Posted on: 01 Apr, 2019
To start the week, we have two clear outliers. Firstly, the Canadian Dollar has seen its valuation adjusted significantly higher on the back of a strong Canadian GDP for the month of January. Another currency currently embraced as part of the improved 'risk on' conditions is the Aussie, further boosted by the positive news out of China over the weekend.
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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.
As the chart below shows, to start the week, we have two clear outliers. Firstly, the Canadian Dollar has seen its valuation adjusted significantly higher on the back of a strong Canadian GDP for the month of January. The slope of the micro trend, which looks at 24h worth of price action through the 25-HMA, has been steadily bullish. Another currency currently embraced as part of the improved 'risk on' conditions is the Aussie, further boosted by the positive news out of China over the weekend, where the March PMI came upbeat. In today's selection of the best markets to trade, I've focused on the Aussie due to precisely the alignment of these crosscurrents, with the constructive rhetoric around the US-China trade talks the icing on the cake, even if one must be aware that the RBA monetary policy statement tomorrow is a time for a reset of technicals. The Sterling, battered by the Brexit circus, alongside the Japanese Yen, sold after the recovery in risk, are the worst performers. I must state, despite the risk appetite, it looks as though the repatriation flows back into the USD, as I explained last week, are still playing a role to keep the USD at very stable levels.
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Whatever measures we are looking at, it leads to the same conclusion. The risk appetite tone is back in vogue, as manifested by our prop Yen index, where not only the micro slope has turned negative for the past 24h, but the macro slope, which looks at 1 week worth of price action, has also reverted back down. If we ask ourselves, is the ‘risk on’ tone signal we are getting from the Yen index being supported across other asset classes, the answer is an outright ‘Yes’. From the S&P 500 flying higher past the 2,850.00 mark, the US 30-year bond yield finding further upside, not to mention the ratios of Oil/Gold or Copper/Gold as a barometer of the global demand or supply for industrial/energy assets. Lastly, the VIX (vol index) is down at 13.7 with no bids to be found amid the ‘feel good’ tone across the board, while in the credit market, the picture is analogous, where junk bonds have put on an aggressive rally when compared to the investment grade-bonds. Overall, this is a time to be constructive in commodity-linked currencies, while the DXY and JPY should be pressured. The GBP, EUR, as long as the Brexit circus extends, will show a rhythm of their own.
AUD/USD: Conquers Resistance at 71c.
The upside gap at the open of business in Asia is a clear testament of the bullish sentiment, with the area of resistance-turned-support just above 71c now acting as the first line of defense ahead of last Friday’s POC just 10p sub the round number at 7090. The synchronized move higher in equities and the DXY + Yuan (inverted) is clearly supporting the buy-side bias, effectively canceling the potential negative flows that may arise from the bearish trend in the AU-US bond yield spread for the time being. There is a vacuum area buyers may capitalize on until the next resistance at 0.7145-50.
USD/JPY: En-Route Towards 111.20 Resistance
With a stubborn DXY still bid despite the dual recovery in the S&P 500 and the US 30-yr bond yields, both showing bullish micro slopes, the clear path is for the upside pressure to keep building up. To start the week, technicals are promoting this narrative after the breakout of a sticky area of resistance in the hourly circa 110.85, which has allowed a test of the next area of resistance around 111.00, while opening the doors towards what’s expected to be a stronger wall of offers at 111.20 approximately, which is the breakout point of the major selloff seen last March 20. There is no reason to shift to an intraday sell-side bias while the intermarket flows remain so supportive.
AUD/JPY: Buy On Weakness Favored
The recent news of China’s March PMI, coupled with encouraging signs of progress in the US-China trade talks, alongside a full-blown micro ‘true risk on’ environment, this is a market that has the traits of buying weakness this Monday written all over the wall. The breakout of the previous swing high through 79.00 is the last declaration of intentions by a market that is setting up to see higher valuations, likely to thrive under the current intermarket flows. That said, the RBA monetary policy statement due on Tuesday is a clear risk for the pair, so remain nimble on your approach.
EUR/AUD: Lower Valuations Well Justified
Anyway you slice it, the exchange rate looks set to stay under pressure this Monday, unless a fundamental-driven event disallows it. The intermarket flows are unambiguously supportive of the downside as the micro bearish slopes in the Yuan (inverted), equities (inverted) and the German vs Australian 10y yield spread demonstrate. Moreover, the technicals are in favor of the downside, with the breakout of the previous swing low at 1.5785-90 creating a successful rotation lower, which is likely to attract further sell-side momentum-led flows to capitalize on this ongoing supply imbalance.
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