Posted on: 01 May, 2019
The Sterling was on an absolute tear on Wednesday, even as breakthroughs in Brexit are yet to transpire (don't hold your breath). It's always going to be a harder task to find a clear attribution to the movements seen during the last day of the month, as portfolio re-balancing on unhedged FX positions tend to rule the movements.
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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.
The Sterling was on an absolute tear on Wednesday, even as breakthroughs in Brexit are yet to transpire (don't hold your breath). It's always going to be a harder task to find a clear attribution to the movements seen during the last day of the month, as portfolio re-balancing on unhedged FX positions tend to rule the movements. In the case of the Euro, which climbed at a steady pace against the majority of its peers (exc GBP), we can clearly pin down the improved European data as the main reason behind the rally. However, it still feels like the data samples need to be expanded not to think that the solid German CPI or higher EU, Spanish GDPs are mere paybacks for weaker previous data. Nonetheless, if more evidence of a minor recovery in Europe pans out, the ECB will feel in no rush to design further stimulatory policies (EUR positive). Another currency where we can clearly link its weakness to a particular event is the Aussie, unloved as a China proxy play after the country fell short of expectations in its PMI releases on Tuesday. The Japanese Yen did fairly well for half of the day, emboldened by the Chinese poor data, only to revert its buy-side flows as US equities were bought strongly off the lows. The Canadian Dollar, notwithstanding a negative GDP for Feb, exploited the slack by the Yen demand deficit late on the day, as BoC Poloz struck a constructive tone on the Canadian economy. Lastly, the two currencies suffering the most included the US Dollar and the Kiwi, the latter battered by a miss in NZ jobs. The focus is now shifting in its entirety towards the US ISM release as a barometer of US economic conditions, followed by the FOMC and Chairman Powell presser.
Tuesday’s environment qualifies as broad-based USD weakness as depicted by the drops in both the DXY but also in the US bond yields, where both micro slopes are back to negative territory. Even the macro slopes (125 HMA) are also aligning, despite we must be aware that the US data and the FOMC, will cause a reset and re-evaluation of market flows depending on the type of number and messages. The S&P 500, meanwhile, continues to advance at the rhythm of its own drummers, finding strong buying interest after a deep retracement which has allowed to achieve fresh all-time highs. It is precisely the combination of higher US stocks (S&P 500 as reference) and a weaker USD that has resulted in the risk-sensitive Japanese Yen to go offered once again. The stability in the VIX, junk bonds, and the tight ranges recorded in the USD/CNH also act as a supporting factor for risk-seeking strategies to remain actively engaged. However, with main financial centers closed until the US, today’s moves will be very much dictated by fundamental-led learnings via the US ISM and the Fed, rather than taking much of a lead from the end of business in NY. A sensible strategy is to stay light in your positions until the usual pick up in vol during the London open, before a full-reassessment of the market permutations and whether or not the US data encourages the ‘risk on’ to prevail.
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EUR/USD: Fundamentally-Driven Bullish Momentum
Improved European data has led to a resurgence of the EUR, this time able to exploit the deficit of USD demand on month-end flows and an overall constructive risk environment. The rally in the exchange rate has stopped on its tracks at a heavy offers cluster around 1.1225-30, which happens to align with the 100% projection level of the 1.1175 breakout measure as well as an H4 horizontal resistance. The bullish momentum, as reflected by the slope of the 25HMA, remains strong. The steepness of the newly created ascending trendline is yet another sign of the rampant movement, hence the retake of the trendline is a prerequisite to start seeing the first cracks in the trend.
GBP/USD: Sharpest Appreciation Since Early April
It’s certainly a rare occurrence to see the Sterling or any currency for this matter to fly past not only the 100% proj target but even the 200% proj target with such an ease, especially in these times of generally low volatility in FX. The slightly more constructive headlines over Brexit, where the Labour party and May’s government appear to be making progress, alongside a clear month-end rebalancing of FX flows in favor of the Sterling and against the USD, have also aided the one-way street trend. At the bare minimum, given the extreme stretching of the rise in the exchange value, a potential period of consolidation between 1.3050 to the topside (horizontal resistance) and 1.3020-25 to the downside (200% proj target retest and former resistance) could develop. Should the USD regain its mojo, the round number at 1.30, ahead of 1.2985 (100% proj target retest) is where the next cluster of bids may be expected. What’s clear, after Tuesday’s price action, is that the main bias has now permuted to buy on weakness as part of a newly created first leg of a bullish cycle.
USD/JPY: Fresh Bearish Leg Established
The story in this particular market is about the new low it found after the reversion back to buy Yen on the back of the miss in China PMIs. As the day went on, and amid the recovery in the S&P 500 and the 200% proj target reached, buyers managed to create a mild rebound to retest the previous area of support-turned-resistance and the broken 100% proj target. The new leg lower in the pair allows us to draw a new trendline, which as usual, should serve as a visual aid of the evolving market bias. The weakness in both the DXY and the US30y has been a burden too heavy to bear for buyers, with players now waiting the US ISM and the FOMC outcomes to determine the next directional bias. Looking at the next targets, any resumption of the downtrend should find an area rich in demand in the area highlighted in white, where two projected targets + round number intersect.
AUD/USD: Tight Range Post China PMIs
With no data releases of note until the US session, the Chinese market closed for public holidays, and the pair stuck in a tiny range worth 25 pips, the current conditions are clearly dominated by market makers, who act as liquidity providers in a sea of noise. Leveraged accounts, fast money, those with an interest to chase out directional movement, have 0 incentives to get involved in this market until a resolution of the consolidation, which will most likely transpite on the release of the US ISM data, followed by yet another re-evaluation of the price action as the FOMC releases its latest statement and Chairman Powell takes the stage to update the market on the latest set of policies. The Aussie has been clearly assisted to hold its range by broad-based USD weakness.
NZD/USD: Sold On NZ Jobs, Bought On Technicals
The play in the Asian session, in response to the downbeat NZ jobs headline number, has been to initially sell the Kiwi hard, only for the exchange rate to rebound at the anticipated cluster of bids circa 0.6625-30, where the 100% proj target, the ADR limit and the hourly horizontal support all met. Ever since the bottom found, the Kiwi has rebounded over 30p to now be retesting the former range bottom which should act as a solid area of resistance for the price to stall awaiting the next directional push once either London comes online or in response to the US ISM data.
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