Disparity In Yen Value As Risk Profile Stands

Are you able to filter out the wheat from the shaft when trading around the US-China trade headlines? Do you trade out of levels where LPs (liquidity providers) will be actively engaging in buy or sell-side campaigns? What's the downside target in the EUR/USD for this week? Can it be projected? All these questions and many more get answered 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

The US Dollar has been the darling of the G8 FX complex in the last week of trading as the recovery in US bond yields continues its course. The market remains unfazed by the noise in the US-China trade negotiations as depicted by the ebbs and flows in stocks and fixed-income, which anchors the 'true risk on' dynamics. The value of the Japanese Yen, once again, is not justifying what we are seeing elsewhere, which should provide opportunities to engage in short-side action at levels rich in liquidity. By the same token, the discrepancies observed among the depressed price action in beta-currencies, especially the AUD and NZD, and the 'risk on' environment, makes these currencies rather cheap and with value to be bought by any logical standard (the chart insights section breaks it all down). The Kiwi can been seen as an aggressive speculative long at the current levels if we assumes that the RBNZ will stand pat when they meet mid this week (consensus is for a 25bp rate cut). I wouldn't be as convinced to hold a bullish bias on the CAD as the f employment report in Canada last Friday strengthened the case for the BOC to stick to the recently shifted dovish script. As per the European currencies complex, the Pound, the Euro and the Swiss Franc, have all been under steady downward pressure across the board as the G8 FX indices chart below illustrates. 

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.

Conflicting headlines by China hawk: White House adviser Peter Navarro said over the weekend that “there is no agreement to rollback any existing tariffs as part of the Phase One deal", adding that it’s never been an option on the table following the handshake deal in October. The headline only reinforces the conflicting signals sent out there. Economic adviser Kudlow said on Thursday "if there's a phase one trade deal, there are going to be tariff agreements and concessions."

Trump keeps semantics ambiguous: US President Trump made brief remarks over the status of the US-China trade deal, saying that things are "moving along, I think, very nicely', adding that “if we make the deal that we want it will be a great deal and if it's not a great deal, I won't make it.” The comments by Trump follow Friday’s ambiguous remarks when he said “They’d like to have a roll-back. I haven’t agreed to anything. China would like to get somewhat of a rollback [but] not a complete rollback because they know I won’t do it.” Trump continues to play a game of chicken with China, neither overly committed nor fully closing the doors. Semantics matter.

'Risk on' dynamics unperturbed: The observations one can obtain from the ebbs and flows in stocks and fixed-income (S&P 500 and US 30y bond yields) leave no room for doubt, the market continues to be unfazed by the US-China trade noise (headlines) at the surface level. The valuations in these asset classes imply the environment remains dominated by ‘true risk on’ dynamics, a context meant to keep benefiting the likes of beta-currencies, especially the Aussie as a proxy of China.

China exporting deflation not helping CB hawkish case: China PPI exhibited further deflation as raw material prices keep falling. The indicator now stands at -1.6% vs 1.2% in September. What this implies is that China is once again creating disinflationary pressures to the rest of the world, which leads to a more challenging environment for Central Banks the likes of the RBA, RBNZ, BOC, Fed, ECB, to achieve their mandates of bringing inflation back towards the 2% threshold. This worsening trend is further fueled by the lack of spending by big corporations as the global economy remains on tenterhooks.

Iran's oilfield discovery makes headlines: Iran's President Hassan Rouhani made an announcement regarding the discovery of an oilfield containing 53 billion barrels in the southwest of the country. "Despite America's sanctions... Iranian workers have found an oil field with 53 billion barrels of reserves," Rouhani said. Details are still going to be coming in over the coming days with Oil traders to scrutinize it, even if in the big picture, with sanctions by the US still in place, won’t make much difference.

UK at risk of downgrade by Moody's: Moody's rating agency has placed the UK on negative credit outlook from stable, attributing the Brexit "paralysis", which leads to more unpredictability when it comes to policymaking. "The increasing inertia and, at times, paralysis that has characterised the Brexit-era policymaking process has illustrated how the capability and predictability that has traditionally distinguished the UK's institutional framework has diminished.”

NZD traders ready for a vol week: This week, based on implied volatility, the currency set to attract the biggest relative flows is the NZD as the RBNZ meets this week, with market consensus for a 25bp rate cut. The underlying reasons why the Central Bank may still want to err on the side of caution by cutting rates further include a sluggish short-term growth outlook, and the reduction of risks that can prevent a more protracted undershoot of its employment and inflation objectives. What this means is that a hold in the rate setting this week, as we saw by the RBA earlier this month, would represent a genuine surprise by the market, leading to an immediate mark up in the NZD.

Canadian jobs reinforces BOC dovish turn: Friday’s Canada net change in employment underwhelmed market expectations by falling 1.8K vs 15K estimate, which comes in stark contrast with the 70k rise last month. Full-time employment came at -16.1K vs +2.5K, while part-time employment was 14.3 K vs 12.5K estimate. The unemployment rate stood at 5.5% vs 5.5% estimate. The participation rate was unchanged at 65.7% vs 65.7% estimates. The hourly wage rate rose to 4.4% vs 4.2% estimates. When accounting for the major jump last month, the latest reading is simply a slight setback in the grand scheme of things, but enough to keep the market psyche inclined to think that it won’t help the case for the Bank of Canada to remove the idea of insurance rate cuts.

Public holidays in the North American territory: For those trading in the US session, bear in mind that the removal of liquidity in FX is going to be a factor one must account for due to the public holidays in the US and Canada today.

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Recent Economic Indicators & Events Ahead

Source: Forexfactory

Professional Insights Into FX Charts

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The first market that captures my attention this a.m. is the AUD/JPY as the valuation of the pair exhibits a huge divergence against the risk-weighted index, which accounts for the S&P 500 and the US 30 y bond yield. The cheaper the currency pair gets while the divergence exist, the greater the opportunity to be buying Aussies at discounted prices vs the Yen. Besides, notice the area highlighted in green? That’s what’s referred to as the origin of a fresh demand level, an area rich in liquidity where plenty of unfilled buy orders (cluster of these) are expected. Overall, as the environment stands, the risk is firmly skewed towards the upside.

As the chart below illustrates, the abnormal discrepancy between the risk-weighted line and the JPY index (inverse) is unbelievably obvious. Whenever these two hybrid asset classes show this much divergence, there is a clear opening for an opportunity to be exploited. In this case, as I point out above, the AUD/JPY or the likes of NZD/JPY are best positioned to capitalize on it.

Let’s now look at the EUR/USD market. The double top formation, confirmed after the acceptance below the previous swing low, has led to follow through supply activity taking the pai closer to the 1.10 level once again. Where can we expect LP (liquidity providers) to be most active to cause a reversal in the bearish trend? Based on a 100% measured move, that level would be at 1.0974, that’s where a pick up in buying activity would be expected.

NZD/USD is a market that as described above, will draw plenty of attention this week, as the RBNZ toys with the possibility of keep lowering the interest rate settings. This is more of a strategic/order flow/market structure trade idea to consider if you are inclined to believe the CB will keep the powder dry this week. Firstly, in terms of order flow, notice that the latest successful rotation to the upside in the 4h chart initiated in Oct 29 was impulsive vs the corrective pullback seen, which implies a constructive context to be buyers based on the conviction shown by each side and represented by the distance and speed the price traveled at. Secondly, the market is retesting an area of high liquidity where long-sided action to fill in long positions is a real possibility by the sector in the market that is looking to build a long campaign on the basis of a surprise hold on rates by the RBNZ, a possibility not to be dismissed.


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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