USD Finds Buying Interest As US Yields Spike

By analyzing the charts, I am left with the impression that swing/day traders may be able to find some solid opportunities in markets that appear to be overstretched in the short-run such as the Aussie, the Canadian Dollar or even Gold.

The Daily Edge is authored by Ivan Delgado, Head of Market Research 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, futures and options, in order to determine daily biases and assist one’s decisions on a regular basis. Feel free to follow Ivan on Twitter & Youtube.

Quick Take

By analyzing today's currency pairs, I am left with the impression that swing/day traders may be able to find some solid opportunities in markets that appear to be overstretched in the short-run such as the Aussie, the Canadian Dollar or Gold. The Aussie has been the main laggard in what appears to be just rumours of a coal import cap to China. If the denials by official continue, the divergence between macro bullish trends in the Yuan, bearish in the DXY, and still an overall benign outlook for equities, makes the Aussie quite cheap for some bottom picking. In terms of the Canadian Dollar, we've entered overbought terrain in the hourly even as Oil and the DXY macro trends (5-DMA slopes) suggest this market will find it rally hard to find sufficient flows to sustain the bullish momentum. If you are looking to enter with an established hourly trend, this might be a good selling opportunity if intermarket flow revert back in favor of the Loonie. A very similar picture in Gold, althugh the impulsiveness of the move with US yields exploding suggests it may take longer for flows to level off for an ultimate resumption of the uptrend, even if the trajectory of this market is undeniably bullish.

Narratives in Financial Markets

  • Wild swing in the Aussie in the last 24h of trading. A stellar Aus jobs report sent the currency higher only to be knocked back down on rumored reports that China’s Dalian port is capping 2019 overall coal imports at 12M tonnes. The plot thickened even further, and with it another episode of upside vol when Aus Treasurer Frydenberg denied the report.
  • Overall, a poor showing of US data, with US Dec durable goods orders missing by 0.5% at 1.2% vs 1.7% with weak orders and soft investment the main concerns. Even more worrying was the fall in the Philadelphia Fed Business index for Feb at -4.1 vs 14 exp, with the internals showing a collapse in new orders and shipments as the key laggards in the report. The US Feb prelim market services PMI also dropped to 53.7 vs 5.4.8, lowest since Sept 2017.
  • US President Trump is set to meet China’s Chief Trade negotiator Vice Premier Liu He on Friday, which should be seen as a positive input in the trade negotiations saga. Meanwhile, Reuters reports that the US and China are drafting multiple alternative MOUs as part of the trade talks in what’s believed to be key structural issues. The report notes these areas of disagreement include IP, services, tech transfer, agriculture, the Yuan and non-tariff barriers.
  • BoC’s Governor Poloz notes the path back to neutral rates in Canada is ‘highly uncertain’, with housing (high debt by households) and business investment weighing. Overall, the policy guidance remains unchanged at the helm of the BoC, which is one of the few Central Banks that still retains a residual tightening bias even if on ‘wait and see’ near term.
  • On the UK Brexit saga, both EU’s Juncker and UK PM May agreed that ‘work would now focus on temporary backstop guarantees. Other officials such as EU’s Brexit negotiator and UK’s Barclays agreed to focus on do whatever is possible to conclude a positive resolution. Reuters cited an EU diplomat as saying that a formal text on Brexit may be agreed mi-March.
  • The German Feb flash manuf PMI came at 47.6 vs 49.8 exp further igniting fears that Germany may be headed towards a recession in H2. In this particular report, the services PMI at 55.1 vs 52.9 continues to act as an offsetting element to the slump in factory activity.
  • A feast of headlines by RBA Governor Lowe in Friday’s Asian session, noting the central scenario is for 3% GDP growth in 2019 while assessing the economic outlook as positive. Lowe says wages are picking up but patience needed. On housing, he sounded quite upbeat.

Economic Indicators Ahead

Source: Forexfactory

RORO - Risk On Risk Off Conditions

Short-term flows are tentatively moving towards a more benign environment for the US Dollar, as long-dated US yields go gangbuster even if that’s not being translated in major gains in the DXY. Still, the transition in the 25-HMA upward slopes in both the US 30-yr yield and the DXY tells us micro flows have returned to support the outlook for the US Dollar. It’s precisely this newly found short-term strength in the USD coupled with falling equities that is keeping the risk profile suppressed. We should follow the guidance of equities as the risk barometers whenever USD/US 30-yr move in tandem. Note, the rapid rise in US yields matters to evaluate the present macro outlook (based on the 5-DMA) as the slope of the moving average is now pointing higher, which marries the uptrend in existence in the S&P 500, while the DXY is still far from being out of the woods. This puts us in an interesting situation, as the macro suggests based on the flows from the last 5 days worth of price action, the environment is still constructive for risk even if short-term falling equities are masking the health of the macro trend. Any recovery in equities should suffice to re-ignite supply imbalance in the likes of the Japanese Yen while keeping the downside pressure on the USD.

Dashboard: Intermarket Flows & Technical Analysis

The charts below are shown in the same order as in the table above. We find ourselves in a range-bound environment in most majors (EURUSD, GBPUSD, USDJPY), while the AUDUSD has been taken lower in what appears to be a movement way out of whack judging by the denial of the coal imports cap ban by both Australia and China. Either way, if we take a look at the macro slope of the DXY + Yuan (both inverted) coupled with equities, it looks to me like this move is way overstretched. With regards to the USDCAD and Gold, both present potential interesting propositions for swing/day traders as USD negative flows have led to a correction which is still occurring within the context of a downtrend in the case of the USDCAD and downtrend on the precious metal. If the short-term flows can re-anchor in the direction of the trend, these two markets have now undergone a correction of enough magnitude to consider reinstating positions in line with the dominant 5-day trend a valid thesis to explore. In the AUDJPY front, with the US yields and the SP500 still showing the 5-DMA slope upwards, buying cheap Aussies vs Yen if a trigger is found has its logic. Similarly, the EUR/AUD has taken off in an impulsive fashion that I personally fail to sustify other than by assuming that the coal imports bank in China is indeed officially confirmed. Lastly, the Kiwi is under pressure, not so much led by the DXY strength but by the double whammy of a lower Aussie and a fall in NZ-US yield spreads.

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Important Footnotes

  • 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. The weekly cycles are highlighted in red, blue refers to the daily, while the black lines represent the hourly cycles. 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
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