The USD attracted steady buy-side flows as yet another piece of evidence via an upbeat US retail sales seems to suggest the upcoming one or two insurance rate cuts by the Fed may be the intended tactical move rather than a rate-cutting cycle.
To our Market Insights
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 USD attracted steady buy-side flows as yet another piece of evidence via an upbeat US retail sales seems to suggest the upcoming one or two insurance rate cuts by the Fed may be the intended tactical move rather than a rate-cutting cycle. This rationale would definitely gain a larger number of supporters at the helm of the Fed if the US data continues to show stable readings as it's been the case in recent times through the NFP, CPI or Retail Sales, all beating expectations. Amid the risk that the market has potentially overplayed the amount of easing the Fed is willing to pursue in the next year, Fed's Dallas President Kaplan made some revealing comments in what may look like an attempt to massage the thematic and downplay the aggressive easing priced in by emphasizing that a tactical adjustment rather than a rate-cutting cycle is what's needed. The outperformance of the USD comes in stark contrast with the price action witnessed in the Euro, finding an avalanche of sellers through Europe as the German ZEW is yet another reminder that the ECB may, after all, be inclined not to wait any further before initiating its new easing measures, judging by the state of demoralization in Germany's economic sentiment among the rest of EU-wide poor data. However, one can only imagine the true extent of discouragement to hold Sterlings when even against a pressured currency such as the Euro today, the latter still looks relatively strong vs the UK currency as the market comes to terms that a hard-exit of the EU type of scenario is where the Brexit process seems to be headed with the soon-to-be-elected new UK PM. Still, a lot of water to go under the bridge before the deadline time though. The CAD index, meanwhile, continues to struggle at a critical macro 100% projection level, with the collapse in oil prices on Iran-US potentially back to the drawing table a key driver weighing on the currency. On Tuesday, we also learned that the NZ CPI Q2 stood steady from the previous quarter, which may not be enough to prevent the RBNZ from embarking upon more rate cuts if it aims to bring inflation closer to the mid-range of its 2% target mandate. However, the market has so far shrugged off such eventuality by keeping the NZD relatively well bid. AUD traders also saw the RBA dampening expectations for further rate cuts short term after decoding Tuesday's July RBA minutes, with technicals in the AUD index, as in the case of the NZD index, still looking quite attractive. Lastly, a pair of currencies with erratic and non-directional price movements include the JPY and CHF indices, both trading around the 13-ema baselines, which clearly indicates a market that has taken a laxer approach towards supporting risk-off currencies yet not convinced to engage in protracted selling campaigns due to the evident risks that exist of slower global growth, trade uncertainties, hard-Brexit outlook to name the most pressing issues.
Narratives In Financial Markets
* The Information is gathered after scanning top publications including the FT, WSJ, Reuters, Bloomberg, ForexLive, Institutional Bank Research reports.
NZ CPI Q2 rose by 0.6%, bang on expectations. By deconstructing the report, fuel prices contributed to the upward pressure but the rest of the components were subdued. Annual inflation in NZ stays on the lower end of the RBNZ target range mandate. The Central Bank has in recent times that to take the inflation back up towards the 2% midpoint of the target, more robust economic growth is needed, which is unlikely to be fostered under the escalation in global growth uncertainties, hence the data does little to discourage the Reserve Bank that a lower OCR would be required to meet its objectives.
The July RBA minutes have cemented expectations that the RBA will most likely take a thoughtful pause by holding rates steady until later in the year, subject to upcoming data. By comparing the June vs July minutes, strong statements that would indicate a third rate cut is imminent were dumped from the minutes. To top it off, a revealing sentence included that “the Board will continue to monitor developments in the labor market closely, and adjust monetary policy if needed”. This condition wording indicates a pause.
Talk about a potential USD selling intervention by the US Treasury has gained some air time with several banks and institutions I’ve read taking note of the prospects. While such a measure would be consistent with Trump’s trade policy, and both Trump and Kudlow have had a go with some vague jawboning, there is still a long way to go. As HSBC notes: “Currency intervention usually has three phases: Start with verbal jabs and jawboning, then move to threats of physical intervention and then finally: Physical intervention. We are only in phase one of three (jawboning) and so it is too early to put on any straight line weaker dollar trades in anticipation.”
The incessant selling of the Sterling continues as the risks of a disorderly hard-Brexit is a real prospect that market participants are pricing in. The refusal to negotiate the Irish backstop by Boris Johnson and Jeremy Hunt (UK PM contenders), both stating that it will not be included in any negotiations with the European Union, has really hurt the Pound. The market is connecting the dots by anticipating that, with no further concessions from the EU on the horizon, the odds are increasing by the day, unless a major turn of events, that a hard-Brexit is a real possibility by the deadline set on October, 31st.
Oil sold off aggressively after tentative signs of an improvement in the US-Iran relationships. Both US Secretary of State Mike Pompeo and President Trump implied that a small window of opportunity might be opening up to make headway in the negotiations. Trump’s approach towards Iran was less critic by noting regime change is not on his agenda and that a lot of progress has been made as of late, while Pompeo said Iran is willing to talk about the potential shutdown of its missile program.
Germany’s July ZEW survey current situation was a very disappointing reading of -1.1 vs 5.0 expected, while expectations also fell further to -24.5 vs -22.0 expected. The nefarious reading, officially recording the weakest print in 9 years, may lead to tilt the balance towards an earlier rather than later initiation of the new ECB easing campaign. The data led to a substantial selling in the Euro even of bottom pickers emerged to keep the valuation in the EUR index by NY close far from the worst daily levels.
Following Trump’s tweets from Monday that China ‘needs’ a trade deal with the US, China’s foreign ministry has hit back by stating it is misleading to suggest that it needs a trade deal with the US. These comments, once again, portray how far apart both sides are from any deal. China even implies that rather than inking a half-baked deal, an alternative always available is to resort to stronger domestically-oriented stimulus policies. To make matters worse, Trump’s comments today are not helping, noting “he could impose more tariffs on China if he wanted”, adding that “we have a long way to go with China on trade.”
US June advance retail sales overshot estimates with a +0.4% print vs +0.2% expected. When looking at the internals, the control group rose by 0.7% vs +0.3% expected. Interestingly, while the data managed to see strong USD buying across the board, it barely dampened expectations that the Fed will only cut by 25bp on July 31st, with the odds for a 50bp rate cut at a generous 33% according to the CME Fedwatch tool. Note, the Fed’s rationale to adjust its rate lower in July is more about global growth, trade uncertainty, and business confidence, rather than consumption or jobs. Meanwhile, the small disappointment in the US June industrial production at 0.0% vs +0.1% expected barely budged the valuations in the USD. Utilities were the drag this time.
Bitcoin keeps selling off to the point of losing the 10k mark on a NY closing basis for the first time since June 20th. Last week’s Senate hearing on Libra or the negative rhetoric by policy-makers the likes of Trump or Mnuchin have taken its toll on sentiment. Crypto traders are coming to terms that the roadmap for the launch of Facebook’s Libra will have to face one stepping stone after another before getting the blessing of regulators.
Today’s intervention by Fed's Powell in a speech titled "Aspects of Monetary Policy in the Post-Crisis Era" at the French G7 Presidency 2019, in Paris, failed to yield new insights. The policymakers reiterated that the Fed will act as appropriate amid increased uncertainties. Powell re-visited the passages, as part of his speech, that more caution is warranted amid US growth down a notch and uncertainties around trade and global growth. The line that the FOMC "raised concerns about a more prolonged shortfall in inflation below our 2% target” was also repeated, suggesting that the Fed is turning laxer in accepting subdued inflation as the new norm.
Fed's Chicago President Evans - dovish member - said today that a 25 bps or 50 bps cut in July is a question of strategy, even if he is of the opinion that 50 basis points of accommodation are needed. Meanwhile, Fed's Dallas President Kaplan said he believes Fed funds rate will stabilize after one cut, essentially telling the market he is comfortable with one single cut. Of interest was the interview Kaplan conceded to Dow Jone, looking to massage his message as to imply that the tactical adjustment the Fed is after is one where one or two insurance cuts are needed rather than an easing cycle. "The persistence of the yield curve inversion "would make you consider at least a tactical adjustment-not a change in strategy, not the beginning of a rate-cutting cycle," he said.
Recent Economic Indicators & Events Ahead
A Dive Into The Charts (Techs, Funda, Intermarket)
Right off the bat, what jumps at first glance through Tuesday’s price action is the solid appreciation of the USD, which finishes off in style by the NY close, supported by higher US nominal yields after the upbeat US retail sales. From an equally-weighted measure against G8 FX, the USD index performance communicates risks of follow-through demand based on the latest sequence of volume dynamics and technicals, which serve as our premise to set a directional bias.
EUR/USD: Next 100% Proj Target Not Completed Yet
GBP/USD: Sellers In Full Control As Hard-Brexit Prospects Priced In
USD/JPY: Trendline Violation Shifts Focus To Stabler Price Action
AUD/USD: Trendline Breakout On Increasing Vol Warrants Caution
USD/CAD: Bullish Breakout To Encourage Dip-Buying, Canadian CPI Next Mover
Risk model: The fact that financial markets have become so intertwined and dynamic makes it essential to stay constantly in tune with market conditions and adapt to new environments. This prop model will assist you to gauge the context that you are trading so that you can significantly reduce the downside risks. To understand the principles applied in the assessment of this model, refer to the tutorial How to Unpack Risk Sentiment Profiles
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
POC: It refers to the point of control. It represents the areas of most interest by trading volume and should act as walls of bids/offers that may result in price reversals. The volume profile analysis tracks trading activity over a specified time period at specified price levels. The study reveals the constant evolution of the market auction process. If you wish to find out more about the importance of the POC, refer to the tutorial How to Read Volume Profile Structures
Tick Volume: Price updates activity provides great insights into the actual buy or sell-side commitment to be engaged into a specific directional movement. Studies validate that price updates (tick volume) are highly correlated to actual traded volume, with the correlation being very high, when looking at hourly data. If you wish to find out more about the importance tick volume, refer to the tutorial on Why Is Tick Volume Important To Monitor?
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.
Correlations: Each forex pair has a series of highly correlated assets to assess valuations. This type of study is called inter-market analysis and it involves scoping out anomalies in the ever-evolving global interconnectivity between equities, bonds, currencies, and commodities. If you would like to understand more about this concept, refer to the tutorial How Divergence In Correlated Assets Can Help You Add An Edge.
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