Yen Bought & USD Holds Ground As Risk Worsens

The Yen is the best performing currency as risk-off flows settled in amid fears of an outbreak of the coronavirus out of China into other parts of the world. At this point, not enough evidence exists of this being nothing else than just a brief hiccup for markets, as it was the case with the Iran-US conflict. The USD keeps holding its ground steadily, while trade prepare to see an injection of volatility in the CAD ahead of the BOC. Want to find out what else is cooking in the FX space? In that case, keep reading the report to find out the rest of drivers and the outlook for the G8 FX complex.

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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Quick Take

In the last 24h of trading activity, the Pound, the Yen, and to a lesser degree the US Dollar, were the best performing currencies. The British currency was mainly driven by a jump in the UK employment figures, even if the positive input has barely budged bond traders, still assigning fairly high chances of a rate cut by the BOE next week (around 70%). The Yen’s strength, as it’s been the case this year, has emanated due to panic-induced dynamics; it was the case when Iran and the US engaged in a tug of retaliatory offenses which never amounted to the worst fears, and sadly, an episode of a virus outbreak in China (coronavirus) was the prelude to another round of Yen buying. Did you notice where the Yen is finding gains from? Today’s technical outlook reveals a relevant snippet of technical information for those aiming to be on top of the market context. The USD buying, plain and simple, follows the underlying buy-side flows dominating since the start of the month. Not favored by today’s ebbs and flows, the Aussie, Kiwi and the Canadian Dollar were all laggars, in a classic move away from commodity-related currencies as the risk-off settled in, a dynamic that was reaffirmed by the sell-side flows that hit US equities as well. Note, one must put this sell into context, as the S&P 500 remains really close to its recent all-time high. Remember, the CAD is likely to attract the most volatility in the next 24h as the BOC policy meeting is due. On Thursday, it will be the time for the ECB to update the market on its latest policy settings. Until then, trading the Euro continues to be a low-key affair as the tight range in the index reflects. Lastly, the Swissy, which remains the star performer this month, keeps the upside capped after reaching its 100% projection target. Don’t underestimate the power of symmetries in Forex!

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.

Narratives In Financial Markets

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

Traders hit the panic button on Yen as coronavirus fear spreads: What appears to be an outbreak of a virus called coronavirus out of China, with more than 200 cases diagnosed, and other countries, including one case in the US, detected, has spread fear among market participants, leading to the strengthening of the JPY. The coronarius seems to be a pneumonia outbreak causing disease even if at this point little is known how its spreading.

One case of coronavirus in the US feeds into the fear: The CDC (Center for Diseases Control and Prevention) confirmed that a traveler from China has been diagnosed with coronavirus in Seattle. The news led to an intensification of the concerns about the disease spreading to other corners of the world as people in the same plane may have been exposed. Too early to find out the real ramifications but reports that the coronavirus has also been identified in other four Chinese cities, as well as Taiwan, Japan, Thailand, South Korea and now the US is not helping.

A wide outbreak of the virus may take its toll on growth prospects: In the early 2000, a virus under the name SARS infected thousands in China, and also Hong Kong. This resulted in a negative impact on the Chinese GDP to the tune of 1-2% points. Aside from the health effects from this virus, it is little wonder that the market may be on guard in case the virus-related diseases continues its expansion as it may affect global growth prospects. Comments by WHO spokesman, Tarik Jasarevic, noted that “more cases should be expected in other parts of China and possibly other countries in the coming days."

BoJ sticks to the script: The BoJ, as widely expected, announced no change to its monetary policy settings, maintaining the forward guidance on interest rates, noting that they will remain at current or lower levels for as long as needed to guard against risk momentum for hitting price goal may be lost. We also learned that the BOJ raised its GDP forecasts while lowering its CPI estimates.

BoJ's Kuroda offers no new insights: As part of the press conference from BOJ's Kuroda, no deviation from the script was noted. Kuroda said the Japanese economy is expanding moderately and reminded the markets that under the BoJ view, the risks are still skewed to the downside mainly due to overseas factors even if he recognized that external risks are becoming smaller due to US-China trade deal. Kuroda said the government economic stimulus package has helped to boost GDP outlook. The usual caveat that “if momentum towards price target is at risk, would not hesitate to ease further” was also mentioned as part of his speech to the press. Nothing new from Kuroda.

UK jobs show an improvement in the last 3 months: The UK November average weekly earnings came at +3.2% vs +3.1% 3m/y expected, which led to an immediate intraday spike in the GBP, with gains capped early in NY as US traders came online and the thematic fully shifted to the coronavirus. A positive input helping the rise in the GBP through Europe was the 3m/y employment change at 208k vs 110k expected, which makes this figure the largest 3-month increase since last January 2019. Meanwhile, the December jobless claims change came at 14.9k vs a prior of 28.8k The data points, nonetheless, have not affected much the BOE pricing heading into next week.

German ZEW keeps recovering from dismal levels: Another encouraging data point out of Europe was Germany’s January ZEW survey current situation, which while negative, continues to recover from its worst levels, last at -9.5 vs -13.5 expected. The expectations reading was even more optimistic, at 26.7 vs 15.0 expected. As one would expect, the ZEW detailed that the marked improvement seen is driven by the US-China trade deal, as firms estimate that the negative effects from trade-related headwinds may not be as bad as previously feared. The ZEM think tank Institute nonetheless noted that growth in the country and region is still expected to remain below average despite the improved outlook.

Trump’s intervention in Davos doesn’t move markets: The speech by US President Trump in Davos felt more like an election campaign speech with little if any meat in the bone for the market to price into financial assets. Trump bragged about the US being in the midst of an economic boom like never before, while boasting with pride the trade deals with China, Mexico last week as part of a new model for the 21st century, while adding that he is creating the most 'inclusive' economy in the history of the country. On a more international context, Trump said the relationship with China has never been better and that Phase Two negotiations will start very shortly, while reminding the market (old news), that most of the tariffs to China will remain in place during Phase Two negotiations.

What to expect from the BoC policy meeting? The Bank of Canada meets today, and while the market does not expect fireworks (no change in the monetary stance), the question remains whether or not the market has acted prematurely by pricing out the easing bias by the BoC? Judging by the economic surprise index in Canada, which touched its lowest level in December since 2009, the market may have gotten ahead of itself even if the trade deals (US-Mexico-Canada & US-China eases the headwinds. According to Francesco Pesole, FX Strategist at ING, "the market’s strong repricing of rate cut expectations puts the bar for a hawkish surprise very high."

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Recent Economic Indicators & Events Ahead

Source: Forexfactory

Insights Into FX Index Charts

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 offers a very uninspiring picture to start the year as the ranging phase expands into its 4th week following the topside failure last week. That test of higher prices did serve the purpose of grabbing higher liquidity before reversing its course ahead of Thursday’s ECB. The index is now edging closer towards the bottom-side of its range where another tug of war between buyer and sellers will be guaranteed. The outcome of the ECB policy in the next 26h will determine the next directional bias even if expectations for a change are minimal. The volatility in the index remains shot to pieces, a recurring theme across FX. The last 8 days of trading in January could still prove a challenge for bulls due to the negative seasonal pattern.

The GBP index continues to pick up momentum, but such impetus remains stuck in the broader context of a daily range, therefore, a breakout is necessary to open the floodgates to a more directional commitment by buyers. I’d say that quite unlikely judging by the increasing pricing of a BOE rate cut next week on Jan 30. What’s more, the latest spell of buy-side tick volume this week has been unable to match last week’s buy-side volume spike, which leads me to think that the firepower to break above resistance is not there and a fading of the upmove will play out. That said, it’s worth noting how extraordinarily well the Pound has been holding up amid the negative news it’s been receiving (UK jobs on Tuesday the exception). The volatility in the GBP, as in the case of the rest of G8 FX, remains very suppressed below the monthly average.

The USD index keeps extending to the upside to the point that it has finally validated a break of the previous swing high and there it confirms a bullish structure. While at this point the price structure gets formalized, the long bias is one I’ve subscribed to since the beginning of the year and those reading the report daily can attest of it. All the boxes are ticked for the index to keep its bullish outlook as we navigate the last week of January. The smart money tracker (enhanced moving averages) is now in agreement with the structure of price confirming the bullish flows, plus the volume pressure is also turning north. The USD seasonals are also in favor.

The CAD index has not been able to find acceptance above the previous high as the market shows lack of buy-side follow-through commitment ahead of the BOC risk event. The latest price pattern formation, with a double top failure, constitutes the confirmation of a range phase, one that must be assessed from the perspective of a weekly bull trend. Therefore, the path of least resistance for the CAD remains to be a buyer on weakness at key levels. The CAD is a market that continues to argue for the building of long inventory on weakness, and with the BOC not expected to provide major surprises, I am highly reluctant to think the trend is over. The seasonals for the CAD, as a reminder, are positive in January, tantamount to what’s seen in USD.

The JPY index, while it has displayed the most bearish trend this year, I warned that it had reached an inflection point amid the tapering of tick volume on the way down into a macro support as marked by the circles on the far left side of the chart. Besides, the compression-like formation by new lows not finding acceptance was also a telling sign. I said that for those contrarian or seeking out cheap valuations on JPY, this was the ideal location to engineer a buy-side campaign as the price is definitely quite low by historical standards. Remember though, the buying wave in the JPY occurs on the back of recent record highs in the S&P 500, which means the JPY is going to have to continuously rely on ad-hoc panic news (coronavirus, risk-off) to maintain the short-term bullish bias that is trying to establish. The index is far from being out of the woods at this point, with the slow money still under control of the trend, it’s just that the fast money is starting to exert more control short-term for now.

The AUD index, having clearly paid juicy profits to those looking to gain short exposure off the midpoint of its macro range, looks set to remain en-route to have another crack at its macro support from its broad range, one that remains in play since Sept last year. For weeks I’ve reiterated that the buy-side bias on the Aussie is most evident when this support gets tested, and while not there, we are getting closer once again, so be on the alert for any buy-side opportunities in the Aussie to arise if further weakness to the tune of 0.3%-0.5% occurs. The seasonals are positive in January, so that’s an added factor to consider if the index makes it all the way to the outlined area of support where consistent buying emanates from.

The NZD index remains stuck in a tight range, hence, until there is a resolution away from it, the next directional bias won’t be confirmed. My outlook for this market is neutral to bullish since I still consider this market to be in a range in the broader context of a bullish trend. Therefore, from a structural standpoint, buying weakness at support levels makes sense. Remember, ranges are the trickiest environments to trade as signals can be more conflicting, so I wouldn’t add that much weight to the positioning of the compounded tick volume pressure as assessed by the 13ma off the OBV nor the enhanced moving averages tracking the smart money flows. The volatility to be trading NZD pairs remains below the monthly average.

The CHF index, as I anticipated, has found the topside limited by the 100% proj target, a symmetrical target that tends to draw attention from market makers, profit-taking activity and contrarian traders to create enough of a supply imbalance to cap further progress. The bullish trend is still undeniably bullish, but even the price action from the last 24h, depicts an interesting pattern, with the CHF starting to be sold on strength as the upper shadow on Tues shows. I remain skeptical that to call this the ultimate top as the fast money will probably not give up that easily in a currency that has performed best this month. If you are after getting paid positive swaps, then CHF shorts is the way to go, just be aware that this will be still against a firm trend, even if the technicals look overstretched and the 100% proj suggests a potential top. As reiterated, these levels are incredibly interesting for the patient traders.

Important Footnotes

  • 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
  • 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.
  • 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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