High-Beta Currencies Fly, Next Brexit Chapter Eyed

The movements in the FX have been rather limited, with risk currencies the major beneficiaries of the currency market dynamics, as we await the Brexit vote, due on Tuesday at 1800 GMT (7pm local time). The Sterling keeps holding extraordinarily firm, while the US Dollar, as a metaphor, is still to see the light at the its of this multi-week long obscure bearish tunnel...

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

As the market awaits the next chapter in the Brexit saga (vote scheduled for today at 18 GMT), we've seen punchy movements in stocks and bond yields, a clear testament that the groovy mood in financial markets continues to improve. The market seems to have come to terms that beyond the fogginess and daily noise from the Brexit circus or the US-China Phase I trade deal, the verdict is that the worst case scenario have now been largely avoided. In other words, the market has re-calibrated to near null the expectations that either the UK will leave the EU without a favorable deal in place, even if we continue to go in circles for a protracted period of time, or that the US and China will return back to square one. These two themes moving in the direction of risk hawks has translated in a Sterling that keeps holding extraordinarily firm, accompanied by the rampant demand still seen in high-beta currencies (AUD, NZD, CAD), while the usual suspects when risk appetite is present (JPY, CHF) suffer from steady outflows. Meanwhile, the US Dollar, and using a metaphor here, is still to see the light at the its of this multi-week long obscure bearish tunnel as the market endorses the idea of a rate cut by Oct 31st. Lastly, the Euro remains in a tight range, with offers overpowering the tepid bids in the last 24h, even if flows have been tampered by the 'wait and see' on Brexit. 

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.

Brexit vote scheduled for today: The movements in the FX have been rather limited as we await the Brexit vote, due on Tuesday at 1800 GMT (7pm local time), according to House of Commons leader Jacob Rees-Moog. Note, the legal text of the new Withdrawal Agreement Bill must be approved by parliament before proceeding with a vote.

'Wait-and-see' in Brexit deadline extension: There has been no formal response received from the EU to PMs letter, in which Johnson unwillingly requested an extension of the Brexit deadline in accordance with British law. According to UK Minister Gove, there is no certainty that the EU will grant Brexit extension, a purely political trick aimed at bluffing to frighten a few soft Brexiteers. The main reason the EU has not issued an official response is because it first wants to wait and see what the outcome of the legislative process in the UK would be like.

Where to from here? Where the Brexit saga goes from here is unclear as even the passing of the withdrawal agreement bill faces the prospects of amendments. ie/ UK to remain inside the Customs Union or a confirmatory vote/Referendum to be validated. Media reports in the UK continue to speculate that UK PM Johnson may have enough votes to get his new deal just over the line. The base case still remains that the UK will ultimately be headed towards a year-end general election with an extension by the EU.

Trump remains a hawk on China trade: Pres. Trump said China has started purchasing agricultural products, noting that “issues that would need to be dealt with in Phase II trade talks with China are in many ways a lot easier than Phase I issues. Adding further insights into the expected timing of a potential Phase I trade deal, US Trade Representative Lighthizer said “US target is to have Phase I trade deal with China by time of Chile APEC summit, but still issues to be resolved.”

China's Dec tariffs off the table? President Trump’s chief economic adviser Larry Kudlow said If Phase 1 of China talks go well, December tariffs could be taken off, adding that things look pretty good as talks continue. The mood in equities and bond yields has improved, with the headlines by Kudlow fueling the groovy vibes ahead of a 'major' speech Thursday from VP Pence on China, which will allow us further insights on whether or not the US wants to continue loosening up its approach to get a deal.

US Ross hints no rush for trade deal: Meanwhile, the US Commerce Secretary Wilbur Ross, said that China deal doesn't have to be in November, it has to be right, adding that "Phase Two/Three" of China deal is 'where the meat is'. The headline appears to suggest that further delays to a trade agreement may eventuate.

NZ Fonterra upgrade milk prices: In what should be seen as a NZD positive, the New Zealand multinational dairy co-operative Fonterra has increased its 2019/2020 forecast Farmgate Milk Price range from $6.25 – $7.25 per kgMS to $6.55 – $7.55 per kgMS, projected to add over $450m into the economy.

Canadian's Trudeau tipped to win election but no majority: Reports are coming in mid Asian session that the ruling Canadian government party from Trudeau is projected to have enough votes to win the general election even if it will fall short of forming a majority government. The news is not as positive for the CAD as a majority would. 

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 has been grinding lower, losing the 50% fib retracement of its existing broad range, while creating a new cycle low. Note, the fluctuations remain inconclusive under the umbrella of a well established balanced area (range), which is capping the volatility until there is new clarity on the next phase in the Brexit saga. The index is likely to stay trendless until the decision by the ECB on monetary policy later this week, when the mark-up/down phase is eyed.

The GBP index keeps finding grateful buyers on any shallow pullback, a testament that the sentiment towards the Pound remains strong as the price find further acceptance. Tuesday’s developments in the UK Parliament on Brexit will dictate the next round of flows into the Sterling, with the clear path of least resistance still skewed towards the upside. The latest revisit of the recent high has led to the creation of a new successful rotation, which should represent a solid area of demand on a retest as that’s where GBP liquidity vs G8 FX will be found.

The USD index has been taken to the woodshed with no appetite from buyers to return as the risk appetite continues to see flows heading into high-beta currencies. Should we see the index start to print compressions this low, it may be the first tentative indication that a potential reversal may be in store. There is certainly great macro value to speculate on longs USD at these cheap prices even if price action is so far not showing signs of a change in behavior.

The CAD index has recovered its mojo although more work needs to be done to validate a fresh upcycle with the price so far retesting the prior swing high in the hourly. The Canadian federal elections results will be the main driver for the currency as the news get digested. From an order flow perspective, this is an index that remains fairly constructive, as the recent move up post the Canadian jobs reports on Oct 13th has been me with tepid selling interest ever since.

The NZD index has broken into new highs in the hourly, also breaching an important level of daily resistance, opening the doors for the currency to see an extension towards higher levels, with the 100% measured move the next logical area to target (0.37% of potential gains in the index from the breakout point). Any dip is expected to attract strong buying interest as the structure stands. On the fundamental front, the Fonterra milk price upgrade is a positive driver in the currency, currently being reflected in the bullish price action.

The AUD index is testing a huge level of daily resistance, location where the currency has been rejected in multiple occasions, with the last test leading to an aggressive selloff. Therefore, based on how strong and how much the last test of the level achieved, I wouldn’t be surprised if sellers make a convincing return at these levels for a protracted change of flows in the coming days. The area definitely offers great value for those perma AUD bears out there.

The JPY index keeps getting cheaper in a text-book stepping formation of successive successful rotation lower, which continues to reinforce the bearish structure and hence the paying of greater dividends by staying short looking to engage in areas of value/liquidity. The violation of a 100% measured move, even if respected on a first pass, is a testament to the poor appetite towards the Yen as the risk profile continues to support the allure of high-beta currencies.

The CHF index was sold off from a key resistance on the mid-term chart (6h), leading to a pullback now en-route to test the prior lows, where buying interest should continue to arise based on the latest departure we saw, which had both velocity and it made new highs. Much of the upcoming flows towards the Swissy will be dependable on the next Brexit chapter, with the currency acting as a hybrid of funding currency but at the same time, tends to react positively to encouraging developments of Brexit as part of the European countries involved in the mess. 

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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