A Weaker CAD As Market Awaits ECB Action

Substantial loss of interest to get involved in the Euro until this week's high-stakes ECB policy meeting on Thursday sheds some light on whether the resumption of unorthodox policies by the ECB occurs in July or September. Meanwhile, the CAD is the weakest currency as the adjustment from overblown levels continues.

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. You can also subscribe to the mailing list to receive Ivan’s Daily wrap.

Quick Take

I perceive the study of forex price action as the art to read all the information the market has agreed to price in at any particular point in time, which is why after witnessing the 3rd narrowest range in the EUR/USD history, the first thought that came to mind is that the market is done and locked in its opinion that ECB's Draghi will over-deliver this week. The market verdict, through recent price action in the EUR, is that the deterioration of macros in the EZ justify imminent easing action by the ECB. But it won't be until Thursday's high-stakes meeting that the ECB will shed some light on whether the resumption of unorthodox policies by the ECB via a rate cut and potentially a new easing program comes indeed in July, or we'll have to wait till the ECB updates its macro projections in Sept, in which case, the price action in the Euro is likely to face some harsh adjustment in valuation to the upside. Either way, ECB easing is coming. As it is on the other side of the pond, in the form of what the market agrees to be a 25bp rate cut by the Fed on July 31st. The market has come to the realization that a 50bp rate cut was a call too far-fetched considering all that's been said by Fed officials before the blackout period. So, with almost null activity in the Euro or the US Dollar, the vol on Monday came courtesy of the CAD, which continues to 'catch down' to the weakening fundamentals (last Friday's downbeat retail sales + fall in Oil prices + more cautious BOC on its last policy statement). The NZD was also marked down in recent hours, as Bloomberg reveals that the RBNZ may be investigating the possibility of tapping into an unconventional policy strategy down the road.  The AUD remains firm, somehow better anchored by last week's reassurance that the RBA is now in a short-term neutral phase to let its recent back-to-back rate cuts to feed through the economy before a re-assessment in Q4. The Swissy is another currency that has found further technical demand, with an exploration of the recent price action vs the weakest currencies in the charts section. Lastly, the Sterling awaits the announcement of the new UK PM today amid a depressed outlook until the new government's Brexit negotiating apparatus is reactivated.

Narratives In Financial Markets

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

Kiwi's flight loses altitude: The Kiwi is under pressure in the Asian session as the RBNZ has reportedly suggested it may investigate the possibility of tapping into an unconventional policy strategy (read QE), even if the consideration is still at a "very early stage", Bloomberg reports. The RBNZ says it was responding to an official information request, even if the immediate reaction has been to panic sell the NZD as that’s totally not priced by any stretch. If the news garners more attention, with the NZD currency index at its highest since late April ‘19, substantial room to correct exist.

US-China enter 'goodwill' phase: US trade negotiators, including Mnuchin and Lighthizer, are scheduled to travel to China next week for face-to-face meetings with their counterparts in order to try to make inroads in the current standoff in trade negotiations. This would be the first face-to-face meeting since the temporary ‘goodwill’ at the G20 was announced. The news is carried by the South China Morning Post, citing unnamed sources. It adds to the positive news that the US will remove 110 Chinese products from being under the new tariffs regime in a goodwill gesture. From the Chinese side, they seem to be planning a boost in the purchases of US soybeans. Note though, Beijing's government has been clear that a final deal will not be reached until the full removal of tariffs.

New UK PM to be declared today: There might be some added vol in the GBP as a new British prime minister is set to be announced on Tuesday as part of the UK Conservative leadership voting contest. It looks like the election of Boris Johnson, characterized as a hard-Brexit endorser if no other options arise, has been perceived as a negative for the Sterling since the official resignation of UK PM Theresa May. Unless a major shocker, Johnson will take office from Wednesday. It’s not going to be Johnson’s election that may influence the pricing of the Sterling per se, but how the politician starts to go about the Brexit rhetoric with models constantly on the hunt to adjust the probabilities that the UK eventually exits the EU in a hard-landing fashion without a deal in place. Remember, the DNA of a politician can be dramatically altered once power is attained, which in the case of Brexit, it means Johnson may soon start softening up the tough language and sound more constructive in finding any solution possible to avoid what nobody in its right mind wants, a hard-Brexit. However, clarity might be hard to come by and will only start to shape up after the UK parliament returns from its recess on Sept 3rd.

All eyes on the ECB this week: Key risk events will not come due until Wednesday when we see Eurozone PMIs and key earnings reports in the US ahead of the much anticipated ECB monetary policy meeting on Thursday, followed by the US Q2 GDP on Friday. Without a doubt, all the attention and thus volatility will be concentrated in the Euro, which ironically, just had its 3rd narrowest day since its inception against the US Dollar, in a clear testament that interest is null until Draghi takes the stage. The price action in the Euro on the lead up to the ECB portrays a very suppressed sentiment on expectations that an ECB cut in policy rates will be enacted this week and potentially the design of a new asset purchase programme, justified by the deterioration of the macroeconomic conditions. For those proponents of no action on Thursday, they are leaning against the fact that the ECB has had the tendency to take decisions at meetings when it has updated macro projections, with the next update not until September.

Fed into blackout with 25bp rate cut priced: The market has gone into the Fed blackout period with a 25bp rate cut priced in and between now and the FOMC on July 31st, there is little data or events that may move the needle in influencing the Fed. However, a standout view I’ve extracted from my daily read of bank research repos comes courtesy of the Strategy Team at Morgan Stanley, who still lean against the 50bp rate cut, noting that “while US demand indicators like the June retail sales report have been strong, the worry lies in the US' sharply weakening capex cycle”, which is one of the primary reasons, amongst others, that they see as the trigger - capex weakness and its impact on productivity/neutral rates - for the Fed to act boldly with a 50 bp rate cut.

Trouble for crypto enthusiasts in India: Crypto trading is under scrutiny in India. According to Reuters, the Indian government panel has recommended banning all private cryptocurrencies with jain time of up to 10 years and heavy fines for anyone dealing in digital currencies. The panel drew up a report and draft legislation and is now subject for examination by the government and regulators before a final decision is made. Interestingly, whereas this type of news would have led to a tsunami of selling pressure in BTC, the price remains anchored above 10k, which in my book is a positive development.

US debt to keep soaring after deal reached: US President Trump confirmed that Congress has reached a deal on the debt limit suspension, which will result in the debt limit ratcheted higher for the coming two years.

Recent Economic Indicators & Events Ahead

Source: Forexfactory

A Dive Into The Charts (Tech, Funda, Intermarket)

In the following explanation, the aim is to encourage one's critical thinking when analyzing the forex market as a holistic endeavor. The logic of the studies below orbit around the individual performance of currencies when crosschecked against a basket of the 8 most heavily traded. An educational article about this topic can be found in the Global Prime's Research section.  

At the start of the week, a chart that immediately caught my attention was the Swiss Franc index, which as a reminder, it’s derived off an equally-weighted measure vs G8 FX. As the chart below shows, not only Friday’s candle found a resolution above a 2-week range, but it also closed above my preferred mid-term daily baseline (13-ema) to determine one’s bias, plus it came with an aggregated tick volume around its average as the 2nd window depicts. Bottom line, the Swissy was setting up to be one of the strongest currencies at the start of this week.

In contrast, the CAD, following the surprisingly poor retail sales print from last Friday, alongside the relentless fall in Oil in the last week, made the cut as a candidate to see selling flows pick up. Upon closer inspection of the CAD equally-weighted index vs a basket of G8 FX, not only we were reverting back to the mean from a 100% proj target reached, but the chart had violated the downside of the 13-ema baseline on a break that carried above-average tick volume when aggregating the activity in 7 CAD pairs. What’s more, the supply that came through represented a violation of the bullish structure, making the currency a match to capitalize on the expected CHF strength.

By then analyzing the CAD/CHF chart, we can clearly see how the initial trigger came about on July 18th, with Friday’s price action rejection higher levels further confirmation of an expected downward adjustment towards the 0.7480 support, where an assessment should be made and positions secured at break even from the sell-side campaign originate 60p or so above. To make the short-trade even more compelling, the highly correlated Crude Oil (orange line) was showing a major short divergence by the time the trigger to short CADCHF was given.

The start of the week has really been all about finding ways to potentially exploit CAD weakness, which in hindsight, could have paid solid dividends to the avid traders so far. Going back to the backbone in order to assess the lay of the land in FX, we could see by Monday Asian open that the AUD index, equally-weighted vs G8 FX, was still in a constructive bullish structure after yet another technical milestone by breaking above 7.05, which was a huge technical area of resistance. In price action terms, the violation of the line came in the form of a bullish engulfing bar and equally important, the aggregated tick volume was on the rise. We had found it, another currency to potentially expect firm demand, hence a contender to further appreciate against the CAD. Besides, last week's RBA minutes cemented the notion that the RBA is likely to stay pat on further rate cuts at least until Q4, hence the fundamental component supporting the AUD long logic was also met. 

The AUD/CAD exchange rate, which I illustrate below, did live up to the expectations of bullish strength, after buyers managed to regroup to push the rate higher off a clear support. The retest of last Friday’s high should, in most cases, guarantee that this is a position where no losses are incurred by moving one’s stop loss to break even. Note, I’ve also added the AU vs CA bond yield spread (5Y) in blue line to further prove that this was a trade in congruence with the intrinsic value as the icing on the cake. Again, by analyzing potential trades with an individual currency performance as the key reference, it can help to filter out the wheat from the chaff.

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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