much long-side exposure on the currency. Looks premature.

The Pound index continues to slide from the key level of resistance it reached last Thursday, which ever since I’ve warned it was an area where residual pocks of demand would be limited given the elongated nature of the bullish movement we saw. Overall, the index remains in bullish territory as per the daily chart, with demand expected to be found nearby as a broken level of support gets retested underneath as depicted by the chart. It’s worth noting that the horizontal support is confluent with the intersection of the 13-d ema baseline, adding weight.

The Canadian Dollar index looks the most bullish out of the G8 FX currencies monitored. The breach of the baseline to the upside on high tick volume (aggregated) does imply that the currency is well-positioned to find follow-through demand in the next 24h. Notice, buyers of the CAD initiated its buying spree off a key level of support highlighted in the chart, which is why I keep emphasizing that the technical analysis of these currency indices can be so instrumental for anyone who is looking to anticipate buying and selling campaign in a particular currency.

The Australian Dollar index has been another currency printing big gains overnight, and as in the case of the Canadian Dollar, the index also found the carving out of a bottom at a critical level of support last tested in early August. That should have been a heads up to be prepared for a potential reprieve in the Aussie, which just so happens to have picked up a huge upside momentum as the overall risk profile had an impressive turnaround. The outlook for the Aussie going forward is still unclear as the index could not break above the 13-d ema baseline, essentially making me quite cautious to support the Aussie in the next 24h, especially after the rubber band (price) got so overstretched. Note, a key resistance also lies ahead.

The New Zealand index is outright bearish with no technical developments making me change the view at this point. Even the abrupt recovery in risk appetite has led to the Kiwi being the underperformer against the commodity-currencies complex (AUD, CAD), which tells us the sentiment around the currency remains quite poor, which is vindicated by technicals. I’d personally stay bearish the currency looking for short-side business.

The Japanese Yen index is still under a bullish context as the price finds, once again, support at the 13-d ema baseline, from which traders are initiating buying pressure in early Asia. The market structure, with higher highs printed last Monday, also suggests that the current cycle is constructive to be adding longs on retracements until the baseline is lost. Overall, the Yen is looking like an attractive proposition at cheap levels considering the uncertain risk profile.

The Swiss Franc index was rejected off a key resistance, and as I wrote yesterday, this was an area that if you had any CHF long exposure, you should have definitely accounted for. The close at the end of NY business has not yet confirmed the currency falling under negative territory as the 13-d ema (baseline) acts as dynamic support once again. The outlook for the currency remains unclear but rest assured that if risk-off picks up, the index is poised to benefit.

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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