Posted on: 11 Feb, 2020
As uncertainty in markets settles in, the USD and the JPY firm up its dominance in the Forex space, while on the other side of the spectrum, the Kiwi and the Aussie continue to outperform. Investors are still trying to figure out the ramifications of the NCoV as reflected by the contrasting directional biases in US equities (new record highs) and global yields (under pressure). What can we make of it? In this report, I provide an update of the latest drivers and aggregated flows in the G8 FX complex.
To our Market Insights
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.
Let’s get started…
The shift in order flow since the outbreak of the NCoV continues to keep the US Dollar and the Japanese Yen in the front-seat, while the Kiwi emerges as the worst performer, starting to divergence from the soothing in sell-side pressure seen in the Aussie. The fact that the Yen continues to rise amid fresh all-time highs in the S&P 500 or that the Swiss Franc keeps finding stubborn buying interest during a stable risk profile phase on Monday (including Yuan buying) and a sharp fall in the Euro, should be another red flag that bullish technicals prevail. Moral of the story? follow the established daily trends. The selling in the Euro, worth touching on, comes at a time when there is renewed German political uncertainty as Chancellor Merkel’s designated successor as part of the CDU party announced that she has decided to step down as the next leader. Meanwhile, the Pound saw a very strong recovery off the lows, in a move that typically gets fuel back up assisted by the tripping of stops by those that went short on the initial breakout. Lastly, the Canadian Dollar, which has put on an impressive 5-day performance, is starting to slow down, in what’s still seen as a market with enough credence to be sold based on technicals (see index). Overall, the market remains caught up in a phase of clear uncertainty, with 2 currencies benefiting the most (USD, JPY), another 2 being the most punished (AUD, NZD), while a basket of 4 (EUR, GBP, CHF, CAD) are trading more subject to fundamental-centric factors. You could argue, however, that the CHF could make it as part of the front-runners while the CAD may join the likes of AUD, NZD as a highly fragile currency to the NCoV woes.
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.
Mixed signals as NCoV plays out: Markets did not paddle in the same direction risk-wise as investors are still trying to figure out the repercussions from the NCoV on both the Chinese economy and the global growth outlook. The divergence seen on the performance by US equities (new all time-highs in the S&P 500) comes in contrast with a rather cautious tone in US and global yields as a barometer of global growth and inflation outlook. Besides, the fall in yields is also a reminder that monetary authorities around the globe won’t hesitate to provide more accommodative stimulus in their policy stances when/if needed. The fall in crude oil also dents the outlook for a quick resolution of the virus crisis in China.
‘Official’ NCoV cases reach 40k world-wide: The number of total confirmed cases of the coronavirus outbreak all over the world is just over 40,000, even if the majority (more than 39,000) are within China. The death toll has so far reached 1,000, with only two cases outside of China. However, by looking at the number of countries where the virus has spread to, it keeps expanding. Singapore is the worst-affected country with 45 confirmed cases. The Singaporean central bank (MAS) advised financial institutions to take additional precautions in light of the coronavirus outbreak. A summary of the latest updates on the NCoV can be found in this post.
A deep dive into China’s rigged NCoV stats: To gain insights into all the tricks China is playing to rig the number of ‘confirmed cases’ of coronavirus, I urge the reader to read this post by ZeroHedge. To cut to the chase, China has quietly changed the definition of what an "infection" means in the latest guideline dated 7/2 by the Chinese National Health Commission. Going forward patients who tested positive for the virus but have no symptoms will no longer be regarded as confirmed. As Alex Lam, a reporter in the Chinese NCoV, "this inevitably will lower the numbers."
WHO shares concerns in latest presser: The head of the World Health Organisation said that a WHO team of experts has arrived in China to lay groundwork for a larger team looking into coronavirus outbreak. Monday’s press conference also noted that “in recent days we have seen some concerning instances of onward [coronavirus] transmission from people with no travel history to China, like the cases reported in France yesterday and the UK today. The detection of this small number of cases could be the spark that becomes a bigger fire. But for now, it’s only a spark.”
UK ups the public alert level on the NCoV: In the UK, the government confirmed four new cases of the new coronavirus, which brings the total number of cases in the UK to eight. The UK has now declared the new coronavirus as a serious, imminent threat to public health, adding that "measures outlined in these regulations are considered as an effective means of delaying or preventing further transmission of the virus". They have designated Wuhan and the Hubei province as an "infected area".
China keeps pumping liquidity into the system: As reported by the Xinhua news agency, China's central bank injected 900 bln yuan (about 129 billion U.S. dollars) into the financial system via reverse repos on Monday. This action is aimed at keeping liquidity in the banking system at sufficient levels, according to a statement on the website of the central bank. A reverse repo is an operation by which the central bank purchases securities from a commercial bank with an agreement to sell it back in the future.
Expectations for fiscal response as China outlook worsens: Morgan Stanley's Equity Strategist Micheal Wilson notes that there is "a growing view that the worse the economy in China gets, the more likely we will get fiscal stimulus from China and perhaps Europe and Japan given how tied they are to China's economy." The strategist highlights that the latest German and French Industrial Production prints for December were "extremely disappointing", but most worrying is the fact that this data still doesn’t capture the outbreak of the coronavirus, yet stock indices are failing to sell-off, in what the economist thinks it "suggests investors may be thinking a fiscal response is now more likely and looking through it."
Renewed German political uncertainty: This is a negative input for the Euro, which may be behind some of the ongoing underperformance in the currency. Annegret Kramp-Karrenbauer (AKK), Chancellor Merkel’s designated successor as part of the CDU party, announced that she has decided to step down as the next leader, hence not running for the German chancellorship at the next federal election. The decision follows the disobedience of a CDU delegate in eastern Germany to follow the party’s guidelines to not cooperate with the far right AfD party.
Canada to pay consequences of NCoV down the line? Canada’s Finance Minister Morneau said that the coronavirus will have a real impact on Canada, especially on tourism and commodities. He pledged Canada will remain fiscally responsible. The latest economic data out of Canada has been on the positive side, with a stellar jobs report last Friday, followed by an improving picture in building permits and housing starts. However, the debacle in the price of Oil, down over 20% in the last month, is definitely a key factor that may weigh on the economy and see the growth outlook for the heavily reliant Oil economy tampered.
Two heavyweights take the stage: ECB’s President Lagarde is due to deliver opening remarks at the presentation of the 2018 ECB Annual Report before the European Parliament, in Strasbourg. Market participants should watch for any headline that may move the needle, even if her pedigree in giving away many clues in policy so far has been null. In the US, Fed’s Chair Powell is also due to testify on the Semiannual Monetary Policy Report before the House Financial Services Committee, in Washington DC; The Monetary Policy Report submitted to the Congress on February 7, 2020, can be found in this link. In it, no surprises were noted.
If you found this fundamental summary helpful, just click here to share it!
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.
If you found the content in this section valuable, give us a share by just clicking here!
The risk dynamics, as detailed in the narratives section above, show a mixed-bag of signals with the equity complex through the S&P 500 continuing to defy gravity by touching new all time highs, while the US 30y bond yield as the ultimate indicator of the ‘real’ outlook for global growth and inflation still sliding, also partially influenced by the fact that if the NCoV-induced growth slowdown in the global economy accelerates, G8 Central Banks won’t hesitate to provide further stimulus. When looking at the USD/CNH, the fall in the pair (strength in the Yuan) should also be interpreted as a positive sign. The net balance, therefore, is mildly positive for risk (upside potential in the AUD, downside in the JPY) as equity rises are accompanied by weakness in the USD/CNH, while the picture taking investors aback is the trend in global yields.
The EUR index managed to gun through bids to see considerable sell-side pressure until stalling at the expected line of support where I’d expect buy side pressure to emerge. Where the index has landed is part of a right-hand shoulder pattern, even if the close seen is far from encouraging, with no buying interest heading into the NY close. In contrast, the selling does not carry significant aggregated tick volume activity, which tends to be suspicious of a move that runs the risk of exhausting, but as I stated, price action offers no clues of that. The smart money tracker has turned bearish, but since the market structure does not agree, I wouldn’t read too much into it. I find being as seller of Euros at these lows a risky proposition as you want to preferably, in the majority of cases, look to buy low and sell high.
The GBP index keeps finding support at a critical line in the sand that is so far preventing the market from validating a bearish structure and is keeping the prospects of higher levels alive. Buying off these lows has proven to be a profitable approach to take upon trigger entries in lower timeframes in a traders’ choice of best currencies to trade the GBP against. The next directional bias is anyone’s guess as the daily offers little clues, with the smart money tracker in a flat phase and the market trapped in a consolidation. When that’s the case, buying and selling of the extremes of the established range becomes an optimal strategy to consider.
The USD index continues its relentless rise following last week’s breakout of a resistance, which has so far been backed up by price action. There is no denial that the path of least resistance continues to be bullish, but unless it’s fitting for your profile as a trader to exploit scalping-type strategies intraday for continuous long-side opportunities, the risk of shallow setbacks is something to strongly consider short-term as the technical movement looks overstretched. The last move up in the currency comes stimulated by a strong US NFP as well as the sense that the US is one of the most immune economies to the NCoV outbreak. The next logical level of resistance where buyers may set the sight next is the next big target for bulls.
The CAD index, after a run of 4 straight days in positive territory, finally saw selling ensue, even if the conviction would be classified as fairly poor judging by the aggregated tick volume and lower shadow reflective of constant buying off the lows in the US session. However, since the market structure is still bearish off the daily chart, alongside a smart money tracker that is yet to turn bullish I’d be wary of betting for further gains. My main case of risks skewed towards the downside is still valid, even if as usual, I will be happy to adapt when/if needed. The index was lifted on Friday by the fundamental backing of a positive surprise in the Canadian jobs.
The JPY index, after materializing the closure of its up-gap from two weeks ago, has printed the type of bullish price action in line with the underlying price structure that makes me be bullish. The upward slope in the money tracker is also supportive to expect buy-side pressure to remain present for an eventual retest of the previous highs. I’d be wary to add Yen short exposure at these levels as the daily pattern tends to be a powerful one for at least the recent trend high. The readership can find out more about this pattern in this video I created.
The AUD index faces the risk of further downside pressure based on technicals. The price action from Monday changes nothing the outlook as all the prerequisites to be a seller on weakness are still in ‘active’ mode, that is, a price structure of lower lows and lower highs, a resistance tested and rejected, alongside the smart money tracker heading lower. Besides, the Aussie is alongside the Kiwi, the most vulnerable FX option to play long if the NCoV-led risk-off kicks in again. Therefore, speculating in longs this currency has little technical backing off the daily chart.
The NZD index has broken its line of key support, with a close beyond. This means the path has been cleared for momentum-type accounts to re-engage in shorts for an ultimate test of the orange box, which is the range where the 100% proj target and the next support line come at. The breakout into new lows also means that the price structure and the smart money tracker agree in selling rallies, with a new active 100% target still to be met, which is what makes this market an ideal short trade premise. Now, it is all about finding the best currencies to exploit the Kiwi weakness against. The Yen, Swissy or US Dollar are strong candidates.
The CHF index printed a critical fractal pattern in the daily chart, which is tantamount in nature to what’s been described in the Yen chart, that is, pressure is set to build up for a retest of the previous trend high. The price action on Monday is concurrent with the bullish stance as further buying on dips emerged even as the Euro sold off and the risk appetite kicked in via equities. The bullish stance is aided by the ongoing bullish price structure as well as by the upward momentum via the smart money tracker, which has been guiding the index higher since the start of the year and it has yet to see a turn lower in the slope.
Feel free to get in touch with us to find out more about our service.