Posted on: 17 Dec, 2019
The ebbs and flows have been well contained to start the week as the market dials down the overall interest to engage in trades after the hectic volatility in the heaviest traded currencies on the back of last week's UK election result and the confirmation of a trade deal by the US and China. In today's report, I frame the context present to be better prepared to tackle the markets this Tuesday.
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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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The Euro, the US Dollar and the Canadian Dollar found the most demand to start the week. While the move in the Euro defies the fundamental logic as European PMIs disappointed quite badly, it plays into the view that the overall flows to accumulate long inventory in the single currency remain present, fueled by the uptrend in the EUR/USD. The range-bound conditions in the Euro index also indicate the Euro is in a rather stable position. The rise in the US Dollar on Monday occurred in a clear context of a bearish trend, a dynamic that has been dominating proceedings since the start of December, while the timid appreciation in the Canadian Dollar supports my case for a potential bottom at an index level. With US equities making fresh record highs (S&P 500 up 33% YTD), the Yen remains the currency most punished as the index extended the downside. The Sterling, after the outsized UK election-induced spike, is accelerating the current downside pullback. The outlook in the Aussie and Kiwi remains firmly anchored by the latest developments in the US-China trade domain as both countries announce preparations for a signature ceremony to seal Phase One deal. Lastly, the Swissy remains a stubborn one, unfazed by ‘risk on’ flows to instead be more influenced by the benefits of a removal risks in Brexit after the landslide victory by the Conservative party.
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.
European PMIs disappoint: The much-awaited European flash manufacturing PMIs turned out to be a disappointment amid expectations that the tentative green shoots seen in some Eurozone countries, including Germany, could find some sort of consistent traction to further cement the idea that the growth slowdown phase is bottoming out. Without exception, the readings out of France, Germany and the Eurozone as a whole came rather poor in what’s ben a dire year amid China’s trade war.
Worst slump in Eurozone PMIs since 2013: After the EZ manuf PMI came at 45.9 vs 47.3, Markit, the sponsor behind the indicator, wrote the following remarks: "The Eurozone economy closes out 2019 mired in its worst spell since 2013, with businesses struggling against the headwinds of near-stagnant demand and gloomy prospects for the year ahead. The economy has been stuck in crawler gear for fourth straight months, with the PMI indicative of GDP growing at a quarterly rate of just 0.1%."
Not encouraging UK PMI even if politics eclipses all: Out of the UK, the December flash manufacturing PMI also underwhelmed at 47.4 vs 49.2 expected, which increases the likelihood of an economic contraction in the UK in Q4. Markit notes that: "The economy contracted for the third time in the past four months. The latest decline was the second largest recorded over the past decade, and increases the likelihood that the economy contracted slightly in the fourth quarter as Brexit-related uncertainty intensified.”
US PMI the only positive: The PMI fest concluded with a slightly higher-than-expected reading in the US, where the Markit services PMI came at 52.2 vs 52.0 expected. Commenting on the flash PMI data, Chris Williamson, Chief Business Economist at IHS Markit, said in the release: "The surveys bring welcome signs of the economy continuing to regain growth momentum as 2019 draws to a close, with the outlook also brightening to fuel hopes of a strong start to 2020. Business activity, order book and jobs growth all accelerated to five-month highs in December, buoyed by rising domestic sales and further signs of renewed life in export orders.”
Lack of details on the US-China trade deal: The Chinese foreign ministry issued a statement in which it announced that more trade information regarding the Phase One trade deal will be released in due course. The official source added that “working levels officials from both sides are in contact.” For now, the market is behaving as if the deal is done and dusted despite the specifics/details disclosure.
US equities keep making record highs: Despite the trade deal is still devoid of all the substance/details one would wish, equities remain unfazed and in the US in particular, the groovy mood has led to both the S&P and Nasdaq making fresh record highs, even if the reaction in the US bond yields is much more lethargic. As a result of the steady demand in equity indices, the Yen remains under the cosh as the worst performer in the currency market as this environment promotes risk-taking strategies to thrive.
The EU warns the UK on tough negotiations ahead: As The Times reports, the European Union has been clear that it won’t budge to UK’s Conservatives pressure to get a trade deal done following the big win. As it was put by a senior Brussels source, the EU will not “cut its own throat” with a post-Brexit trade deal next year if Boris Johnson refuses to align Britain’s economy to single market rules. Michael Gove, the cabinet minister tipped to become Britain’s lead negotiator from February, said “what I can absolutely confirm is that we’ll have an opportunity to vote on the Withdrawal Agreement Bill in relatively short order and then we will make sure that it passes before January 31. We will have concluded our conversations with the EU about the new framework of free trade and friendly co-operation by the end of next year.”
China’s fundamentals keep showing signs of stabilization: Monday’s raft of monthly activity data out of China reinforced the positive fundamental vibes as the readings were all on the positive side, with industrial production particularly strong after a print of 6.2% from 4.7%. Retail sales were also strong at 8% y/y vs expectations of 7.6%.
MYEFO suggests the RBA to carry the burden: In Australia, Monday’s Mid-Year Economic and Fiscal Outlook (MYEFO) carried downgrades to the economic outlook, leading to a reduction in expectations for wages growth, which in turn saw the government lower its ambitious call for a budget surplus in coming years. Besides, as the NAB research team notes, “the government did not announce any material fiscal stimulus, with additional spending – on drought, aged care and a slight bring-forward of infrastructure projects – only totalling $1.2b in 2019-20 and $1.1b in 2020-21. This suggests the RBA will have to continue to carry the burden of supporting growth.”
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The EUR/USD shows a firm bullish bias based on the weekly and daily market structure as higher highs and higher lows get printed. However, here is a word of caution. With Friday’s spike ending up with such a strong reversal back down after the 100% proj target was met, I wouldn’t be surprised if the market now enters a period of distribution with Friday’s high marking potentially this quarter’s high as liquidity is about to evaporate as Christmas nears. Still, any deep retracements in the Euro towards a point of equilibrium creates a potential opportunity.
The GBP/USD is a market that I personally label as only ‘buy on dips’ but not blindly at any level. I’d like to see, at the bare minimum, a pullback towards the 1.3250 where the origin of the demand imbalance was established. For those more aggressive, a retracement into the 50% equilibrium point around 1.3280 may also represent a good opportunity to start seeking out for trade setups before the next leg up. Remember, a period of consolidation into year year is likely as the market liquidity thins out starting next week.
The USD/JPY remains in an overall bullish path even if one must be aware that the crossing of these two currencies represents trading the two weakest links in the G8 FX space. That, combined with the fact that on the weekly we are very high and trading straight into a level of horizontal resistance, really puts me off to be looking for longs at these relatively hefty levels. Even if both timeframes are aligning, my involvement to get dealing in this pair would only come at the most recent lows and not at the highest it’s been in more than 6 months.
The AUD/USD trades at a point in the chart where any long intraday setup has enough backing from the higher timeframes (daily and weekly) to anchor this bias. Besides, the latest bullish leg has now seen a retracement to the tune of 50%, an area in the chart I dub ‘point of equilibrium’. As long as there is concurrence in the higher timeframes, as is the case in the AUD/USD based on market structure, then this is a prime location to actively look for longs if the setup exists.
The USD/CAD outlook, judging by the market structure in the weekly and daily, looks set to face bearish pressures in coming weeks. Monday’s price action, closing below the prior swing low, is a testament that validates this premise. Any upward correction in the rate has my attention to short this market in the coming days, in what I ultimately project to be a market settings its sights towards a macro default target of 1.3050 (100% measured move).
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