GBP Clear Winner Of A Central Banks-Charged Week

The Sterling, the Yen, and the Swiss Franc were the big winners as volatility picked up across the board in response to the latest Central Bank decisions by the BoE (overruled by Brexit), the BOJ and the SNB respectively. The NZD and the AUD looks under the cosh as the market prices in further rate cuts by the RBA and the RBNZ. The USD still looks rather attractive at this juncture.

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 Sterling is hands down the currency running away from the FX pack in an upside direction, while the opposite is true about the New Zealand Dollar. The rest of currencies indices, when crosschecking its performance against a basket of G8 FX, are still sandwiched in rather compressed ranges, with the exception of the Aussie, as sellers start to make further strides after the conviction of another rate cut by the RBA in October gets priced into the Oceanic currency. The USD continues to show a benign technical picture in the index, which should bode well for the currency next week as the market readjusts the neutral policy stance by the Fed as the current base case. The EUR is also showing its most combatant side with further demand found in the European session but unable to be sustained through the North American trade. The CAD has been treading water for the past few days with very limited volatility in its index, while both the CHF and JPY exhibit strength after the market perceives the latest policy calls by the SNB and the BOJ as falling short of the easing expectation built ahead of the events. As a result, both currencies were boosted even if the technicals are still rather dubious at this stage. 

The indices show the performance of a particular currency vs G8 FX. An educational article about how to build your own currency meter 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.

RBA rate cut in the horizon: The market is pricing in a fresh rate cut by the RBA in October with a probability of around 80%. This change of heart comes after the Aus employment change came at a decent +34.7K vs 15K expected, but that was about it. From there, it went downhill with the unemployment rate missing expectations at 5.3% vs 5.2% exp, but even worse, the full time employment change was -15.5K, with part-time taking up the slack with a gain of+50.2K. The participation rate stood at a record high of 66.2%, which was a strong number to offset a bit the negative results.

GBP on a tear fueled by Juncker: The Sterling keeps defying gravity by rising further as EC President Juncker said “we can have a deal. Brexit will happen”, Sky News reported. The headline was immediately picked up by algorithm activity, resulting in a sharp appreciation in the British currency. Juncker stressed that a no-deal Brexit would have catastrophic consequences, and that he “is prepared to get rid of the so-called backstop from a withdrawal agreement, so long as all the objectives are met.” He has sent documents to Prime Minister Johnson outlining draft ideas for a new Brexit deal, while the UK government also confirmed written documents sent to the EU on Brexit, which according to the UK government spokesperson, “are a series of confidential technical non-papers which reflect the ideas the UK has on the Brexit agreement and the backstop.”

BoE a familiar non-event: There wasn’t much to latch on as part of the Bank of England policy decision, which remains a sideshow. Carney continues to imply that a smooth Brexit will probably lead to rate hikes, while a hard Brexit would not be automatic rate cuts but rather it will require the extend in which the economy is disrupted by this event.

Norges Bank goes for a dovish hike: decided to raise rates 25bp to 1.5% from 1.25%, in a move that should be considered not entirely unexpected even if there was no consensus. The NOK, after the initial spike higher, was unable to accept higher price levels as the Central Bank signaled a prolonged pause from here on out. As James Smith, an Economist at ING notes: “Amid lingering global trade, Brexit and geopolitical/energy uncertainty, the central bank's tightening cycle looks like it has run its course for now.”

BoJ preparing the market for more easing? The Bank of Japan left its policy unchanged as widely expected by the market even if it looks as though Governor Kuroda is starting to prepare the market for further easing tools to be deployed down the line, potentially as soon as October. The admission by BoJ Governor Kuroda, in the presser, that the Bank is giving a stronger consideration toward easing now compared to its last meeting is a dovish turn, even if that was not manifested by the performance of the Yen, which ends as one of the top performers. The statement read: "Given the slowdowns in overseas economies and their downside risks seem to be increasing, the Bank judges that it is becoming necessary to pay closer attention to the possibility that the momentum toward achieving the price stability target will be lost. Taking this situation into account, the Bank will reexamine economic and price developments at the next MPM, when it updates the outlook for economic activity and prices."

SNB disappoints dovish expectations: The SNB left its policy rate unchanged at -75bps with an adjustment of the basis for calculating negative interest on sight deposits held with the central bank. There is a certain exemption threshold before the negative charges are effective, even if the SNB will apply flexibility in this approach by updating this threshold on a monthly basis. They also downgraded the inflation and growth forecasts but despite that, the CHF strengthened as the market felt it was a disappointment not to see a cut today. Moreover, there wasn’t any clear sign that the SNB is ready to step up its intervention rhetoric just yet (CHF positive).

Trump's adviser on China spooks the market: According to the South China Morning Post, Donald Trump is ready to escalate trade war if deal not agreed soon, citing the president’s adviser on China, Michael Pillsbury. “Tariffs on Chinese goods could go to 50 per cent or 100 per cent”, leading White House adviser said. The headline led to a retracement in the price of equities in the US while exerting further pressure in the likes of the Australian Dollar or the New Zealand Dollar. Note, unless these headlines come from the horse's mouth or another major decision-maker, the markets tends to overreact before a reversal is seen as was the case in stocks rebounding later on. 

Iran's defiant stance not a good sign for Oil: Iran's foreign minister Zarif has been stirring up the tensions on a potential bellic conflict after implying via Twitter that allies of the US in the region are trying to deceive President Trump into war. “For their own sake, they should pray that they won't get what they seek." The price of Oil has deflated after Saudi Arabia vowed to have its Oil production capacity at full steam in 1 month, but a second major driver which continues to be priced in as an added risk premium in Oil is the risk of a war between the Saudis and Iran, even if Trump has been hinting that the US does not intend to have an involvement for now. Also interestingly, Saudi Arabia is said to have asked Iraq for 20 mil barrels of crude for domestic use, which implies they are struggling with the supply side.

Recent Economic Indicators & Events Ahead

Source: Forexfactory

A Dive Into The Charts

The indices show the performance of a particular currency vs G8 FX. An educational article about how to build your own currency meter can be found in the Global Prime's Research section.

The EUR index keeps finding sell-side pressure at the origin of a supply imbalance zone in the daily chart, leading to a retracement of the currency every time is tested. Until the demand is strong enough to consolidate above the resistance line marked in red on a closing basis, the EUR outlook remains rather uncertain even if one must accept that the most recent inertia ever seen the ECB outcome last week has been to apply upward pressure into the resistance area. There is no doubt we are at a critical supply juncture in the index, but one that looks at risk of breaking the more times that it gets tested, with Asian accounts having as I type another go at it. To sum up, one should approach EUR long exposure with extra caution until the resistance clears up.

The GBP index has blown through the 100% proj target as EU Juncker presses the right buttons on what to say regarding Brexit to stimulate algorithm activity. The continuous momentum in the Sterling not respecting as a potential reversal area the anticipated target reveals two things. Firstly, fundamentals overrule anything else to determine a sustained price direction, including these highly accurate targets. Secondly, you are much more likely to get shaken out due to unexpected headlines in the Sterling than any other market due to the nature of Brexit newsflows. Momentum traders keep thriving in this market and it looks like further appreciation ahead after the increase in aggregate tick volume and the high close on Thursday’s bull candle.

The USD index has gone through a technical corrective pullback in the context of a bullish environment, with the bounce occurring at a rather predictable level (13d ema - baseline). The index has found acceptance above the baseline for 4 days in a row with the suite of technical indicators in the second window (fisher transform slope + CCI) both positive. Besides, the market structure stays bullish with the latest penetration to regain the upside of the baseline happening on the back of a double bottom in the pricing of the USD. All in all, the USD looks like one of the most attractive long plays in the coming weeks, with technicals and fundamentals (FOMC saw a hawkish rate cut) agreeing with this bullish view.

The CAD index is trading in a very compressed manner with no clarity on the next directional bias as the index is literally sandwiched between support and resistance. If we were to draw a Fibonacci retracement between these two levels, we are at the exact 50%, which implies a market with a high degree of unpredictability and certainly driven by Oil movements near term. It is no coincidence either that the baseline is also stuck at the 50% mid range. Today’s direction bias in the currency will also be determined by the Canadian retail sales outcome.

The NZD index has broken into new lows, opening up the doors for an additional 1.5% of losses in the coming weeks based on the calculation of a 100% projection target. What’s also important is that the currency has broken the prior low with a spike in sell-side participation as reflected by the spike in aggregate tick volume. The move appears to be mainly driven by the rationale that if the RBA is set to cut rates next month after the poor Aus jobs data, the RBNZ may need to follow the same steps sooner or later, which is why the NZD also trades heavy.

The AUD index is about to hit a wall of bids judging by the macro level of support being tested. The overextended nature of the movement from the prior macro resistance (over -1.3%) has been fast and furious with little demand to counteract the one-way street move, but the index is telling us this may be about to change, with a relaxation of the sell-side pressure eyed. Whenever a currency starts to price in the chances of rate cuts, as in the case of the AUD due to the action expected to take by the RBA, this is hands down the number 1 driver, so do bear that in mind as this critical support is tested under the wrong set of conditions to find major buying support one would think. That said, the technicals alone should provide some temporary respite.

The JPY index, as anticipated by the daily technicals, found sellers at the intersection of the baseline, which was a pristine location to expect a refusal of higher prices given the confluent nature of the area being tested. The index is now encapsulated between the upper resistance area and the macro support area found last Friday. The overall outlook is still bearish as the price remains below the baseline even if the recent price action is not indicative of a major decision made by market participants, unlike what we’ve seen in the GBP or NZD indices.

The CHF index shows a very similar picture to the Yen, with the valuation of the Swiss currency testing the baseline but unable to break higher by the end of trading in NY. If a resolution were to come above this week’s high, then there is room for a 0.3% run to the upside approx. There is also a potential double bottom being carved out if equilibrium is found above the current range, which remember, gets formed when there is a combination of a drop in volatility as the third window (bollinger band) suggests + a double rejection of a level.

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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