Posted on: 13 May, 2019
Last Friday's inconclusive US-China trade talks kept the markets guessing, what's next? However, that was not an impediment for a relief rally in risk assets to take effect even if the sustainability of this movement looks a tall order at the current levels of uncertainty.
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Last Friday's inconclusive US-China trade talks kept the markets guessing, what's next? However, that was not an impediment for a relief rally in risk assets to transpire, even if as I elaborate in today's report, the sustainability of this movement looks a tall order at the current levels of uncertainty. The soft deadline that represents the hike in tariffs last Friday, as it essentially still gives the US-China an extra 2 weeks to further negotiate the potential removal, influenced the price action. But the market may play the 'half full' glass for so long, as will the Chinese the patient hand amid constant aggressive rhetoric by Trump. For now, though, the priority by China is to extend the period of negotiations, which has led to the settling of market nerves a tad. We were left with, I must admit, from a directional standpoint, inconsequential broad-based range-bound price action in FX markets last Friday, with the exception of a Canadian Dollar, re-invigorated by a 10:1 beat in last Friday's Canadian job report. Further weakness in the Chinese Yuan at the open of markets this Monday, paired with downside gaps in the S&P 500 futures, is a reminder that the dynamics are far from ideal to support risk.
* The Information is gathered after scanning top publications including the FT, WSJ, Reuters, Bloomberg, ForexLive, Institutional Bank Research reports.
We ended last Friday with spells of risk on swings feeding through, leading to both US equities and US bond yields closing higher and reverting back to a micro bullish trend as per the slope of the 25-HMA. However, be warned that this tentatively nascent price action must be reconciled with still pronounced bearish trends from a macro perspective as the black moving averages, which look at 1-week worth of data via the 125-HMA, indicate. Even if the market looks at the assurance by the US-China sides that negotiations on trade are set to extend, there is little ground and too much uncertainty to justify a sustainable recovery in the ‘risk on’ profile.
The substantial downside gap open in the S&P 500 futures (ES1!) or the bid tone in the Japanese Yen this Monday supports this case. With regards to crosscurrents in the currency market, despite the 2--day correctional move in the Japanese Yen, the elevated levels it has managed to find equilibrium at is a warning sign. The new lows made by the Chinese Yuan (offshore) at the open of business in Asia (higher USD/CNH) at 6.87, is yet another revelation that price action provides before our eyes about the dicey environment, which as I said, will not help to promote the ‘risk on’ flows for sustainable periods of time I suspect.
The USD, interestingly, has shown a very interesting and so so encouraging pattern for the bulls. Regardless of the rhetoric on the trade negotiations, it has really struggled to make headways, while the magnitude and speed of its depreciation has been much more clearly manifested. I’ve been saying that the increase of volatility in equities via a hefty VIX (now down to 16.00 from 23.00), alongside a much more volatile Yuan, is a well-justified logic to start re-evaluating carry trades in FX. Carry trades involve borrowing in low-yielding currencies the likes of the EUR, JPY, CHF and use these funds in far more attractive vehicles of FX investments with the USD offering the highest yield.
As uncertainties build and fear of the proverbial hitting the fan in the US-China trade negotiations take center stage, it causes the unwinding of these positions, which so far may be outweighing whatever demand has existed towards the US Dollar as a safe haven asset class, even if it may prove short-term in nature. Additionally, the softish US CPI on Friday is yet another reason for the Fed to avoid any grounds to sound hawkish at all in the foreseeable future. As Morgan Stanley notes: “A weaker core CPI has the potential to put the USD under significant selling pressure. This is because it meets a market that is not only trading breakeven rates sharply lower, but also concluding that the US may be less well prepared for trade escalation compared to summer last year.”
So far, by looking at the dynamics in equities and the Yuan, the market keeps telegraphing US-China trade impasse remains a source of unresolved 'uncertainty' as the chart below depicts. A crossover of the ES down thru the USDCNH line is needed as evidence a deal is really being discounted.
EUR/USD: Rotational Profile Eyed
The exchange rate looks set to experience a non-directional bias this Monday, following the inconclusive 1 single distribution volume profile from last Friday. The absence of news in the economic calendar strengthens this case. The single distribution occurs in the context of a bullish cycle after the strong spike seen on May 9th. The symmetries to define today’s market structure are very clear, with the POC perfectly coinciding with the middle of the established 1.1250-1.1210 range. The edges of the range is where the key decision will be made while engaging in buy/sell-side action the massive pool of liquidity that constitutes the levels nearby the POC offers unclear prospects. While the OBV has flattened out, which indicates a more balanced pressure in terms of volume activity, the paper of volume from the 1.1250 top is not that encouraging for the interest of sellers. Overall, I cannot envision a sudden setback of the bullish bias unless a close sub 1.12 is achieved.
GBP/USD: Extension Of The Range Expected
The symmetrical measures reached and the locations where the concentration of volume is occurring continues to suggest that barring any unexpected Brexit headlines, the market is due for an extension of the range conditions, a scenario that was endorsed last Friday too. Whenever that’s the case, it means the market is expected to trade with a rotational bias as no side is able to take control of the price action beyond key levels of liquidity. These levels continue to be assigned at 1.3040-50 to the downside, while sub 1.2990 and through 1.2970 is where fading selling flows are probable. In the chart below I’ve also drawn, in case of a breakout, the next targets to achieve by the side in control.
USD/JPY: Range-Bound Pattern With Bearish Risk
With the demand towards the Yen abating as the market turns slightly more risk constructive, the market must content itself with the formation of a balance area. The risk still looks skewed towards an eventual downside resolution or at least I envision the next test to be the bottom side of the range, judging not only by the dominant macro trend but by the deterioration of risk at the open of business in the Asian session, where the RORO micro trend has reverted back down (black line), while the bearish trend remains firmly in place in the DXY, as the thick blue line slope (micro trend) shows. A resolution of the range to the downside should expose 108.90 as the next 100% measured target.
AUD/USD: Bottom-Side Of The Range Tested As CNH Weakens
The spike in the USD/CNH in the early hours of the Asian session has led to the sell-side pressure on the Aussie to build further momentum, now testing the bottom of its range. On one hand, judging by the volume profile printed last Friday, the single distribution formation does promote buy side campaigns off these levels, with the elevated levels of the OBV(On Balance Volume) supporting the rationale as it communicates that the latest fall is very much a removal of market liquidity without much committed sell-side activity so far. On the other hand, with the aud/usd value line via the slope of the inverted USDCNH + DXY making new lows, the negative intermarket flows must first pause. At these levels, the risk-reward to fade the sell side move looks interesting, subject to one’s particular strategy. The turnaround in the USDCNH will dictate the chances the AUD has of an intraday bounce.
USD/CAD: Sell-Side Bias Favored, Techs-Funda In Alignment
In a forex market with an absence of directional biases in the last 24h, playing long CAD could be the exception if Friday’s double distribution down in the exchange rate serves as an indication. The upthrust bar in the CAD index across the board led to the USD/CAD to reach its 200% measured target last Friday, before an ongoing rebound has taken the rate back towards levels near a key resistance at 1.3445-50, where sell-side interest should be on the rise. Last week’s accumulation of volume has been trapped just above at the 1.3060 area, making the prospects of a recovery through the level even more challenging, while it incentivizes committed sell-side account to de-risk exposure. Besides, the accumulation of volume activity through the OBV maintains a clear bearish slope, while intermarket flows both in Oil (inverted) and DXY communicate sell side pressure should not abate.
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