Trump Upsets The Market, Risk-Off Back In Vogue

The Yen, Swissy and the Pound to a lesser extend, dominated the proceedings, in a day characterized by the shocking headlines that Trump is rethinking the trade strategy with China. The risk-off profile is definitely back even if the technicals suggests some currencies are poised to do better than others. Fancy to find out more? Today's report distills it for you...

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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Quick Take

There has been a shift in G8 FX flows as Trump triggered a major sell-off in both stocks and bond yields, with the impact of these fluctuations this time reverberating into the currency market, as the Yen and Swissy were bought up as the market flocks back into the protective and safe-haven nature of these assets at times of uncertainty. The remarks by Trump, stating that "it might be better for the trade deal with China to be done after the US election", which is a year away, if true, should radically change what the market had been pricing up to this point, which was some type of positive resolution around the turn of the year. Are we moving from a glass half full-type of approach to now experience a paradigm shift by which the market starts to rollback the built optimism? The risks are certainly on the rise. As the chart below illustrates, despite the return of the risk-off profile, the NZ Dollar keeps its status as the top performer this week, followed by the Swissy, while the Aussie comes third, benefited by China PMIs and a less dovish RBA, even if the reconciliation with the negative headlines on China trade have taken the shine away from the currency. The Euro and the Sterling have shown a decent performance so far, in line with the synopsis shared with the readership that both currencies look set to experience upward pressure in early December. At the bottom, we can find the North American currencies, both moving into softer territory in tandem, even if it will be the Canadian Dollar the one to stimulate a contrast in flows today as the BOC is due to releases its latest monetary policy decision, with unanimity, according to a survey by Bloomberg, that the Bank will keep its powder dry.

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.

Trump triggers a market sell-off: A flurry of headlines by US President Trump led to a sudden change of heart in the market as market makers pulled liquidity away from the market and algorithm activity was quick to discount what appears to be a backpedaling of the US in its interest to get a quick resolution as part of Phase One of the trade deal with China. President Trump soared the mood by stating that it might be better for the trade deal with China to be done after the US election, a year away.

True risk-off profile returns: Understandably, we’ve seen what’s typically described in my own repertoire of personal jargon as ‘true risk off’ dynamics in which a reshuffling of portfolio back into safe-havens has ensued. The stock market and the US long-dated bond yields experienced sharp moves down in accordance with the relevance of such a statement by Trump. The usual suspects, that is, the Yen, Swissy, Gold traded with renewed fortitude as a consequence of the risk aversion present.

China's mouthpiece sees US backpedaling: The Global Times, a sounding board for the Chinese government, has been quick to chime in its opinion that the US appears to indeed be backpedaling in trade talks. The tweet read: “The US appears to be backpedaling in #tradetalks as officials threaten tariff hikes, but that will have zero effect on China's stance because Chinese officials have long prepared for even the worst scenario: Mei Xinyu, an expert close the Chinese Commerce Ministry.”

A FOX report depresses the mood further: A report by Fox News states that the US still going ahead with December 15 China tariffs, which resulted in depressing the mood in the market even further as the report is tentative evidence that the US is shifting its strategy. The Correspondent for FOX, Edward Lawrence, tweeted: “Trade Sources tell me the Dec 15th tariffs on basically the rest of what China imports into the US are still going forward as of today. I was told the caveat is if Phase One trade deal gets on paper or something else positive happens President could choose not to impose tariffs.”

China calls out on Pompeo's toxic remarks: To make matters worse, China, via the foreign ministry, said that US Secretary of State Pompeo is repeating 'toxic lies' about Huawei, which came as a warning after Pompeo cautioned European countries against allowing Chinese companies to build 5G networks. "With so much on the line, it's urgent that trustworthy companies build these 21st-century information arteries. Specifically, it's critical that European countries not give control of their critical infrastructure to Chinese tech giants like Huawei, or ZTE.” The cold war is here to stay for many years folks.

BOC to inject volatility into the CAD today: The Bank of Canada monetary policy decision is the major fundamental event on Wednesday, with the outcome expected to be a call to keep rates unchanged. In a survey conducted by Bloomberg, the view is unanimous that the Bank will keep its powder dry. Out of 27 economists, all without exception share the view of no change of the 1.75% rate. As a reminder, the market has not fully ruled out rates cut down the road, with 26.2% odds of a cut in January. Later this week, the Canada employment report will be released alongside the US NFP numbers.

Ross says US must get 'the right deal' with China: In an interview with Reuters, U.S. Commerce Secretary Wilbur Ross said on Tuesday that was more important to get a proper trade agreement with China than to get the deal done by this December or next December - after the 2020 presidential election. Ross said more details need to be worked out about China’s purchases of farm products, some structural issues and an enforcement mechanism to complete an interim trade agreement.

Australia's growth figures fuel further AUD selling: The Australian Q3 GDP came at +0.4% vs +0.5% q/q expected, seen by economists as a disappointment, even if on the bright side, the upward revision to Q2 tames down the bitter taste after the report. The Australian Dollar extended its losses as the negatives keep building up after Trump implied a deal with China may not happen until after the next election, which is one year away. This headline led to the Aussie to pare most of the RBA-led gains from Tuesday after it hinted the bar to cut rates is higher now.   

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Recent Economic Indicators & Events Ahead

Source: Forexfactory

Professional Insights Into FX 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.

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The EUR index failed at the 50% equilibrium area of its broad monthly range as Trump upset the normal business flows with his hint of a walkback in the US-China trade deal. The currency appears to be indecisive which direction to take at this point, which makes picking a particular side a very tricky exercise at this point. A rather neutral approach is how to best define the EUR.

The GBP index, through the higher high printed, has strengthened my core view that this market was seeking out lower levels of liquidity only to build GBP long inventory before the bullish price delivery, which appears to now be underway for a retest of the previous trend high. The low on Monday could very well be the point that represents the low for the week.

The USD index remains in a clear mark-down phase with the bearish price delivery not expected to abate until the price travels a further 0.3% down from Tuesday’s close into a 100% measure move, a juncture that will align with a horizontal support where a pause may ensue.

The CAD index broke into new trend lows, not seen since mid June this year. The next directional bias will be a function of the BOC outcome later today. Liquidity will be removed ahead of the event, with the market re-setting for an assessment of the CAD valuation. Unless the BOC ditches any chances of a rate cut in early 2020, I’d expect this market to remain a sell on rallies.

The NZD index has stalled its bullish momentum at a key confluence area. As noted in yesterday’s report, playing longs in the Kiwi at this stage of maturity in the bullish price delivery carries significant risks as the market is likely to enter a period of distribution. The sizeable topside wick on Tuesday reaffirms my view that the trend in this market may have terminated with the risk of either a slow grind lower or a consolidation at the bare minimum.

The AUD index came to retest the point of resistance outlined in yesterday’s report, only to see a reversal back down as the AUD sell-side flows kicked in aggressively in response to Trump’s remarks on China trade. The overall bias for this market is lower, with the poking of the recent high on Tuesday representing the right shoulder of a potential H&S pattern.

The JPY index has printed back to back bullish pin bars off a critical support area (bottom of the daily range), shifting the focus towards the upside for an eventual comeback to the top side of this existing consolidation phase. If the momentum to the upside picks up, I can envision the JPY complex to put on a rally to the tune of 0.8% from Tuesday’s close.

The CHF index, following a bullish signal via the printing of a sizeable bullish outside bar off the daily, found enough follow through to revisit a previous resistance level. This slow grinding move lower over a number of weeks hints at a potential long accumulation storyline as every single time lows have been taken out since October, the market bounced back up.

Important Footnotes

  • 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
  • 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.
  • 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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