Reality Check In The AUD & USD Markets

The AUD index succumbed to the dovish outcome of the RBA monetary policy meeting, following the move by the Central Bank to slash its benchmark interest rate by 0.25% to 0.75% as expected, while a very weak US ISM Manufacturing PMI (lowest since March 2009) took the shine away from the US Dollar as long-side exposure was dialed down aggressively.

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

The Australian Dollar has lost a significant amount of value on the back of a well-telegraphed 25bp rate cut by the RBA, with the one-way street bias in the Oceanic currency since the event a clear manifestation of the build up in expectations for further easing by the Central Bank. The NZ Dollar acted as a slower version replica of the movements seen in the AUD, as the market expects the RBNZ to follow suit with lower rates now that the RBA has made a move again. The US Dollar was another notable mover after a decade-low print in the US ISM Manufacturing PMI, which has led to a quick re-assessment for a lower valuation in the world's reserve currency as bets for further cuts by the Fed in October are back on the rise. The Sterling also suffered its fair share of volatility, with the sell-side pressure predominant since the European session, only to see a major bounce of a daily demand area after a rather dubious, which later turned out to be devoid of substance, that the EU was considering time limits on the Brexit backstop. The main beneficiaries were the Yen and the Swissy as a by-product of the sell-off in bond yields globally, while the Euro also put on a meritorious turnaround day. Last but not least, the Canadian Dollar index deserves a special mention as it continues to make history by printing fresh highs (this year). 

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.

The market adjusts AUD valuation to the new low rates reality: The AUD index succumbed to the dovish outcome of the RBA monetary policy meeting, following the decisive move by the Central Bank to slash its benchmark interest rate by 0.25% to 0.75% as widely expected by the market, while at the same time, the policy statement did provide enough of a hint in order for the market to expect further cuts down the road.

RBA Lowe speech a non-event: The speech by RBA's Governor Dr. Lowe later on the day fell short of the vol expectations eyed, with most of the movement in the Aussie done by then. RBA didn’t really enlighten the market with new insights but rather stuck to the script by outlining the downside risk to the global economy and structurally lower global interest rates, while adding that progress on employment, inflation goals in Australia were slower than liked. Lowe, nonetheless, repeated that the economy is at a gentle turning point.

Decade low US ISM PMI raises red flag: A very weak US ISM Manufacturing PMI (lowest since March 2009) took the shine away from the US Dollar as long-side exposure was dialed down aggressively. The major reversal in the USD index that ensued must be seen as a by-product of the second thoughts the market is currently going through when it comes to the outlook on the policy front by the Fed. Will manufacturing weakening spill over into other areas of the economy? The chances for a cut in rates before year-end stand at 82%, while a cut in October is priced in at 65% vs 50% pre-US ISM release.

A volatile & directionless Pound: GBP had a volatile day, behaving in a rather erratic fashion, up in early Europe, then sold hard, only to see a vigorous late day rebound after reports that the EU was considering a concession for a time limit on the backstop arrangement as part of the Withdrawal Agreement. However, as the report expands, “Johnson's refusal to accept the idea of the backstop suggests the the EU concession won't come into play…”, which is partly why unless evidence exists that the UK aims to soften the stance on the backstop, the headline does not contain enough substance to believe, at this point, that a major breakthrough has been achieved.

The EU categorically denies time limit on the backstop: However, according to BuzzFeed, quoting an EU commission spokesperson, we learnt that the EU denied such story that they are amenable to a time limit backstop agreement. The spokesperson said that “the EU is not considering this option at all”, adding that “we are waiting for the UK to come forward with a legally operational solution that meets all the objectives of the backstop.”

Canada's GDP flat-lined: The Canadian July GDP reading came underwhelming at 0.0% m/m vs +0.1% expected, with the sub-reading showing that goods producing, construction and manufacturing were the laggards, while services-producing, wholesale and retail trade were positive contributors.

Recent Economic Indicators & Events Ahead

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 has traveled in a strong fashion from its most recent lows into its next level of resistance in the 8h chart. Sellers off this upper level are now in control, but the successful rotation off the lows makes any retracement at risk of being bought up. We need further price action to eventuate in order for this up-cycle to mature, which would help to determine whether or not the Euro stays range-bound or can muster enough interest to break above its overhead resistance area to form a second leg up. For now, trading off the extremes of the range appears to be the safest bet. Note, the overhead area has already been penetrated, without so far achieving any major technical developments, which makes it riskier to play EUR shorts on retests for now. 

The GBP index keeps finding it hard to violate a major support off the daily, seen as a buyers’ stronghold. Selling into strength from higher levels is still paying off to manifest one’s bearish view on the Pound, just beware that shorting the GBP into weakness as the index heads into this key daily demand is a rather high-risk proposition. All else equal, we are at a juncture in the chart where the control is exerted by daily buy-side flows, even if the price action off the hourly is not yet providing a congruence across timeframes.

The USD index has reversed in a rather violent move, with risk of follow through continuation to the downside not to be ruled out even if one must bear in mind that the price is now overextended and a level of demand off the daily is expected to stall the advancement by sellers. Should the demand area be penetrated, there is over 0.3% of additional losses in store before the next major level of support comes into focus. Buying the USD on weakness, while technically attractive, represents a fundamentally riskier trade near term due to the fact that the US ISM Manuf PMI has been quite a shocking disappointment, hence why the sell-side interest may have further to go in order to re-adjust the USD valuation in line with higher odds of a rate cut by the Fed before year-end.

The CAD index is on fire with no signs of the momentum abating as the latest daily participation has ramp up as per the aggregate tick volume. There is further room still to go before the 100% proj target, indeed, the ample room of 0.9% before the potential termination of the up-cycle makes it still a very attractive currency to play to the long-side by momentum accounts. Any setbacks towards the level of demand outlined off the daily should represent interesting buying opportunities to jump onto the CAD bandwagon.

The NZD index looks poised to experience a squeeze to the downside in coming days as the area it trades is highly doubtful to attract much bids. Any retracement should be seen as an opportunity to sell on strength at higher levels of interest. The successful rotation achieved through the hourly chart makes the current cycle maturity as a 2nd bearish leg cycle, which is unlikely to terminate until there is a 3rd push to the downside.

The AUD index sunk precipitously after the RBA delivered a rate cut and hinted there is more to come. As a result, the index broke through an area of daily demand, finding follow through continuation the moment the backside of the daily area got retested. The conditions to remain a seller of the Aussie have definitely improved, but patience is required as the price is at excessively cheap prices, which makes any selling inherently risky unless we can see first a retracement back towards the evaporated daily demand at the bare minimum.

The JPY index has created a fresh up-cycle, finally breaking through its torturous range and is now expected to attract greater levels of volatility. I’ve highlighted a couple of immediate levels of interest where an imbalance of demand can be expected. It’s not the time to be a seller of JPY as the technicals have transitioned into a more constructive stance, therefore, one’s focus should be mainly fixated in finding lower areas of demand to engage in buy-side action.

The CHF index, unlike the JPY, is not as clear-cut, as technicals remain bearish. The positioning of the index appears to be at a prime location to look for short-side exposure in the CHF should one be able to match the currency against an index expected to go through a spell of demand. The resistance being tested is especially relevant and valuable to reinstate sell side business because at the time it was formed, it preempted the formation of a successful rotation. Overall, the CHF is a candidate to see weakness in the next 24-48h, but equally important, it’s important to be able to match the currency against a strong contender.

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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