Brexit Breakthrough Adds To Trade-Led Optimism

The market has celebrated not only expectations of a partial trade deal between the US and China, but the news of a possible resolution to the Irish backstop in the Brexit saga (major breakthrough), leading to extra enthusiasm to support risk currencies, as reflected by the sharp depreciation in the Yen, Swissy, bonds and the stocks rally. The nearly 2% Sterling rally deserves a special mention.

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

The Pound stole the US-China 'trade talks' showdown after the UK prime minister and the Irish leader, as part of a joint statement, agreed that "they could see a pathway to a possible deal", which is a big deal as it opens the doors for the UK to leave the European Union by Oct 31st deadline time without the need for an extension. It's far from being baked in the cake, but the reaction in the British currency, up by over 2%, does indeed make justice to the major milestone this event in itself is to unlock the stalemate. Meanwhile, the high-beta currencies (AUD, NZD, CAD) had a field day, emboldened by the prospects of some sort of deal between the US and China; the fact that Trump is scheduled to meet Chinese Vice Premier Liu He on Friday is a testament that willingness to make a deal is an outcome strongly considered. The Euro joined the bullish party temporarily but could not sustain the rapid acceleration above the USD 1.10 round number, eventually giving back most of its gains. Lastly, the USD, JPY, CHF went through a rough patch, especially the Japanese and Swiss currencies as the favorite funding currencies to borrow at times of rampant risk appetite as it was the case on Thursday. 

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.

Rampant risk appetite on US-China partial deal anticipation: The market has celebrated not only expectations of a partial trade deal between the US and China, or at the bare minimum, a ‘currency pact’, which alone has caused a tremendous shift in market sentiment, but the news of a possible resolution to the Irish backstop, has jolted the markets with extra enthusiasm, leading to ebullient risk appetite, as reflected by the sharp depreciation in the Yen, Swissy or strong gains in stock indices.

The big shorts will come face to face: Reports of an early departure from the Chinese delegation were denied during the day, which when added to a “leaked” commentary by Bloomberg that the US is considering a currency agreement with China as part of partial trade deal in exchange for the suspension of further tariff increases, set the ball rolling. We then learned via circulating credible reports that US President Trump has scheduled a meeting with Vice Premier Liu He on Friday, leading to an extra boost in the groovy mood towards risk-seeking strategies in the marketplace.

Will Trump blink enough to hash out a partial deal? Trump tweeted “Big day of negotiations with China. They want to make a deal, but do I? I meet with the Vice Premier tomorrow at The White House.” This tweet by Trump, inviting Liu He for further talks, is an admission that he likes what he’s heard for him to be willing to mid somewhere in the middle, in other words, he seems to be blinking in order to activate damage prevention tactic to reduce the downside risk in both equities and his re-election chances.

Positivism around the trade talks prevail: While Doug Barry from the US China Business Council said that his sources confirmed that a trade deal is going to be smaller than hoped, he added that “a deal of any kind is more than a lot of skeptics have felt.” This follows comments by Craig Allen also of the US China Business council, who said: “We are losing share rapidly. If the light agreement is perceived to be 1st of a number of agreements or down payment on a resolution of issues that would be positive.”

The US makes a 'good-will' gesture on the Huawei saga: Even more reason to be optimistic about a trade deal came after a NYT report indicated that the “Trump administration will soon issue licenses allowing some American companies to supply nonsensitive goods to the Chinese telecom giant Huawei”, according to people familiar with the matter, adding that “this is a step that could cool tensions” as part of the trade talks.

Brexit breakthrough: The Sterling went through a few hours of rampant demand as a joint statement said the UK prime minister and Taoiseach (Irish leader) had a "detailed and constructive discussion", with the statement adding "They agreed that they could see a pathway to a possible deal." As the reaction in the Pound reflects, this is an inflection point as it heightens the prospects to get a Brexit deal done next week at the Brexit summit. The talks concentrated on "the challenges of customs and consent", Downing Street said. "They agreed to reflect further on their discussions and that officials would continue to engage intensively on them." Cabinet minister Michael Gove, who has responsibility for the UK's no-deal preparations, said: "I have to prepare for every eventuality but I'm hopeful following the good conversation that they had that we can make good progress in the days ahead." Meanwhile, Northern Ireland Secretary Julian Smith said to be "delighted to see the positivity that came out of the meeting".

Recent Economic Indicators & Events Ahead

Source: Forexfactory

A Dive Into The FX Indices 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 EUR index remains on a constructive bullish path with the overpowering of bids over offers expected to re-emerge out of the 8h support level just hit. Thursday’s EUR rally was rejected off the 8h resistance level outlined, found above a consumed 100% measured movement target. All else equal, this is a pristine location to add long-sided business into the EUR, with the added positive being that the major mark down from the highs has come on a taper of volume.

The GBP index has gone ballistic, placing the index in exceedingly overbought levels, which makes buying right of the gates in Asia a very dangerous proposition unless one lets the price cool off (pullback) for even momentum traders to find some justification to jump in. The Brexit breakthrough is no doubt welcome news as the one-way street huge move depicts, which should see further follow through should the positivism around Brexit continue.

The USD index has lost the 13d ema while at the same time, it has formed a successful bearish rotation, suggesting that any rebound could seriously be considered as a potential opportunity to find an excess of offers back up. The green hourly level is where I expect the first real test where a change of behavior in favor of sellers taking back control would occur. Even if the USD musters enough strength to blow through the hourly level, Thursday’s swing has run far enough to have also qualified a level higher up as a key level of supply on the daily (in red). On the way down, there is plenty of void room for sellers to capitalize on until a level of daily support.

The CAD index remains one of the most compressed currencies to trade, with the volatility experienced minuscule when compared to the movements seen elsewhere. Nonetheless, within the pirric range it trade, a new upleg was formed in the hourly, with a re-visit of the origin of that demand area towards the end of the NY session leading to a fresh demand imbalance. The latest flows we’ve seen in the CAD, thus, suggest buying off the lows can represent a good opportunity with technical value for a retest of higher levels in the day ahead.

The NZD index saw strong bids throughout the day in response to the groovy mood in the markets, with an hourly level of resistance tested and rejected on the first pass. There is no immediate levels that catches my attention in the hourly, which paired with the fact that the level currently in control is off the 8h as depicted in a blue line, and also the absorption of offers after the multitude of tests off resistance, makes the balance of risks be skewed to the upside.

The AUD index is well positioned structurally wise to keep making further strides with the latest round of ferocious demand flows violating the prior swing highs to create a fresh cycle up. The respect of the most recent hourly levels created along the way is a sign that this is a buying on dips markets as long as the optimism about a partial trade deal with China is sustained. There is plenty of upside room available for buyers to bank on the positive technicals until faced with a sticky resistance level on the 8h chart, which is about 0.35% away from Thursday’s close.

The JPY index is at a juncture of demand off the 8h chart, a level expected to see interest from various parties (market makers, profit taking from sellers) to create an initial stalling point. The confluence of the 100% measured move off the latest bracket area makes the confluence off this level quite a powerful one, even if the sentiment is clearly against a sustainable holding time. Nonetheless, there is definitely value to be a short-term buyer on the condition that the risk sentiment deteriorates from here on out, which can be observed through stocks or bonds.

The CHF index shows an identical picture to JPY, with a 100% measured move now completed at a key intersection point in the chart as part of an hourly horizontal support level. It wouldn’t be rare at all to see bids overpowering offers in the near term as this becomes a prime location for reversal to the mean strategies to thrive at what’s perceived as technical value areas. Should the selling pressure not abate, there is a daily support area (untested) over 0.25% below the closing price of Thursday, where solid buying interest should emanate from 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.
  • 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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