Posted on: 15 Jan, 2020
The forex market portrays a Swissy that defies any logic, a US Dollar that consolidates at elevated levels, a Euro that trades in a dull low vol environment in a context of steady demand, a Pound that despite calls for a cut by the BoE finally shows some signs of shorts taking profit, a Yen that remains a victim of the risk appetite dynamics, an Aussie on 'stand-by' ahead of the US-China trade deal ceremony... Want to find out the rest of drivers and the outlook for each of the G8 currencies, then keep reading...
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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 Swiss Franc’s stellar performance should be of no surprise by now as the currency continues to defy gravity and traders seeking out swap dividends through short exposure are getting trounced. Despite the chatter of lower rates by the BoE this year as evidence through dovish remarks by members of the committee and poor growth numbers mount, the Pound managed to print some solid gains, with another important test today via the UK CPI figures. The market is pricing a 50/50 chance of lower rates by the BoE by the next meeting in February. The US Dollar, in congruence with its seasonals, retains a bullish outlook after a flattish performance with a slight spell of selling hitting the currency after soft US CPI figures on Tuesday. Similarly, the Canadian Dollar also nudged lower despite it clearly retains a bullish bias at an index level. The Aussie and Yen trade on stand-by, with the overall outlook bullish and bearish respectively, but a reset of the flows will occur today as the market reacts to further details emerging as part of the US-China Phase One trade deal, with the signing ceremony scheduled today. Lastly, the Kiwi trades on a softer footing with the next catalyst, again, based on China trade headlines.
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.
US inflation pressures nowhere to be found: The US December CPI came soft at +2.3% vs +2.4% y/y expected, with real avg weekly earnings also disappointing at 0.0% y/y vs +0.8% prior, while the real avg hourly earnings came at +0.6% vs +1.1% prior. These numbers are dismal even if seasonal bearings were at play.
Fed to stay sidelined: Despite the US boasts a tight US labour market, without real wage gains, it’s hard to think the Fed will find it compelling to tighten by any stretch of the imagination. It confirms the US labour is tight due to low quality jobs being produced otherwise wages would pick up. The US Dollar was hit by a small wave of weakness on the aftermath of the event. The soft US inflation reads keeps well and alive the chances that the Fed may need to resort to further rate cuts even if the outlook for the economy is more optimistic. The market is pricing about 90% chance of a cut by Dec 2020, which is still a long shot away.
US-China trade deal (truce) will be signed today: Ahead of the event, Trump has ben bragging by calling it a “big, beautiful monster” of a deal. Nonetheless, a headline that caused some brief intraday selling in risk assets, including the USD/JPY, detailed that US officials want to verify first that the phase one trade deal is being adhered before removing further tariffs. It is thought that the data at which further removals may happen won’t be before the US election. The delay in the planned Dec tariffs and a reduction in the rate on $120B in Chinese products still stands. This likely refers to tariffs of 25% on $250B in goods and 7.5% on another $120B.
Details about the deal are coming to the surface: According to Politico, China is set to buy more US energy, manufactured goods in trade deal. The report also reveals that China will buy $200 billion of U.S. goods over a two-year period in four industries, with the target for manufactured goods purchases worth around $75 billion. China will also promise to buy $50 billion worth of energy, $40 billion in agriculture and $35 billion to $40 billion in services, Politico notes.
GT backs up emerging China-US trade details: Global Times editor Hu Xijin, who acts as China’s mouthpiece, has confirmed via social media reports of new commitments by China to buy US products. He stated the following via Twitter: “As far as I know, China did make a commitment to expand imports from the US. China has a huge market which is growing quickly. It will be more of a test for the US whether it can provide enough products that Chinese market welcomes and are competitive in price.”
China removed as currency manipulator by the US: The Treasury's semi-annual report did not list China as a currency manipulator in what’s seen as a political move ahead of the US-China trade deal signing today. The report says China made 'enforceable commitments to refrain from competitive devaluation' in phase 1 trade deal, adding that China needs to take necessary steps to avoid a persistently weak currency and that China also agreed in trade deal to publish relevant data on exchange rates and external balances.
CHF unstoppable: The Swiss franc continues to defy gravity after the US Treasury added the SNB policy practices in the watchlist of accounts to monitor as currency manipulators. Swiss officials noted that they don't manipulate currency for export advantage but rather the interventions are only motivated by monetary policy with the objective to counteract the effect of too strong franc. You can’t make this stuff up. In itself the statement is contradictory.
China trade data beats expectations: China December trade data showed exports rose 9% y/y vs +2.9% expected, while imports also saw a huge beat at +17.7% y/y vs +8.6% expected. These numbers represent the largest rise since October 2018. The Aussie found some footing after the data but the overall flows were rather dull and tamed ahead of finding out further details in the US-China trade deal today.
Even Fed’s George endorses moderation in policy: It was quite revealing to see the biggest Fed hawk, Ms. George, Fed's George, to give up on inflation and hence her endorsement of rate hikes. She said it is appropriate to hold rates for now to assess economy, noting she sees benign inflation and that headwinds to business spending are likely to persist alongside expected continued weakness in manufacturing.
Earnings seasons starts with big profit jumps by big names: Even if the Q4 earnings season started on a strong footing, equities in the US were flat-lined after headlines emerged that the US is not expecting further tariff cuts until after the elections. Nonetheless, JPMorgan or Citigroup reported solid profits. JP Morgan’s profits was up 21% and Citigroup 15%. It’s worth noting the comments by JP Morgan CFO noted that “the U.S. consumer remains in very strong shape, both from a credit perspective and spending sentiment,” and that among corporate clients “sentiment is at least certainly better than it was six months ago. So we have a constructive outlook as we’re heading into 2020.”
US inflation, China trade deal key events of the day: There is no data of interest in Asian while in Europe, attention shifts to the German Q4 GDP and UK CPI, with the latter the data to inject most volatility as the market is now fixated in the chances of a rate cut by the BOE this year, with January easing priced at about 50%. In the US, all the focus will center around further details on the US-China phase one trade deal with the US PPI data an early aperitif to contend with but far from being a mover today.
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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 idea of this analysis is to complement one’s daily bias by accounting for this holistic analysis.
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The EUR index is finding dip buyers after the recent upside break found a base at the retest of its Monday’s demand imbalance departure. The smart money tracker (enhanced MA) has turned bullish but a red flag is the fact that the buy-side tick volume is tapering, never a good sign as it shows dubious commitment by buy-side accounts. The 13ema applied to the OBV retains a bearish slope, which means the current rally is a dangerous one to commit to. The volatility in the EUR-pair, as the last window indicates, remains quite low. January’s EUR seasonal pattern, I won’t get tired of reiterating, averages over 0.5% in losses since 1982.
The GBP index found buy-side interest at an area that traders should have anticipated to act as a reactionary level as it aligned with a macro support. The move on the way down approached the support on tick volume tapering, with the counter demand forces picking up the volume flows. As a word of caution for those looking to play GBP longs, remember that the market structure retains a bearish formation, anchored by the enhanced moving averages tracking the main trend by the smart money category. Another component that warrants prudence to engage in long exposure is the compounded volume pressure, with the 13ema applied to the OBV displaying a bearish slope. Besides, GBP faces negative seasonals during January.
The USD index continues to communicate a bullsh storyline in line with the positive seasonals. The icing on the cake would be the breakout of the previous swing high, even if the acceptance found above the smart money tracker (enhanced moving averages) reveals the market has found value at significantly higher levels than those traded earlier in the year. The breakout of the last static resistance line came on a sizeable volume, which has led to the reinforcement of the notion of buying on dips in case we see shallow pullbacks towards a retest of that area. The compounded tick volume trend (13ma applied to the OBV) also shows a bullish slope, which means buy-side commitment is elevated and hence should support the bullish view.
The CAD index remains in a buy on dips mode with the latest price action not altering a bit the constructive technical picture. My base case continues to endorse the idea of looking for opportunities between the 38.2 and 50% Fibonacci retracement, a location that offers good value to see buyers re-grouping for an eventual squeeze higher. The index has the backing of the price structure, the acceptance above the prior resistance line and the smart money flows via the enhanced moving average. Besides, the aggregated tick volume supports the trend as it communicates buy-side commitment prevails, with the low volatile trend also providing the ideal conditions. The seasonals for the CAD are positive (+0.33%) in January.
The JPY index, following a sequence of volume tapering for the last 4 days, found a greater degree of absorption on the way down, even if this does not alter the bearish bias. The list of reasons to keep the bearish bias intact is plentiful, with the price structure bearish and the risk sentiment adding pressure to the Yen as a safe-haven (record high in the S&P on Monday). The compounded tick volume slope (13ema to OBV) points lower too. Remember, the seasonal pattern for the Yen averages +0.25% in Jan since Jan ‘82, even if not playing out so far.
The AUD index continues its struggle to break any higher with the midpoint of its macro range acting as a nut too hard to crack after the elongated move up off a support area. I personally see the Aussie poorly positioned to engage in long positions even if in the next 24h, China-US trade sentiment will rule price action and anything can happen. The time to engage in AUD longs was last week off a relatively cheap valuation at the level of macro support. I remain in wait and see in the Aussie until the picture clears up following today’s US-China trade deal headlines. The forex seasonal pattern is positive to the tune of +0.54% in Jan since the early 1980s.
The NZD index has entered a short-term consolidation phase in the wider context of a bullish trend, The index found a base at a key level of static support with the overall volume pressure as assessed by the 13ma off the OBV currently in the process of flattening out. The price structure anchors the long bias, despite the fact that the enhanced moving averages tracking the smart money flows has confirmed a bearish turn. The volatility to be trading NZD pairs remains above the usual monthly average, which is a good signal to seek out opportunities.
The CHF index has strengthened further and is by far the most bullish currency. This has turned out to be a monster of a long trade for those buying the Swissy at cheaper levels even if holding positions, remember, carry significant negative swaps. This is a trend trading/momentum type market, with those looking to engage in swing trading having no chance to buy at these levels unless they want to do the ‘harakiri’ to themselves. If you are a contrarian or long-held strategies are applied to benefit from positive swap payments, this market may also be fitting. The price structure is very bullish, the smart money moving average anchors this bias, as does the overall tick volume pressure. The forex seasonals for CHF is for the currency to average losses worth 0.53% in Jan since 1982, even if this month looks like a clear outlier.
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