Posted on: 08 Jan, 2020
The commanding driver in the Forex market is the unfolding crisis between the US and Iran after news broke that Iran has retaliated against airbases in Iraq targeting US forces. The dynamics has shifted in no time to full-blown risk averse conditions, and the number one question the market is asking is, will the US declare war to Iran? As a result, volatility in FX, especially in the JPY, CHF, has ballooned.
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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.
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One of the immediate effects whenever the dark clouds of war prospects hover around is the increase if volatility. Sadly, that's precisely what we saw in the opening of the Asian session after news broke out that at least 30 missiles had landed at Iraq's Ain Al-Asad airbase among other locations, targeting US forces. The retaliation by Iran to the death of its highest military profile leader has now taken long, and the open question now remains, to what extend will the US strike back? Will a war be declared? The buying of the Japanese Yen and the Swiss Franc currencies was fast and furious, as it was the sell-off that hit the Oceanic currencies (AUD, NZD). The rest of G8 FX (EUR, GBP, CAD, USD) were not greatly affected by the ebbs and flows as a result of the jump in risk aversion. Instruments were the panic mode was immediately noticeable included equities, where the S&P 500 futures wiped out all the gains since mid Dec, the price of Oil, which received a punchy spell of demand, alongside the further defiance of gravity by a flying gold. The fluid situation heralds the clear risk of unraveling into a full-on war, with the ramifications being heightened volatility in Gold, Oil, the Yen, Swiss Franc, Bond yields and equities. Should the US refrain from engaging in further retaliation, a major relief rally could be in store. Much will depend of whether the attacks have claimed US casualties.
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 Information is gathered after scanning top publications including the FT, WSJ, Reuters, Bloomberg, ForexLive, Institutional Bank Research reports.
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The reaction in the Forex market has been to take the Australian Dollar to the woodshed, while the Yen got bid to the boots, leading to a sharp fall in the AUD/JPY. This is one of the markets that may see the most pronounced one-way traffic as the reshuffling of portfolios into the safety of the Yen and away from beta currencies creates the perfect bearish storm. By drawing a 100% proj target, we can see that just ahead of 73.00 is the next logical target for the pair, which from a liquidity standpoint, makes sense, as the area is found below a double bottom.
One of the characteristics witnessed across the board as news of the Iranian attack broke out is the increasing tick volume (sell-side commitment), which in relative terms, tracks very closely real volume in spot forex. I tend to label this type of pattern a ‘real money or smart money acceleration’. More often than not, when it happens, rebounds tend to provide sell-side opportunities.
Another asset that has taken off, further extending its bullish momentum, and never looked back is Gold. By resorting to a weekly timeframe, we can observe that appears to be more technical room for the asset to keep printing gains, with the 100% proj target at $1,658.00. Before reaching such hefty elevation, profit taking is likely to be taken circa $1,625.00. Remember though, should the US declare war to Iran, these levels should act as a baseline for reference but the unorderly vol could easily see these levels broken quite easily. Note, the prospects of war is the single most reliable source of predictability for gold’s upward trajectory.
As we turn the focus to the USD/JPY, it’s completed a bearish successful rotation, which should open the doors to further downside in due time. The projections, based on the last 2 bracketed areas broken, indicate that 107.20 down to 107.00 is the next bearish target. Note, the pair remains greatly overextended even if the current risk-off environment suggests that shallow rebounds should be expected as the prospects of direct war between the US and Iran went up.
As per Oil, the prospects of war and the disruption of production in the region has led to an immediate buying of the instrument, currently trading above the $65.00 mark, with the round number $66.00 the next relevant horizontal support to account for if you are holding longs. Above that level, each $2 interval offers the next macro resistance as the chart below illustrates.
In the equity market, the S&P 500 futures have suffered the largest fall since late November, wiping out the gains made since mid December in one single candle. The downside room looks like is wide open until the next 100% proj target around the 3,158.00 is tested, a level that coincides with a critical level of prior resistance, expected to act as support on a backtest.
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