Market Gives Benefit Of The Doubt In US-China Trade Truce

Given the risk-off ahead of the trade talks as evidence mounted that neither the US nor China was setting the stage for a fruitful outcome, the rampant risk reversal after another truce was reached is perceived as part of a market caught wrong-footed and overplaying what's been achieves so far. The Yen, Swissy and US Dollar were punished the most, while the Sterling remains on fire.

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.

Quick Take

Notwithstanding the merit of reaching a trade truce once again, one wonders if the market got ahead of itself by over-selling funding currencies the likes of the Japanese Yen and the Swiss Franc, both destroyed, alongside a considerable loss of value by the US Dollar as well, although to a lesser degree. The truth is that the partial trade deal between the US and China barely scratches the surface on what's still a rather ambiguous and limited trade accord of intent. The Pound's volatility, meanwhile, represents a whole different ball game, as the high-stakes EU-UK Summit later this week approaches amid optimism that a compromise in the Irish border could be reached. Again, has the market overplayed its hand on the Sterling? The pricing of the Pound looks awfully expensive on any time frame other than the monthly perhaps. One of the main beneficiaries last Friday, following at a fair distance the Sterling's tail, is the Canadian Dollar, catapulted by a sizzling hot jobs report. The Aussie also did well as a proxy for China, while the Euro and the New Zealand Dollar were met with new moderate imbalances of supply as both keep retreating from the best levels in weeks. 

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.

Narratives In Financial Markets

* The Information is gathered after scanning top publications including the FT, WSJ, Reuters, Bloomberg, ForexLive, Institutional Bank Research reports.

US-China agree to bare minimum: A partial trade deal between the US and China jolted financial markets once again last Friday, even if it should be understood as yet another mere trade truce, whereby China will buy more soybeans ($40-50bn annually) in exchange for a suspension of the next tranche of trade tariffs hikes (from 25% to 30% on $250bn) by the US in October 15th. The formalization of the deal is thought that it may occur during the APEC Summit on 11-17 November.

The 'Phase One' trade deal: The trade deal has been dubbed as ‘Phase One’ of a more comprehensive deal down the road. As it stands, there is simply not enough meat on the bone for markets to get overly excited unless the core issues such as intellectual property, subsidies, market access, currency accord, among others, get addressed, which by the end of talks no public details transpired. What’s more, there was no cancellation of the existing tariffs, while further tariffs are still planned to go ahead for December 15. The blacklisting of Chinese companies by the US administration or the restrictions imposed on Huawei are still not addressed either.

A market caught wrong-sided: Given the risk-off  ahead of the trade talks as evidence mounted that neither side was setting the stage for a fruitful outcome, the rampant risk reversal should be perceived as part of a market caught wrong-footed even if the sustainability of the rally remains debatable based on what’s been achieved so far.

No end in sight to lackluster investment and hiring intentions: Since none of the underlying issues as part of the trade war with China were resolved, it does fall short of what global and US firms would have expected in terms of clarity to crank up investment intentions and hiring decisions, hence the global slowdown is still very much a hot topic of discussion among the trading floors. If one buys into this assumption, safe-haven assets the like of Gold, bonds, Yen or the Swiss Franc should still be an attractive macro trade on the basis that the protracted trade war will drag on.

The Sterling is on fire as Brexit rules the rooster: Brexit deal optimism continues to catapult the Sterling, averaging over 2% gains in the last 48h of trading. The latest spike in the GBP on Friday frontrun a subsequent statement from the EU and UK's chief negotiator, in which both had a constructive meeting, where the phrase “both agreed to intensify discussions over the coming days” acted as the driver.

Can UK PM get enough support from the DUP? The real question is whether or not the UK PM Johnson is now capable of convincing the DUP party, by softening his stance on the Irish border, to increase the probabilities of hashing out a deal with the EU before the deadline of Oct 31. DUP’s Nigel Dodds said that “Northern Ireland has to remain fully party of the UK customs union”, while the EU’s Barnier reiterated that the proposal is not good enough to get a deal.

The UK-EU Summit on 17-18 October is absolutely key and it should bring about heaps of volatility in the British Pound. An extraordinary Parliamentary session in the UK on Saturday 19, where PM Johnson might be, by law, forced to seek a Brexit extension followed by the decision to call fresh general elections, may follow.

New details about the Fed’s balance sheet expansion: The NY Fed announced plans to purchase Treasury bills at roughly $60 bn/month, in addition to o/n and term repo operations to guarantee sufficient supply of USD in the system. The statement emphasizes that this isn't a change in the monetary policy stance: "These actions are purely technical measures to support the effective implementation of the FOMC's monetary policy, and do not represent a change in the stance of monetary policy."

A spectacular Canadian employment report: The Canadian jobs report came much better-than-expected at 53.7k vs 7.5k. The details of the report were extraordinarily good, with the unemployment rate at 5.5% vs 5.7% expected, the hourly wages for permanent employees at +4.3% vs +3.8% expected (prior +3.8%), while the full time jobs increased by +70.0K, while part time jobs saw a decline of 16.3K. Chances of a rate cut by the BOC have effectively gone down to 0% for the next meeting.

Recent Economic Indicators & Events Ahead

With Monday expected to be an unusually quiet day given the public holidays in major financial centers (Japan, US, Canada), the week will really come to life from Tuesday. It’s going to be a week with enough market catalysts, fundamentally speaking, to inject decent volatility in G8 FX. The week starts with the publication of the RBA Minutes on Tuesday, with Thursday’s employment data in Australia also to watch closely. Its neighbor, New Zealand, sees the publication of the CPI figures on Wednesday. In the US, focus will be on the earnings season kicking off on Tuesday, which should be the main driver for stocks, hence act as a major driver for the likes of the Yen on risk on/off. Brexit will definitely be another focal point, as the market awaits headlines from the 17-18 October UK-EU Summit. The base case by the market is that an extension will be followed by fresh elections, with the behavior in the Pound still reflecting chances for a deal are alive. Other data points of interest include US Retail Sales on Wednesday or China’s Q3 GDP and other monthly activity indicators on Friday.

Source: Forexfactory

A Dive Into The FX Indices Charts

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 EUR index rally could not be sustained beyond a level thought to be of rich liquidity as depicted by the red horizontal line in the chart, as it refers to a daily level. From there, the initiation of a sell-side campaign ensued in the next 2 days, taking the currency to grab liquidity at a level of support in the 8h chart (now tested) as the blue line shows. We seem to now be entering a period of potential consolidation between the 8h support level and the newly created 1h of resistance identified in green color, which holds enough credence after the swing achieved a successful rotation, although not strong enough to validate a new bear cycle.

The GBP index continues to be on fire, fueled by the promising Brexit headlines coming through in the last few days of active trading. The extension is so out of whack that even momentum strategies may find it hard to justify further extensions without at least a meaningful correction lower. That said, if more positivism in the Brexit saga emerges, algo-led strategies will be fast to front run best bids available to keep the momentum going, although as I said, it’s rather suicidal to be a buyer of the Pound at these levels unless you have a macro perspective in mind and the intention is to hold the position for a protracted period of time. A few levels to take into account on the way down were marked in the chart to keep in mind as reference.

The USD index tested a pristine technical area where a potential long lasting buy-side campaign could be initiated from. The low reached on Friday already indicates demand flows are emerging where one would expect, which comprises an area of great confluence including a level of daily horizontal support, a trend line visible off the daily too, and a 100% measured move. A retest of the opposing supply level represented by an 6h resistance level is on the cards in the following days I’d expect, where sellers may find a lot more value to re-engage.

The CAD index has reached its 100% measured move in the hourly chart after a sizzling hot Canadian jobs report. This is a technical area where profit-taking by Friday’s buyers should ensue, potentially leading to a shallow pullback in prices in a day where liquidity is set to be much thinner-than usual on the closure of markets in US/Canada. Should the market manage to return towards its prior hourly swing high (aligns with the 50% retracement and 13d ema), I’d expect demand flooding in for the rally in the CAD to resume into fresher legs.

The NZD index appears to be caught in an hourly range of roughly 0.7%, with the current valuation finding a balance of bids/offers right at the mid point, which makes the zone to be trading the currency rather unattractive unless the edges are re-visited. The multitude of failed attempts to break higher has led to an eventual retracement of the index, although one would think the supply overhead is being consumed the more times it is tested. For now, the index is in no man’s land with a movement of about 0.3% in either direction to reach the cleanest areas of supply or demand where the next directional move is most likely to originate from.

The AUD index is building higher highs and higher lows through the mid-term 6h chart, permitting to create the prospects of a market that should continue to draw buy-side interest on dips, with the most critical support levels drawn in blue below the price. The constructive structure in the Aussie, accompanied by the positive vibes around the renewed truce between the US and China, make the upside supply level depicted by a blue line a potential target to eye. As long as the trendline off the 6h is not breached, the bullish structure is valid off the MT chart.

The JPY index has reached a key level of demand in the daily chart amid overextended conditions, causing the temporary thriving of contrarian reversal to the mean strategies. The void caused by the sharp devaluation of the Yen allows for further upside recovery in the days ahead, with the downside quite limited based on the relevant fresh daily level hit. Should the Yen recover enough ground to reach the 6h resistance level, that’s where the increase in supply imbalance should be most prevalent, as it aligns with a prior support level.

The CHF index looks set to seek out pockets of supply to the upside after it violated a prior daily swing low, creating a fresh bearish cycle on the daily chart. As in the case of the Yen, there is significant upside room for the CHF to undergo a corrective movement before it faces a significant opposing area of resistance off the hourly. A recovery all the way towards the 50% retracement would attract sell-side more macro sell-side interest based on how relevant the level has been in recent chart history, with plenty of interactions seen.

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.
  • 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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