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'Risk On' Returns, Aussie Reigns

'Risk On' Returns, Aussie Reigns

The AUD has been the kink of the currency market in the last 24h, spurred by a notable beat in Australian retail sales, with the added fuel (demand) via the positive rhetoric in what appears to be the very last stages of negotiations in the US-China trade talks.

Date: 4/4/19

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 AUD has been the kink of the currency market in the last 24h, spurred by a notable beat in Australian retail sales, with the added fuel (demand) via the positive rhetoric in what appears to be the very last stages of negotiations in the US-China trade talks. Risk appetite is still well sustained across the board, even if equities in the US, unlike in Europe, failed to keep the overnight gains. A reflection of the recovery in the desire to join the bid on the risk tone is the fall in the USD or JPY indexes. The Sterling remains steady, keeping most of its Tuesday's gains, as hopes keep building up over the UK averting a hard Brexit. The inflows into European equities and the overall risk-induced swings seems to have finally played a role in the Euro, which has found demand once again after retesting this year's low. The economic agenda is very quiet today, as the market liquidity dries up ahead of Friday's US NFP, set to inject the usual volatility at the start of every month.

Key Narratives in Financial Markets

  • Risk assets were invigorated overnight after the FT reported that the US and China are getting closer to a final trade agreement, noting that representatives have solved most of the issues standing in the way of a deal. How to implement and enforce the agreement remains the main sticking point, according to the story carried by the Financial Times.
  • Australian retail sales almost tripled the street calls at +0.8%, much higher than the +0.3% expected. Besides the Australian trade balance came at a surplus of 4.8bn, which is over 1.1bn above market expectations. The Aussie ended the day as the top performer currency.
  • The solid services PMIs in China, Europe, and the US vindicate the notion that fears of a global slowdown may be overstretched. According to a report by HSBC, the relative robustness in global PMIs, particularly on the service side, “suggest recession fears could be overblown.”
  • UK PM May and Labour leader Corbyn engage in constructive talks while the prospects of a no-deal Brexit continue to reduce as the UK parliaments prepares to pass a bill that would bloc leaving the EU without some sort of a compromise that prevents a hard Brexit.
  • According to a report by Sky, BoE Governor Carney will not stay at the helm of the BoE beyond January 2020. The policy-maker spoke to Sky news on Wednesday, noting that the risk of a no-deal Brexit has become alarmingly high.
  • US ISM non-manufacturing PMI falls to 56.1 vs 58.00 expected, with the drop in new orders the red flag even if the index remains at fairly elevated levels by historical standards.
  • The US March ADP employment report saw a miss, coming at 129k vs 175k expected, and while the reading was the lowest print in 1 ½ year, the fact that the US runs very tight employment means that high figures will be harder to achieve due to shorter labor supply.

Recent Economic Indicators & Events Ahead

Source: Forexfactory

RORO - Risk On Risk Off Conditions

By analyzing the crosscurrents in equities, fixed-income and currencies, it’s undeniable that the environment remains broadly supportive for risk assets, with both the Yen and the DXY indexes, a manifestation of such permutation away from safe havens and into riskier bets. In the case of the currency market, the Aussie managed to capitalize the most on such benign conditions, not only benefited via the ‘true risk on’ profile established but through a fundamentally-adjusted rate. The ratio of industrial metals such as copper vs gold does reflect the same clues as what we can obtain via the selloff in US bonds (higher rates), and that is, investors are betting on higher global growth. The latest raft of positive datasets from China and Europe (PMIs) has caused a short-term re-evaluation that perhaps the fears of a protracted global slowdown are not as terrible as the IMF made it sound this week, after stating that about 70% of countries worldwide will experience significantly slower growth. As the Research Team at Morgan Stanley explains as part of their latest note to clients, “IMF’s Lagarde warning about slowing global growth and the WTO warning that 2019 trade growth will be the weakest in three years stands in sharp contrast with commodity markets breaking higher. While some of the commodity price increase – especially in oil markets – may be due to supply cuts, it seems that demand has strengthened too.” Food for thought as copper vs gold breaking higher is a clear indication that what matters as the number 1 foreteller of economic news is price itself and not a lagging view by a policy-maker. The only ugly reading out of this expanded version of the RORO model, I’d say that the spike higher in the VIX into the 14.00 handle is the only marginal concern at this stage, even if the S&P 500 remains is a rampant run, as the enormous separation between the current pricing of the index and its 125HMA (macro slope) clearly proves.

Markets To Watch: Intermarket & Technical Analysis

EUR/USD: Sellers Lose 2-Week Long Price Control

The red flag emanating from the market structure evolution and dully highlighted in yesterday’s report has acted as a precursor to accurately pinpoint the area in the chart where buyers have made a comeback. The risk of a shift in trend dynamics, following a sequence of lower lows at intervals of decreasing magnitude (170, 108, 63) has now been vindicated after bids gunned through a descending trendline originating from March 26th. The rotation back up has not found acceptance above 1.1250, which puts us at the bare minimum, in a range-bound environment between 1.1180-85 & 1.1245-50. Notice, the run from the lows has marginally surpassed the previous down-leg extension (63p vs 71p), a communication that the change in the cycle pattern is taking effect. Note, with Wednesday’s P-shaped volume profile formation in place, the pressure to break into higher ground is building up. Should the upside continue to hold, the key focal area where buyers and sellers will battle it out to gain control is the midpoint of the range at 1.1215 approximately. Be reminded, it’s US NFP on Friday, what this means is that technicals should be thrown out of the window, while we can anticipate that the incentives to commit towards a specific direction ahead of the event may not be as desirable due to the risk event that exists just ahead of us.

USD/JPY: Upside Target Reached, Breakout Pressure?

Another retest of an ascending trendline has transpired after price failed to break through a cluster of offers following the latest 100% proj target achieved before the slight roll over. Note, the 2nd leg of this ongoing bullish cycle has gone for a total of 152p, an increase of over 50% from the previous leg up (99p). What this means is that even if setbacks occur short-term, the market structure is still suggestive of a broad bullish trend as long as the ascending trendline off sub 110.00 is respected. Be aware, the current ‘true risk on’ environment (DXY down, SP500 & US30Y up) tends to lead to safe haven flows causing extra supply pressure on the JPY. With a P-shaped volume profile structure, and the downside still capped by the trendline, the path of least resistance is still higher. The breakout of the ascending trendline would be a warning sign that 111.15-20 may be revisited next.

AUD/USD: Buy-Side Bias As Intermarket Flows Stand

The trifecta of a bullish slope in equities, DXY+Yuan (inverted) and Aus-US bond yield spread becomes our guidance to anticipate the buying pressure in this market to stay its course. Technically, the market is in a broad range, but with so much value building up at the highs of the day as the volume profile POC reflects, one would expect buyside systems to have another go at the critical area of resistance 0.7130, with a breakout higher exposing an exploitable 20p vacuum area until .07150. Any setbacks on the Aussie should find plenty of demand pockets around the 0.71-7105 support, with a break lower to find further buying interest at 0.7085, even if it looks like a tall order to achieve by sellers as the intermarket crosscurrents stand at the moment.

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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