Posted on: 04 Jul, 2019
The most heavily traded currencies (EUR, USD) remain on the backseat when it comes to its overall performance as commodity-linked currencies take commanding action to exploit the vulnerabilities in both the European and American counterparts.
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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.
The most heavily traded currencies (EUR, USD) remain on the backseat when it comes to its overall performance as commodity-linked currencies take commanding action to exploit the vulnerabilities in both the European and American counterparts. I'd say, there is a well-founded justification to keep pushing these currencies lower as the immediate risks suggest that the Fed is the next in line to bite the bullet and provide further easing measures, while the ECB may be one or two months behind. It is precisely for the same reasons that we find a suppressed USD that US equities are finding further buying interest at record highs. Easing by a Central Bank is the sugar hit buyers need, even if this time I wouldn't say is different, but rather I will only suggest that the rally defies certain logic if history is any indication as when an easing cycle occurs in the context of weakening growth as clearly seen via the US 30-year bond yield, then this is not the ideal environment for equities overall, especially cyclical sectors. That said, let's keep moving on by highlighting one of the key triggers for the appreciation in the CAD today, which came courtesy of the first trade surplus in years, further illuminating traders that the Fed and the BoC may be headed, as the US-CA bond yield spread has been telegraphing for some time, in different directions. The AUD, with the RBA potentially affording to hold its record low-interest rate unchanged for a few months now that back-to-back cuts were delivered, is also finding solid buying, diverging dangerously from the Yuan. Lastly, the Japanese Yen and the Swiss Franc, unlike the price of Gold or US 30-year bond yields, tell us that investors have clearly reduced considerably the G20 hedges.
* The Information is gathered after scanning top publications including the FT, WSJ, Reuters, Bloomberg, ForexLive, Institutional Bank Research reports.
If you are going to be trading on Thursday, be reminded that liquidity during the US session will be thinner than usual as US banks will be closed in observance of Independence Day. The inactivity by the majority of traders should lead to abnormally low volatility, even if it can be a double-edged sword to see higher volatility at times.
An eagle-eye view of some of the instruments most sensitive to risk sentiment tells us that the environment as we enter Thursday is characterized by the broad-based depreciation of the US Dollar as the equally-weighted currency index portrays. This weakness has been well capitalized by commodity currencies.
A notorious outperformer in recent times is the CAD, with the AUD playing more catch up. The CAD not only saw positive fundamentals in the form of its first trade surplus in years, but the rise in US equities acted as an underpinning factor to keep the momentum going.
The new lows in the US 30-year bond yield, not only suppresses the USD appeal further but it also tells us that the market clearly didn't find much justification to buying into the US-China trade truce agreement at the G20 as there is still no meat on the bone for traders to get to re-price a deal.
The market remains fixated in global easing cycles to be dominant as the growth outlook deteriorates amid US protectionist policies. The rejection off highs in the JPY index communicates residual supply but with US yields so low, Yen sellers can only partially find an argument to be optimistic via rampant US equities.
EUR/USD: Consolidation After 100% Projection Target
When scanning through the daily chart, the back-to-back bearish rejections should be a source of concern for buyers, as it also should the fact that the 13-EMA (baseline) is being rejected. There are some positives to highlight though, such as the German-US bond yield spread surge seen, mainly led by the expectation of Fed cuts, as well as the bullish structure of higher highs and higher lows off the daily timeframe. Besides, the price has reached its 100% projection target, where it's paused. The volume is also tapering on the way down (US bank holiday today), which does not tend to be an encouraging signal for follow through as exhaustion becomes a risk.
GBP/USD: Looks Set to Test The Area Of 1.25
At first glance, the Sterling looks like a currency poised to grab some liquidity at the area of 1.25 with the price structure very bearish below the 13-EMA (baseline). The test of the liquidity-rich area at the round number should find grateful buyers based on macro intermarket flows, but a very risky proposition judging by technicals. The advancement by sellers is on the tapering of volume but the fact that we are so close to retesting the previous lows, makes me think not many buyers may want to engage at present levels.
AUD/USD: Technically Bullish, Yuan Strength Not Supporting Run
Technically, the Australian Dollar remains in a clear bullish path with no reason to turn bearish off the daily unless price action gives us some clues. The run higher is supported by the positive tone in equities as the S&P 500 breaks into fresh record highs, while the AU-US bond yield spread trades at rather neutral levels. The risk that I find for the Aussie to keep finding further follow through lies on the depreciation of the Yuan, the taper of volume on the way up and the strong resistance overhead.
USD/JPY: Bearish Structure, Intermarket Flows Limit Upside
The pair remains bearish below the 13-EMA (baseline) with Wednesday's absorption candle on low volume communicating that some choppiness is likely in the next 24h as the interest to trade the pair fades, especially with the US bank holidays to see liquidity drying up. The rise in the S&P 500 has not acted as a key driver in the pair and I am not expecting much appreciation risk from here unless the bearish structure in the US 30-year bond yield or in the DXY start to turn around.
USD/CAD: Bond Yield Spread Takes Front Seat
The Canadian Dollar has been the darling on the forex market for quite some time now. The overstretched move lowe has resulted in the pair reaching a critical projected target area around 1.3050, even if the very bearish NY close does not suggest sellers have had enough. The CA-US bond yield spread has put an enormous amount of pressure on the pair, as capital flows return to Canada in expectations that the Fed and the BoC monetary policy paths will start to diverge as Canada's upbeat data keeps justifying.
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