AUD Set To Temporarily Steal The Spotlight

Today’s main volatility event will center around the RBA meeting. The market expects a 25bp rate cut, a view reinforced by the latest employment report in Australia, where the jobless rate ticked up to 5.3% from 5.2%. However, it’s not as clear cut, after a more upbeat tone by the RBA Governor Dr. Lowe in a speech last week...

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

It didn't matter that the pendulum swung from risk off late on Friday to a more benign profile on Monday, neither made a difference to experience month and quarter end flows, the buy-side activity in the world's reserve currency (USD) and the Canadian Dollar continues relentless, with the latter printing fresh yearly highs at an index level, while the US Dollar is just at a stone's throw from achieving this same milestone. But in the next few hours, the Australian Dollar is the currency set to command the market's attention, as the RBA prepares to release its latest monetary policy decision, with the overwhelming consensus agreeing that a 25bp rate cut will be delivered. Meanwhile, on the other side of the USD, CAD spectrum we find the NZD, EUR, CHF. The former troubled by terrible back-to-back business confidence prints on Mon and Tues, while the Euro feels the heat of a market now more decisively discounting the ECB perma QE stance, reinforced by the German CPI miss (QE linked to inflation). Lastly, the Sterling has found robust buy-side interest once again, as the currency retests the origin of its aggregate demand back on Sept 13 as shown in today's index analysis. 

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.

No immediate risk of blocking Chinese listings: The US administration has confirmed that there are no plans to block listings of Chinese companies in the US stock market, helping to stabilize the risk tone. The S&P 500 ended the day with gains of 0.5%, in contrast with US yields which were down slightly.

Gold under the cosh: The sharp fall in gold, even if influenced by month and quarter end flows, it suggests that investors are starting to feel more positive about the global risk environment. The aggressive selling in Gold must also be seen from the standpoint of a stronger USD index, which is just a whisker away from making new highs for the year.

NZD longs in trouble: The NZD was the weakest currency on Monday, alongside the Swissy, after NZ business confidence for September came at -53.5 from -52 last, with the business activity outlook at -1.8, the lowest it’s been since 2008/09. To make matters worse, thi sTuesday morning, the NZ Q3 Business Confidence index (QSBO) also showed a disappointing headline of -40 in Q3 vs -34 in Q2 while the Own activity index fell to -11 vs -4 previously, playing into the view that the RBNZ has no choice but to stay dovish going forward.

Detailed Brexit proposal due out in 24-48h: The UK is set to send a detailed Brexit proposal mid this week in an attempt to break the deadlock with the EU with regards to the Irish backstop. The UK looks set to propose a number of 'customs clearance centres' on both sides of the Irish border. There is going to be heightened vol around the GBP once the report is official published and we start getting reactions from EU officials on whether or not it has merit to initiate new negotiations. 

Monday's key data points soft: The latest data releases were underwhelming. If during the Asian session it became obvious the state of dismal in the NZ business sector, in Germany, the update about the inflation numbers for September provided no reason to be encouraged, after the inflation print missed expectations by a small fraction at 0.9% vs 1% exp In the US, the Chicago PMI fell to 47.1 in Sept vs 50.4 in August, while the Dallas Fed survey showed a soft print of 1 from 2.7 in August.

Recent Economic Indicators & Events Ahead (RBA In Focus)

AUD vol eyed post RBA: Today’s main volatility event will center around the RBA meeting. The market expects a 25bp rate cut, a view reinforced by the latest employment report in Australia, where the jobless rate ticked up to 5.3% from 5.2%. However, it’s not as clear cut, after a more upbeat tone by the RBA Governor Dr. Lowe in a speech last week, saying the economy was at a "gentle turning point." If one is preparing the market for a cut, you may want to refrain from these comments. The comment led to a quick yet ephemeral spike in the Aussie last week, as traders interpreted the remark as the RBA being in no rush to embark on further easing after the June and July rate cuts.

What if the RBA keeps powder dry? Robert Carnell, Chief Economist Head of Research, Asia-Pacific, at ING, notes: “Failure by the RBA to deliver a cut at this week's meeting will likely see the AUD spike higher. But both real and nominal effective exchange rates for the AUD have weakened since the end of last year, and a small near-term spike should be quite manageable. If AUDUSD bounces back to a little over 0.68 following a no-change decision this week, then this would not derail Governor Lowe's "gentle turning point" for the economy. It would also leave policy rates closer to a level at which, even if they aren't actually doing all that much good, they won't actually be doing any harm.”

NAB believes rate cut baked in the cake: According to NAB FX Strategy Team: “We expect the RBA to cut the cash rate by 25bp to 0.75% today. This reflects our view that an underperforming economy requires more policy support, with Governor Lowe stating there had been “an accumulation of evidence” that unemployment can be lower and stressing that ignoring lower world rates would see a higher exchange rate. We expect the press release and comments from the Governor tonight will justify the decision, but not offer any guide to future moves, other than to say that rates are likely to stay low and that the Board will monitor developments to see if further easing is needed. The RBA commentary could also repeat that the economy may be at a gentle turning point.”

Westpac joins rate cut calls: Bill Evans, Chief Economist at Westpac, also support a rate cut by the RBA today: “With two meetings now having passed since the last move and, from my perspective, most importantly, the key rate cut theme that “the Australian economy could sustain lower rates of unemployment and underemployment” returning to the narrative, our central view that there is no reason to wait until November for the next move still seems reasonable. Westpac continues to predict cuts in the cash rate of 25 basis points in both October and February next year.”

What's else is ahead today? Other events of interest today include the German/EU/UK PMIs (final versions), the European CPI, Canada Manufacturing PMI and m/m GDP, we well as the US ISM Manufacturing, US Markit Manufacturing PMI, and also Fed speeches by Evans, Clarida and Bowman.

Source: Forexfactory

A Dive Into The Charts

The EUR index stumbled into heavy offers at its daily resistance level, from where the smart money initiated a renewed sell-side campaign that allowed the index to create a successful rotation to the downside, setting the stage for further follow through this week. The next logical target for the current leg lower is projected to be at its lowest level of the year, which allows about 0.5% leeway to the downside. The target for the bears would align with the 100% projection target measures from the post ECB high through the breakout point.

The GBP index found strong bids the moment it touched the origin of a very strong demand areas as per the surge in buy-side interest on the currency back on Sept 13. I’d be expecting this area to constitute an ideal location for the smart money to consider adding long-side exposure in the Sterling for an eventual resumption of the uptrend. The first attempt to move away from the daily demand area has been met with plenty of upside absorption, which is not surprising as the currency attempts to retake the 13d ema (baseline) to the upside.

The USD index is unambiguously bullish as the currency closes is the distance that separates its current valuation from the highest level this year. Any setback towards the blue line in the chart, which refers to a 8h level of support should induce strong buy side pressure, as the area represents the origin of the latest demand flows hitting the world’s reserve currency. The gap between the current valuation and the baseline makes the current pricing too expensive to play swing opportunities unless pullbacks are seen, which should be met with strong demand.

The CAD index has gone one step further than the USD in terms of performance, breaching its most recent swing high to print a fresh yearly high. This valuation, ultimately, reflects the current monetary policy divergence between the Bank of Canada, not yet committed to a dovish bias, and the rest of Central Banks. Treating the CAD as a buy only currency is a sensible strategy to follow, especially if as a trader you deploy momentum-type strategies. The swing traders out there would need to be more pragmatic as the current valuation is way too overstretched to consider longs at this stage, you’d be way too late in the cycle unless we can first see a retest of lower levels today, with the lines in blue (8h level) and red (daily) where I’d be expecting buy-side interest to re-emerge for a resumption of the uptrend.

The NZD index faces the risk of suffering further losses with the index ferociously rejecting the baseline after a few days of consolidation near-by. The latest business confidence data out of New Zealand has been the clear catalyst re-activating the bearish momentum, which now looks set to target, at the bare minimum, the most recent lows, which gives room for an extra move to the downside this week to the tune of 0.5% approximately. Should the yearly low be taken out, there is a dual confluence via 100% proj target levels circa 6.85, allowing for an additional 1.2% worth of losses in the Kiwi from the moment the index makes new lows.

The AUD index, as one could have anticipated if following my notes, has found two main levels acting as the boundaries from which to encapsulate price action, that is, the baseline to the upside (13d ema) and the daily horizontal support level to the downside. Technically, I am inclined to think that the red line (daily support) is a very strong level to break, hence we will need a decisive dovish action by the RBA today to find enough supply imbalance. What this means is that the RBA will be required to cut its rate and keep the dovish bias intact in order to see sufficient sell-side interest to attempt a break of the mentioned support. On the upside, the next 24h will be, based on how I assess a currency outlook, whether or not the index can conquer the upside of the baseline, an outcome likely to transpire if the RBA decides to hold rates unchanged today given the amount of dovish bets by the market.

The JPY index, similar to what we are seeing in the AUD index, is trapped in a compressed range awaiting further developments that may unravel the tight gyrations. As the latest cycle and volume activity stands, I am of the opinion that the sellers are the side showing the most conviction as of late, due to the fact that the latest downside extension from the daily resistance level in red achieved a successful rotation with high participation as per the aggregate tick volume on Friday, even if a lot of absorption was seen. The attempt to correct higher this Monday carries much lesser activity, but again, the price action is inconclusive for now. Any retest of the red line in the index presents the best opportunity to engage in JPY sell-side action.

The CHF index has been unquestionably rejected off a resistance level of the daily (in red), leading to a successful rotation in price, and as importantly, the acceptance of lower levels by the close of business in NY. This activity has deteriorated the outlook for the Swissy, exposing an additional 0.5% worth of further losses in the coming days. The index also trades below the baseline, making any bounce to retest the backside of this dynamic indicator a potential area where sellers may re-engage to resume the downtrend in line with the dominant cycle. I’ve highlighted this level with a blue line in the chart. Expect supply to hit the Swissy around it.

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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