Markets Play 'Glass Half Full', FX Stuck In Ranges

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.

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. Feel free to follow Ivan on Twitter & Youtube.

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Quick Take

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.

Narratives In Financial Markets

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

  • The scenario of a no-trade resolution between the US and China as part of last week’s talks, even if negotiations are set to resume in the near future, alongside the increased 25% rate in tariffs to Chinese imports, keeps the market guessing what’s next?
  • To make matters worse, US President Trump announced the process has begun to put together the paperwork necessary for another planned hike in tariffs on over $300bn. Talk has it that the US has given China 3-4 weeks before it enacts the next tranche of tariffs.
  • The front page of the Financial Times reports that there are hopes that a Trump-Xi meeting by the end of June at the next G20 summit may rescue the trade accord. The Director of the US Economics Council Kudlow also suggests to the press of the possible meeting taking place.
  • The market remains expectant on the Chinese retaliatory response to the increase in US tariffs, which is yet to be announced. It could come in the form of non-tariffs trade barriers, a depreciation of the Yuan as a tool to maintain the same levels of competitiveness…
  • Chinese Vice Premier Liu has stated that if progress is to be made, the US must remove all the extra tariffs rather than by stages as the US intends to do in case of an agreement, also set targets for China to buy US products within logical parameter and the text to be ‘balanced’.
  • Reports have emerged that Treasury Secretary Mnuchin and Trade Representative Lighthizer have been invited back to Beijing at an undisclosed date to continue the talks.
  • US President Trump has been tweeting about China over the weekend, sounding confrontational, noting that ‘he loves collecting tariffs’ from China and that a trade deal will be far worse for China in his 2nd term. Sooner or later, one would expect his incendiary comments as part of his premeditated tactics to put pressure on China may backfire.
  • So far, the market continues to treat the lack of progress on trade talks as a glass half full, with the price action manifesting that there is still disbelief in the negotiations breaking loose. The ambiguity in Trump’s comments, saying that tariffs may or may not be removed depending on negotiations. The market interpreted the language as hopes for only a slight delay to a deal.
  • The Canadian Dollar rallies in response to a blockbuster Canadian employment report last Friday, essentially beating expectations by a ratio of 10:1 after 106.5k jobs were created.
  • Once again, US inflation figures underwhelm after the April’s CPI YoY comes at 2% vs 2.1% exp, but even worse, real average weekly earnings saw a major miss YoY to 0.9% vs 1.4% exp. This outcome, alongside the potential unwinding of carry trades, signifies two negatives for the USD.
  • On the Brexit front, the Times reports that a movement is shaping up within UK PM May’s Cabinet Ministers to abandon the cross party talks with Labour to instead begin indicative votes in parliament in light of the lack of any substantial breakthrough in talks.

Recent Economic Indicators & Events Ahead

Source: Forexfactory

RORO (Risk On, Risk Off Conditions)

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.

Latest Key Developments In FX (Technicals, Fundamentals, Intermarket)

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.

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. The weekly cycles are highlighted in red, blue refers to the daily, while the black lines represent the hourly cycles. 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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