Oceanic Currencies On A Roll To Start The Week

Did you manage to scan through Monday's Daily Edge report? I anticipated a short-side campaign in North American currencies while a resurgence of buying interest in the Euro. Want to find out what's the outlook in the currency market after the punchy moves we've seen? In that case, don't miss today's report, as it breaks it all down, as usual...

The Daily Edge is authored by Ivan Delgado, 10y Forex Trader veteran & Market Insights Commentator at Global Prime. Feel free to follow Ivan on Twitter & Youtube weekly show. You can also subscribe to the mailing list to receive Ivan’s Daily wrap. The purpose of this content is to provide an assessment of the conditions, taking an in-depth look of market dynamics - fundamentals and technicals - determine daily biases and assist one’s trading decisions.

Let’s get started…

Quick Take

The NZD was the stellar performer right from the get go as the technical bullish momentum converged with the positive fundamental developments. The signal of more fiscal stimulus in NZ tames down the prospects of the RBNZ cutting rates further for domestic reasons. The Aussie also piggybacked the NZD, although at a slower pacing, driven mainly by the upbeat data out of China as PMIs return into expansionary territory. After the RBA, the Aussie was given a new impulse northbound as the RBA signaled the bar to cut rates is quite high now. The Euro and the Swiss Franc, after a typical early move lower in Europe for the smart money to collect further currency inventory, eventually experienced an aggressive mark-up phase. This rise in the Euro is perfectly congruent with the bullish notion portrayed in my reports and YT live streams. On the other side of the spectrum, we find the CAD and USD, both taken to the woodshed. In the case of the USD, the US ISM manuf PMI was the nail in the coffin, even if most of the negative pricing in the American currency was conducted last Friday when the market reversed. The weakness in the CAD was turbocharged not only by the strong correlation it shows with the USD at times when no fundamental drivers rule the price, but also due to the technical outlook as the index was retesting the origin of a supply area where sell-side pressure was expected. The Pound had a down day, even if there is little reason to believe the market is not just simply seeking out lower levels of liquidity to build GBP long inventory before the bullish mark-up phase. Lastly, the JPY showed a fake out move by weakening in Europe only to pare all losses in the US session.

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.


RBA holds rates steady, signals a less dovish stance:
The RBA held the key rate at 0.75%, as expected, since the marked had only priced in an 8% chance of a cut today. The next meeting is Feb 4. Out of the official statement, the most revealing line was "given these effects of lower interest rates and the long and variable lags in the transmission of monetary policy, the Board decided to hold the cash rate steady at this meeting while it continues to monitor developments, including in the labour market. The remark about the lag is an admission that the RBA is no longer pro-actively looking to slash rates any further, at least the reaction in the Aussie is what it portrays.

US ISM print disappoints the market: The US ISM manufacturing for November came weaker-than-expected at 48.1 vs 49.2 estimate, with subcomponents such as employment, new orders, inventories, new export orders, all acting as a dragger in the weakness of the indicator, which is flirting with the lowest since 2014. The less followed US Markit manuf PMI for Nov came at 52.6 vs 52.2 estimate, the highest level since April 2019 even if its impact was limited.

Gloomy outlook by the ISM Institute: The official statement read that “even if the tariff issue gets resolved, people aren’t going to want to make investments, because they don’t know whether the tariff issue can come back. So people are going to wait for the election period, and make some decisions after that.” This is a major warning sign as it suggests the stage is building up for the US economy to struggle the coming year in the run up to the election.

US-China data contrast: The disappointing US ISM index comes at a time when China’s weekend official PMIs for Nov returned back into expansion at 50.2, first time it has happened since April, while the services (non-manufacturing) stood at 54.5 vs 53.1 expected, marking the highest since March this year. The important private survey (Caixin / Markit) PMI on Monday also came upbeat at 51.8 vs 51.5 expected, marking the fouth consecutive reading above 50.

China gains leverage in US-China trade: What this contrast in data between the US and China does, when coupled with the recently signed HK bill by the US President, is that it creates an environment of heightened uncertainty about China not rushing it in getting the Phase One trade deal done. Indeed, it gives the Asian giant the upper hand by creating leverage as it’s Trump that is more pressured to get a deal.

US not bluffing on tariffs: The market is on alert as the US is not bluffing in its threats to establish tariffs by walking the talk. The latest evidence came on Monday when Trump tweeted about the removal of steel and aluminium imports tariff exemptions for Brazil and Argentina, It indirectly suggests that if no further progress in trade talks is made, the US may not hesitate to implement further tariffs against China, even if the bar remains high in my opinion.

ECB’s Lagarde to make inflation key topic in ECB review: In a much-anticipated intervention as part of a testimony to the EU Parliament, the new ECB President Lagarde, said that symmetry of inflation goal to be a key topic in an ECB review, which is the first one to be conducted this decade in what represents an important strategic move. Lagarded also outlined the ECB determined to use all available tools.

Warning of more tariffs if China impasse continues: Wilbur Ross, the current United States Secretary of Commerce, told Fox that Pres. Trump will increase tariffs if there is no China deal, adding further pressure to US stocks, which have kicked off the month of December under the cosh, retracing sharply from all time highs. Ross warned that “if nothing happens between now and then, the president has made quite clear he’ll put the tariffs in – the increased tariffs.” By seeing how Trump has re-established tariffs for Brazil, thought to be a close ally, it implies the US makes no distinction of favoritisms in tariffs.

Trump sends the Fed a reminder about the USD: Trump also called out the Fed to depreciate the value of the USD by tweeting that “the Federal Reserve should likewise act so that countries, of which there are many, no longer take advantage of our strong dollar by further devaluing their currencies”. Ironically, the USD has been one of the main underperformers as the month of December gets underway, with the market paying more attention to the potential divergence between the stabilization of European data and the further deterioration in some of the key data points in US fundamentals such as the US ISM on Monday.

Higher EU tariffs not ruled out: The US is considering higher EU tariffs after WTO ruling, a US trade representative said, even if the news was completely shrugged off by market forces so far. According to the source cited in the report, “strong action is needed to convince EU to end market distorting subsidies.” The USTR, citing lack of progress in ending dispute over aircraft subsidies, says will review increasing tariffs on EU products, adding other items to current list.

China preparing to blacklist US companies: According to the Global Times, China will release an "unreliable entity list" soon, which looks to be linked and in response to Xinjiang related bill that will harm Chinese firms interests. As a reminder, China is pondering retaliatory response against the passing of the HK bill in the US, but also looking to hurt US businesses’ interest as the US House readies to pass a Xinjiang-related bill, prompting China to also speed up a move against the US. Xinjiang has been a focal point, as there have been several reports of abuse and torture at the internment camps where at least a million Uygurs (and other Muslims) are detained.

NZD flies as technicals convergence with fundamentals: The Kiwi has been on a one-way street run following news that NZ Finance Minister Robertson announced the preparation of a “significant” fiscal package. The Finance Minister flagged extra spending in infrastructure in the short to medium term. "We are currently finalising the specific projects that the package will fund but I can tell you this - it will be significant." The more fiscal stimulus, the less likelihood that the RBNZ needs to slash rates further for domestic reasons.

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Recent Economic Indicators & Events Ahead

Source: Forexfactory

Professional Insights Into FX 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.

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The EUR index is en route to test a pool of higher liquidity, with Monday’s price action reinforcing the point I made in my last report that the currency appears to be on bullish price delivery phase. What we saw on Monday was a typical inducement of selling into a previous low, sucking in more sell-side interest, which acted as the perfect fuel for institutional flows to find counterparty before sending the index sharply higher. The bullish outside candle in the daily is in perfect congruence with the bullish storyline I’ve narrated this week.

The GBP index retraced back down, yet my core view is still one anchored by the premise that the market is seeking out lower levels of liquidity to build GBP long inventory before the bullish mark-up phase comes to fruition. Note, the daily communicates the trend is up. When marrying that up with the fact that the supposedly low in the Sterling should be found either on Tuesday or Wednesday, as that’s how typically tends to happen in FX, so far the pattern of seeing weakness on Monday does nothing to negate the bullish view. It’s the potential build up phase.

The USD index has materialized the mark-down phase I was anticipating. My original view on Monday was that once buy stops in USD pairs were run and the rise was met with an institutional order block in a yellow rectangle, sell-side pressure would be released. Besides, the juncture where this activity would occur orbited around the 50% equilibrium area, reinforcing the idea that any sell-side campaign would get a fair price. Besides, the grinding upward trajectory over the last week was a red flag - tapering buying volume is a bearish sign -. My view is that the USD index has further downside - roughly 0.6% - as sellers will most likely seize the next logical pool of liquidity at the double bottom formed mid Oct- early Nov.

The CAD index has sold off aggressively and it’s fair to say that the ‘easy gains’ being short the currency have already been made. Again, if you go back to check my Monday’s view, I stated that the CAD index was setting the stage to display bearish price action as from an order flow perspective it had come all the way up to test the origin of a supply area. The double bottom would then provide the liquidity pool necessary for the smart money to find enough counterparties to close shorts. This scenario is so far playing out as anticipated. Besides, as stated, the transition into the supply zone came on a tapering of volume too (bearish). I personally wouldn’t place the CAD in my radar to short it as it’s reached oversold status.

The NZD index took off in strong fashion as the technical bullish momentum was further boosted by positive domestic news (NZ FinMin signaling more ambitious fiscal package). The path of least resistance was clearly to the upside judging by the price action displayed through November. Now, be extremely cautious to join longs in the Kiwi at this stage as we’ve reached a point of maturity in the upcycle given the confluence of factors acting as an optimal location for the market to go through a distribution phase where buyers will start taking massive profits off the table. The upward rhythmic traction of this market may have terminated with the risk of either a slow grind lower or a consolidation at the bare minimum the scenario I’d expect.

The AUD index was injected bullish momentum driven by sentiment after the positive news out of China (PMIs back into expansion). The index remains on the lower end of its broad daily range with liquidity available to the downside as per the double bottom in Oct. The RBA (just released) acted as a catalyst to target the midpoint of the broad range (about 0.4% higher), which is where the next key resistance comes in.

The JPY index has managed to find buy-side interest at the bottom of its range, which was always a scenario to factor in. I warned that one should not get carried away shorting the JPY unless there is sufficient evidence that the range gets broken. Instead, the market has come down to collect JPY long contracts by running sell stops in JPY-related crosses before bouncing back up. To me, this has written in the wall the risk of a bullish reversal. The daily bullish pin bar with a sizeable downside wick manifests this fake out in the index chart.

The CHF index formed an unambiguous bullish signal by printing of a sizeable bullish outside bar off the daily, which strengthens the notion in trying to understand what this downward correction phase in the currency was all about. In my educated opinion, this price action reflects a long accumulation storyline as every single time lows have been taken out since October, the market bounced back up. This suggests a build up of longs and buy on dips prefered.

Important Footnotes

  • 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
  • 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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