It's All About The US-China Trade Rhetoric

The risk sentiment is on the mend as the market awaits further clarification on where we stand in the US-China trade negotiations conundrum. The Japanese Yen, which has been by a country mile the currency to flock off to amid the de-risking of financial markets, is on the backfoot

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.

Quick Take

The risk sentiment is on the mend as the market awaits further clarification on where we stand in the US-China trade negotiations conundrum. The Japanese Yen, which has been by a country mile the currency to flock off to amid the de-risking of financial markets throughout the week, is on the backfoot. Reports of a phone call between US President Trump and President Xi due shortly has further appeased the nerves. While the increase in tariffs on Chinese imports comes to effect in a few hours at 14h Sydney time, it should be interpreted as a 'soft deadline', as exports that have already left Chinese ports before May 10 won’t be subject to the increase. Interestingly, despite the risk on/risk off pendulum has swung in both sides, the end result for the interest of the USD has been identical, a net negative. The Euro is the currency to be in the last few hours, even strengthening against the Yen in times of true 'risk off' as seen in the early stages of the last US session. The commodity-linked currencies are also having a solid bid tone.

Narratives In Financial Markets

* The Information is gathered after scanning top publications including the FT, WSJ/Dow Jones, Reuters, Bloomberg, ForexLive, Institutional Bank Research reports.

  • In the next 24h, it’s all about the turns and twists in the language used by both the US and China as part of the trade talk negotiations. One can find out more about the possible scenarios in yesterday’s report, where various outcomes are outlined.
  • According to Fox media, US President Trump, Mnuchin and Lighthizer have been talking up the talks referring to the first hours of conversations as achieving progress. However, remember that the ‘soft headline’ imposition of higher tariffs on Chinese imports is just hours away.
  • US President Trump has been manipulating the public view by stating that a trade deal with China this week is still possible, helping to lift equities and other risk-sensitive assets off lows. However, the soundbites and confrontational/defiant stance suggest since the weekend suggest this is a very low possibility outcome at this stage.
  • US President Trump ratcheted up the pressure and the confrontational language against China by publicly stating at a rally in Florida that China ‘broke the deal’. There is mounting pressure by the Chinese public and top decision-makers for China to also toughen up its stance, which makes this game of chicken look like it has dire prospects of a near-term resolution.
  • It’s worth noting the deadline postponement potential, as according to the US Federal Register Notice, exports that have already left Chinese ports before May 10 won’t be subject to the increase. Hence, it allows a couple of weeks of the unofficial window. Today is the 'soft' deadline.
  • A headline that if sees follow up details has the potential to deteriorate risk further hit the screen early in the US session, when President Trump said the US is starting paperwork on 25% tariffs on a further $325 billion of Chinese imports today.
  • Overall, investors around the world continue to de-leverage the exposure in financial markets, even if some brief spurs of risk-off rollover can also be observed as there are unconfirmed reports that Trump and Xi are set to have a conversation via phone in a few hours.
  • The RBA Statement on Monetary Policy downgrades the economic and inflation outlook in Australia, while still sounding confident that lower jobless rate within reach due to subdued inflation. The labor market will continue to determine the way the policy is headed.
  • There are some major events later in the US session that should not be discounted, even if the reality is that the US-China trade conundrum will largely overshadow the positioning the market takes based on these events, which include the US CPI and the Canadian jobs report.

Recent Economic Indicators & Events Ahead

Source: Forexfactory

RORO (Risk On, Risk Off Conditions)

If we take the close of markets in NY as a reference to take the pulse of the market mood with regards to an imminent resolution of the trade talks, my verdict is that the chances remain extremely slim. That said, there is a glimpse of optimism that the US and China will not simply walk away, in other words, that the negotiations may continue in the future, even if it remains to be seen whether or not this will result is just a slight delay on an eventual trade deal or on a prolonged year-long one.

The recovery in the US 30Y bond yield alongside the S&P 500, both paring its entire losses on Thursday after Trump tried to massage market expectations, is a reflection that the market still finds the latest headlines constructive enough to hold onto the hope that trade talks will not break down. If one adds into the mix the fact that today’s potential imposition of tariffs on China is a ‘soft deadline’, the downside to risk sentiment might be slightly more muted vs a “hard” deadline.

That said, this is a very fluid environment where one headline can change it all, so stay nimble constantly adapting to the soundbites in the media. With regards to the Yen or the USD, both have turned lower since the US session, in a move that reinforces the market’s hope of a temporary compromise to at least resume the negotiations at a future date conditioned to both sides sounding as if progress was achieved.

The first day of talks concluded this Thursday just a few minutes ago, which means that in the next 24h, wild swings in the markets will continue to be the norm driven by a headline-by-headline basis. Unless there is a sudden change of plans by Trump, US tariffs are set to increase on Chinese imports at midnight NY time, which would be a soft yet symbolic step in the wrong direction.

Latest Key Developments In FX (Technicals, Fundamentals, Intermarket)

EUR/USD: Bullish Bias As Volume Pressure Builds

The spike in the rate comes on the back of broad-based USD weakness, combined with relentless demand in the Euro, even exceeding in demand the Yen while US equities were still in a funk earlier. The upthrust bar, anchored by the strong appreciation in the USD/CNH, reached the 100% proj target to the pip before sell side pressure took control of what’s expected to be a short-lived correction with a potential area of termination at the 50% fib retracement. Not only the OBV in thick orange line indicates the buy side pressure has been dominating the exchange rate since the May lows, but the double distribution up in the volume profile with the POC trapped sub 1.12 is a further suggestion that the path of least resistance is for the rate to keep pushing north. Watching for low vol taps in line with the bullish structures on price and tick activity is what I am keeping an eye on.

GBP/USD: Balance Area With Buy Side Volume Dominance

With the accumulation of negatively-related Brexit news over the past few days as the Labour and the Conservative parties fail to achieve a follow through, alongside the wait-and-see mode in the US-China trade negotiations, not enough impetus exist for the market to develop the next bias. This indecision is reflected via location of the POC in the last 2 days of trading around 1.30, further reinforcing the notion that from a symmetrical standpoint, this has become the midpoint of the existing range. The 3 legs down is a technical event that tends to be followed by a period of distribution, which appears to be what we are seeing, corroborated by the failures of the last tests of the bottom side, which translates into sellers using these liquidity rich areas to take profits off the table. A resolution outside the pre-defined range suggest technical targets of 1.31-3110 to the upside, while 1.29-2910 to the downside, both coinciding with the 100% proj targets. In terms of the OBV, the buying pressure as per the accumulation of volume is skewed to the upside, while the latest price structure has also shifted the focus towards higher levels within the range context.

USD/JPY: Testing 50% Fib Retracement, JPY Sell Side Pressure

The Japanese Yen is under relative sell side pressure in the early stages of Friday, as reflected by the transition from a trend into a range in the exchange rate. The build up of buying tick activity as the OBV in thick orange reflects is a communication that interest to be Yen sellers is on the increase. We have a perfectly symmetrical structure once again, which is helping to properly define the context of range-bound conditions between 109.40-50 and 109.90-110.00 with the midpoint of the range where the POC from Thursday is found around the 109.70-75. Intermarket flows emanating from the currency market have taken a turn for the worse for the USD, sold across the board, and limiting the upside potential. It’s not all lost as the trend in the risk sentiment line in thick black is starting to turn around. Even if it does, the upside on the pair is far more limiting than exploiting JPY weakness vs other currencies the likes of the EUR or the AUD is the US-China revert the negative sentiment. A break to the upside through 110.00 can expose the next proj target at 110.25-30. If the dire sentiment returns, a retest of the bottom of the range at 109.50-55 will be eyed ahead of 109.10-15.

AUD/USD: In Bullish Trending Mode

The higher highs in the price structure comes accompanied by very high buy side pressure as the micro trend (25HMA) applied to the OBV represents. The next projected target to be hit is within a few pips at the 0.7015, where some counter-balancing forces could slow down the momentum. The RBA Statement on Monetary Policy today downgraded the economic and inflation outlook in Australia, while still sounding confident that lower jobless rate within reach due to subdued inflation. The labor market will continue to determine the way the policy is headed, which is what the market cares about. Since no tangible changes outside of expectations came about, the market sees this event as a risk removed so that the focus can stay firmly on the US-China trade talk headlines. Further reinvigoration of the risk sentiment could see the Aussie rise towards its next target of 0.7030-35 (100% proj target). On the contrary, it’s going to take a break and hold sub 0.6970 (Thursday’s POC) to damage the bullish technicals.

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. The weekly cycles are highlighted in red, blue refers to the daily, while the black lines represent the hourly cycles. 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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