Aggressive Shift In Oceanic Currencies' Value

Do you understand why the NZD rallied the way it did? What's been fueling it aside from the RBNZ? Have you adopted as part of your trading the identification of value area rich in liquidity? Is the risk profile congruent with follow through continuation in the JPY? Why did the AUD/JPY rebounded below 74.00 after today's Aus jobs report? Find all the answers in today's report...

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

What a difference a couple of headlines can make to one's trading account, either positively or negatively, wouldn't you agree? The recent performance in the AUD and the NZD embodies like no other such statement as the former keeps suffering from renewed US-China trade deal pessimism only to get knocked down by an awful Aussie jobs. On the flip side, longs in the NZD are thriving as the RBNZ keeps the powder dry, with the momentum fueled by the unwinding of an overly long leveraged market. The CHF continues to attract steady demand flows with the market unfazed by the attempts of SNB's Jordan to jawbone the currency. Amid the marginal pullback in risk sentiment, the JPY keeps faring quite well, even if we are far from a risk profile that may suggest much follow through continuation on JPY's own merits. The USD has been lacking the drivers to show much volatility this week, with Fed's Powell testimony in Congress offering 0 new insights to discount into the currency valuation. The CAD, after a brief period of upward correction on the back of a dovish BOC in late Oct, has now clearly transitioned into a mark-down phase since the end of last week as shorts keep piling up. Lastly, the Euro, as the index below illustrates, stays under steady selling pressure with no technical evidence yet of a potential turnaround in fortunes. 

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.

Australian jobs to bring back RBA easing prospects? The Australian jobs report was a big miss, leading to an immediate mark down in the AUD. Looking at the details we can observe how the unemployment rate worsened to 5.3% vs. 5.2% expected, which is miles away from the RBA aim to targeting 4.5%. The headline employment change came at -19.0K vs 15K expected, with the breakdown of full-time vs part-time not helping, as the former declined by 10.3K while the latter also saw a loss of 8.7K . The participation rate at 66.0 % was also disappointing vs 66.1% exp.

The trade deal pendulum swings to the negative: US-China Trade deal news were on the negative side on Wednesday after the WSJ reports “talks hit snag over farm purchases”. Nonetheless, the risk profile remains largely unfazed with the S&P 500 near record highs while the US 30-year bond yield saw a small bleep lower. China reportedly cautious on “putting a numerical commitment [on farm buys] in the text of a potential agreement. Beijing wants to avoid cutting a deal that looks one-sided…”

WSJ reports fueling trade pessimism: The WSJ also threw an early curve ball to sentiment noting “tariffs are emerging as the main stumbling block in efforts to come to a limited trade deal”, which follows a speech by Trump saying “if we don’t make a deal, we’re going to substantially raise those tariffs.”

Fed's Powell testimony a non-event: Fed’s Powell stuck to the familiar script on monetary policy as part of a testimony to Congress with remarks very similar to his October FOMC press conference. Powell said “the current stance of monetary policy as likely to remain appropriate as long as incoming information about the economy remains broadly consistent with the outlook.” As a result, the market impact was very subdued as the market had no chance to price new inputs into the USD valuation.

NZD bullish sentiment intact post RBNZ: The NZD has managed to keep the bid tone throughout the day after the surprising announcement to keep rates on hold by the RBNZ. The outsized move in the NZD was further propelled by the fact that this was the last RBNZ meeting until Feb 12th, which implies they will keep its powder dry for another 3 months. Besides, the overall positioning in the NZD was overly short as per the leveraged positions, further fueling the NZD rally on the unwinding of shorts.

RBNZ decision unanimous but a tough one: The Reserve Bank of New Zealand Governor Orr press conference revealed that the RBNZ decision to leave its cash rate on hold was unanimous even if he later admitted that “it was without doubt a tough decision to hold rates”. Orr said that the policy is very stimulating at the moment but more stimulus will be added if needed. Orr reiterated what the statement reflected in terms of rates to stay low for a long period of time.

RBNZ's growth outlook the culprit? Tapas Strickland, Director of Economics at NAB, notes: “Adding to the sustainability of the knee jerk reaction was some notion that the RBNZ could be on hold for a while with my kiwi colleagues at BNZ noting that the key to the RBNZ’s reluctance to reduce its cash rate stemmed from its revised view on the economy’s potential growth rate: the RBNZ’s potential growth rate track now troughs at 2.2% in 2021, which means that any growth in excess of 2.0% will likely start to see inflation rise. BNZ now sees rates remaining on hold at 1.0% for the foreseeable future, with the risk skewed to another cut if economic conditions materially weaken.”

SNB Jordan keeps talking down the CHF: The Swiss Franc has been, with the exception of the Kiwi, the outperformer in FX. Coincidentally. we saw SNB's Jordan, cited by the Swiss government, as saying “the Swiss franc remains highly valued” in what appears to be an attempt to talk down the currency. Jordan said “negative rates and readiness for intervention is still very much necessary. It was nothing new and as such the bullish sentiment towards the CHF was unfazed.

US inflation a tad better: US CPI for the month of October came slightly better at 0.4% vs 0.3% estimate, although on the flip side real average weekly earnings YoY came at 0.9% vs 1.0% last month. The Labor Department said that energy accounted for more than half the increase with the added contribution of healthcare, food and owner equivalent rent as primary residence. This data won’t move the needle at all for the Fed to shift its ‘wait and see’ stance for now.

Will Germany confirm a technical recession today? German Q3 GDP will attract headlines and act as a mover for the EUR today. Can Germany avoid a technical recession? If economic growth disappoints, and even worse, if the recession is confirmed, calls for fiscal stimulus will only rise, which would ultimately be EUR positive. The consensus is for a marginal recession of -0.1% q/q, which follows the prior -0.1% q/q.

A busy day of Fed speakers: However, it's safe to say that the headlines will almost certainly won’t have much impact on volatility. Chair Powell speaks again, this time before the House Budget Committee on the economic outlook, with the remarks to be quite similar to what was shared in the last 24h. Besides Powell, there are as many as seven other Fed speakers scheduled to speak with no surprises expected as the Fed has now clearly massaged its communication for a period of no rate changes near term.

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Recent Economic Indicators & Events Ahead

Source: Forexfactory

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USD/CHF has met an area with plenty of liquidity available, one that gains major credence as a potential turning point as the confluence of a horizontal support line meet with the 100% measured move. Not only that, but a final mark down in prices late in NY led to a fake out, reinforcing the notion that this is an area prone to induce late sellers only to see a turnaround.

It’s critical that you always look to gain exposure at areas in the chart where decisions will be made. A great example of that is the buy-side opportunity that emerged in Gold earlier this week, where the origin of a demand area off the daily aligned perfectly with the 100% measured move, which gets always calculated the same way (prior H/L through the breakout point). These confluences offer areas in the chart with clusters of bids/offers to exploit.

Let’s keep scouting the market for more opportunities. This time, I present the identification of a level in AUD/JPY where market makers will again be active pre-populating the area with passive buy limit orders. I am talking about the level just below 74.00 (73.97 to be precise). That’s the inflection point where the 100% measured move meets a key horizontal support off the H4 while the context to be long the AUD/JPY based on the risk-weighted line (SP500 +US30Y).

Lastly, I am picking another market (NZD/CHF) where volatility has abounded in the last 24h. Here we can see that the inertia of the market was to distribute orders at a level high in liquidity below a critical support area tested multiple times before a breakout of structure eventuated as the RBNZ left rates unchanged against market expectations. This is what I refer to as a ‘trapped traders’ pattern, one that can be exploited by adding longs at a pullback, with my preferred area to engage being the 50% retracement with a move to breakeven on a retest of the prior high and the market to aim for the 50% measured projection move (see circles).

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.
  • 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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