Vol Set To Pick Up With ECB, US NFP Ahead

The US Dollar regained its mojo as the market took most notice of a very strong US non-manufacturing ISM survey, even if traders had to previously contend with the lowest US ADP employment report in over 9 years.

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.

Quick Take

The US Dollar regained its mojo as the market took most notice of a very strong US non-manufacturing ISM survey, even if traders had to previously contend with the lowest US ADP employment report in over 9 years. This mixed bag of economic indicators has led to confusing signals heading into Friday's US NFP report, which is going to be cardinal to re-assess the chances of the Fed cutting its interest rate in the July to Sept window. Before the US NFP lottery event though, traders will be fixated on two fronts. Firstly, the ECB policy decision, set to release updated forecasts on inflation and GDP. Secondly, the market needs clarification on whether the US will impose tariffs to Mexico as Monday's deadline set by Trump approaches. Overall, the risk environment has been friendly once again, especially in the volatile equity market, supported by the notion of a dovish Fed in coming months, as the 69% pricing of a rate cut by the July 31st FOMC meeting clearly depicts. The Yen seems to be defying this rationale by still finding strong demand, which comes to show that the current risk rally is limping of one leg as one would expect Yen selling as part of the 'risk on' procedures. The Kiwi, meanwhile, was the only currency that managed to challenge the pick up in USD demand, spurred by the neutral tone by the RBNZ assistant governor against dovish expectations. The behavior in the Kiwi comes in stark contrast with the poor performance of the Aussie, as the market remains of the belief that there is more easing ammunition to be utilized by the RBA. Ahead of the ECB, and in anticipation of Draghi striking a more pessimistic message that may reinforce their existing dovish stance, the market has been selling Euros. Sandwiched in between the currency crosscurrents we find the Canadian Dollar and the Pound, unstimulated by the absence of fundamental developments. 

Narratives In Financial Markets

* The Information is gathered after scanning top publications including the FT, WSJ, Reuters, Bloomberg, ForexLive, Institutional Bank Research reports.

  • Markets remain buying into the notion that the US and Mexico will reach an agreement to avoid tariffs judging by the behavior of risky assets. Talks on border issues began Wednesday, which means in the next 48h headlines on new developments will likely act as yet another catalyst for a pick up in volatility. 
  • While China has been clearly ramping up the domestic propaganda as a way to retaliate against the US, Trump notes every signal is that China wants to make a deal. 
  • The European Commission has triggered a disciplinary process against Italy over public debt, noting that Italy is backtracking from structural overhauls, pension reform.
  • A very weak ADP employment report at 27k vs 185k expected (lowest in about 9y) was offset by an upbeat US non-manufacturing ISM survey coming at 56.9 vs 55.6 expected. Looking at the details, the ADP miss was mainly caused by small firms, which should appease the nerves. 
  • Oil suffers further losses after the EIA reported the largest build up in oil product inventories in almost 30 years as fears of a global slowdown grow.
  • The shockingly low ADP report has led to some banks to immediately downgrade the estimates for this Friday’s US NFP, even if the sub-component of the non-manufacturing ISM came strong, which suggest a still relentless labor market. A mixed lead heading into Friday's NFP.
  • Ahead of the FOMC meeting on June 18-19, the Fed’s ‘Beige Book’ concluded that regional US economic conditions showed a modest pick-up in growth in April and May.
  • US Treasury Secretary Mnuchin is scheduled to meet with PBOC Governor Yi Gang in Japan in the context of a G-20 meetup from June 7-9. It’s the first time, ever since the US-China trade impasse, that a high-profile US official will try to break the impasse in the trade war with China.
  • Further evidence of a slowdown in China’s economic activity after the May Caixin services PMI came at 52.7 vs 54.5 prior, mainly due to subdued business confidence.
  • Australia’s Q1 GDP came lower than expected at 0.4% q/q vs 0.5%. Household spending was a key contributor to the modest 0.1 percent slide in growth as spending in discretionary goods such as furnishing and household equipment, recreation and culture take a hit.
  • The Kiwi found strong demand after RBNZ assistant gov says Bank needs to adapt to changing conditions to meet its objectives Wed 5 Jun 2019 01:24:45 GMT Author: Eamonn Sheridan | Category: Central Banks Reserve Bank of New Zealand said the Bank's central view is for rates to remain broadly around current levels for the foreseeable future, which took the market by surprise as expectations were for NZ to follow the path of lower rates in Australia.
  • The ECB policy meeting is the next major focus, with the Central Bank set to release updated forecasts on inflation and GDP, with most analysts calling for downgrades. It will also be critical to understanding the ECB position amid the escalation in trade tensions as well as the revelation of new details around the next round of TLTRO and other unorthodox tools to support the EU.

Recent Economic Indicators & Events Ahead

Source: Forexfactory

RORO (Risk On, Risk Off Conditions)

The more the market prices in a cut in the Fed’s fund rate, more of an excuse exist to justify a recovery in equity valuations, as clearly reflected by the reversal in the micro and macro flows via the bullish slope of the 25 and 125-HMAs. According to the CME Fedwatch tool, the market is pricing a 69% chance that the Fed will lower its interest rate in its July 31st FOMC meeting. As a secondary culprit behind the renewed buying interest, hopes that the US and Mexico may strike a deal that will avoid the imposition of tariffs by next Monday also contributed to the ongoing momentum in equities, putting the tensions between the US and China on trade temporarily on the backburner, even if such impasse remains the key macro issue to be fixated with casting a major shadow in this risk recovery.

The state of play in US equities runs the risk of growing disjointed to other risky assets as the paradigm that seems to be evolving is one where the Fed lowers rates to stimulate growth, which would only occur if the US and China fail to breach the major gap on trade. In this scenario, equities may still stay supported. Remember though, that paradoxically, one of the triggers for the Fed to be pushed into easing action in the July to Sept window, would be a deterioration of financial conditions, hence why it still may take fresh rounds of selling pressure in equities for the Fed to be fully convinced that they must act in order to circuit break the bearish trend in stocks.

On the currency front, it’s interesting to note that the Yen and the DXY both traded firm, especially the latter, despite the rejuvenated risk appetite currently present, implying there is a disparity between how equities and bond traders view current dynamics and the state of affairs, especially in the Yen. Other measures of risk such as the S&P 500 vol index (VIX) or junk bonds do justify the rise in equities, even if by assessing the valuation in Chinese assets, it’s clear that the market’s renewed ‘risk on’ profile is not built upon hopes of the US and China addressing the trade conundrum. Remember, we have a new driver for risk to be supported in the form of expectations for a more accommodative Fed, a factor that is being discounted through higher valuations in equities as large companies’ dividends become more attractive in an environment of lower rates by the Fed.

Latest Developments In FX (Technicals, Fundamentals, Intermarket)

EUR/USD: Bullish Structure Violated, ECB To Inject Vol

GBP/USD: Sellers Take Control Intraday

AUD/USD: Price Finds Equilibrium Below Key Support

USD/JPY: Still Stuck In A Range, Proj Targets Eyed

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. 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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