Low Vol FX Detaches From Trade Noise

The state of affairs in the Forex market as Nov comes to an end remains relatively quiet with volatility rather suppressed while equities in the US keep making record highs. The Kiwi remains the main contender to end the month in top position, while the CAD keeps fighting back. The USD and the EUR remain compressed in limited ranges. Find out what's going on 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 volatility in Forex remains quite compressed, with the positive soundbites in the US-China trade talks, not really providing the stimulus necessary to see a stronger commitment of capital into the currency market. It appears as though equities are still the main destination to express an opinion, which continues to be, the market sees a glass ¾ to almost full as an analogy of the chances that the US and China will ultimately sign the phase one deal, which is most likely going to include a generous roll back of the existing tariffs. So, while vol remain low in the USD, EUR, CHF amid the lack of fresh fundamentals to re-examine valuations, there are a few currencies that continue to show interesting price action. These currencies are, unsurprisingly, the ones where Central Bank have recently made some noise. Firstly, on the back of the RBNZ shocker earlier this month (kept rates steady), a healthy dose of vol remains in the NZD as traders exploit the bullish sentiment as the short-side exposure keeps unwinding. The CAD keeps regaining ground with solid vol intraday after last week’s BOC Poloz threw cold water into the prospects of a rate cut in December. Another currency that saw a brief spell of vol intraday in the last 24h was the Aussie as the RBA Boss Lowe updated the market on the chances of QE. The net effect, I must say, was quite neutral as the market realizes that we are still a long shot away from any QE-related scenario to become a hot topic yet. Meanwhile, the GBP slid from its weekly high on a setback in UK polls for the interest of the Conservatives. it's been all about sentiment-led trading in the GBP based on which way poll results go. Lastly, the JPY remains on the back-foot as equities keeps soaring.

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.

RBA Lowe not to consider QE until 0.25% interest rate: RBA Governor Philip Lowe, in a much-awaited speech, which has been made available via the RBA website, said it is unlikely that Australia gets to the point where it needs QE, but if it were to happen, it wouldn’t be considered until interest rates got down to 0.25%. Lowe recognized that may come a point when QE would help but I "don't expect us to get there."

RBA remains a long way from resorting to QE: Note, the market is pricing in another 25bp rate cut for the next year while the 0.25% threshold Lowe mentions is still 50bp away, hence why the prospects of QE in Australia do not represent a short-term focus for the market until at least mid to late next year. Lowe said, should the RBA need to resort to QE, it could include the purchase of state government bonds. Bottom line, “we are still a long way from QE happening in Australia”, citing Lowe here.

GBP under pressure as Tories lead narrows: The pattern we began to see emerging earlier this week, that is, Labour starting to improve in the polls, continues to play out. In the latest UK election polls, conservatives stand at 43% (-2), Labour 32% (+5), according to Kantar poll. A tighter race implies a lower GBP. Analysts appear to be justifying the step back by the Tories in response to the general population feeling slightly disheartened by the release of a more reserved than expected election manifesto by Tories.

US-China deal getting closer: According to a report by Politico, a China deal is getting closer following a call yesterday between top deputies. The report details that China is expected to give concessions on IP and that the sides aren't too far apart on which tariffs will be removed and when. Politico adds: “There was a call between the main players Monday night (USTR Robert Lighthizer, Treasury Secretary Steven Mnuchin and Chinese Vice Premier Liu He) so at least talks are continuing toward some type of announcement. Still no word on when it would take place.”

Trade ball in US’ court: Another report by the Global Times also carries a positive tone. The article cites experts saying that “the phone call sends positive signal, but the ball is in US’ court to make reasonable compromises on tariffs, including a proportional removal of tariffs.

China feeds into the positive trade rhetoric: A statement released from the Ministry of Commerce notes that “both sides achieved consensus on properly addressing relevant issues and agreed to maintain contact over the remaining issues…” The topics thought to have been discussed, according to an expert close to the trade talks included “tariff removals, agricultural purchases, a review mechanism for the implementation of a potential agreement as well as arrangements for a face-to-face meeting.”

US data a mixed-bag: In terms of US data, we saw a busy calendar. Overall, the data came quite mixed. The US consumer confidence came weaker than expected, printing a fourth consecutive month of declines even if it originates from very elevated levels. New home sales were very solid, with the back-to-back increases the best we’ve seen in more than a decade as low interest rates continues to support this category, even if the role it plays in the GDP is limited. Meanwhile, US October advance goods trade balance narrowed to -$66.5B vs -$71.0B economists called for. It is expected that Tuesday’s data will contribute positively to the Q4 growth numbers.

US equities unstoppable: The lay of the land in the equities space remains supportive for beta-currencies (AUD, NZD, CAD), as long as these are not influenced by fundamental factors as was the case in the AUD where the ebbs and flows were subject to RBA’s Lowe speech on Tuesday. The rise in equities in the US, with the S&P 500 making fresh record highs is driven by the injection of fresh liquidity into the system and a market that keeps pricing in a positive resolution of the phase one deal.

US yields send conflicting signals: On the contrary, the US long-term yields are telling us the market is not buying into the reflationary trade environment, which puts a cap on how much deterioration we can see in funding currencies as lower bond yields (US 30y as benchmark) indicates that the bond vigilantes are not expecting inflation nor growth to materialize in a meaningful way.

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The EUR index portrays limited flows hitting the currency is the last 24h. Within this context of slow movements, it’s been predominantly dominated by buyers. The push away from 1.10 in the EUR/USD comes a long way to explain why the EUR is finding renewed buying interest. However, at an index level, it really remain unclear which way we go from here as the index is far from testing any relevant confluent area on the daily via supply/demand or support/resistance.

The GBP index saw sellers step in, which makes the conditions in the currency return to a range-bound state as opposed to the now fading possibility that the Pound can develop a fresh uptrend at an index level. This scenario is hard to see materializing ahead of the general election unless the UK polls see the Conservatives extending the lead significantly in the coming days. If anything, the pattern we are seeing is Labour gaining back a bit of ground. This should put the odds for the GBP to continue being encapsulated in familiar ranges.

The USD index continues to struggle at a key level of resistance in the daily. The price action we are seeing in the world’s reserve currency embodies perfectly the low volatility in Forex amid the lack of fresh top-tier economic events and lack of breakthrough in the US-China trade talks. The sticky resistance the index is facing at this juncture, a point where one could anticipate the sell-side orders in the USD to have picked up, may also contribute to the low key affair so far.

The CAD index found enough buying interest to end as the top performing currency on Tuesday, even if one must be aware that the index is now heading straight into the origin of a supply imbalance area where I’d expect sellers to potentially regain the upper hand. It is unlikely that the currency guns through this area without a major fight by sell-side actors. Looking to pair the CAD, soon expected to face sell-side pressure, against a currency that may find strong bids, such as the CHF based on the level it trades at, could be a sensible strategy to consider.

The NZD index remains the currency attracting the steadiest demand flows, with the campaigns to be a buyer of the Kiwi coming to life after the RBNZ held rates unchanged and led to a major re-assessment of an overly committed market to short-side exposure. All the technical evidence visible in the index chart tells us the way to go is higher, hence why the NZD should continue to be a market one can look to exploit to the long side vs the weakest peers.

The AUD index is yet to find a resolution from its existing distribution phase. That said, it’s important to understand that the current range occurs after the price stalled at a key demand area in the daily as per the strong departure back on Oct 16th. This is a pristine area to initiate a fresh buy-side campaign by large accounts and see a potential rotation back up. This scenario will be negated should the market managed to consume this demand. Note, the bottom-side tails every time there has been an attempt to enter the zone suggests strong buy interest.

The JPY index found a double top after the print of equal highs and it has now rolled back down, in a move that threatens to revisit the most recent lows. If you are a buyer of JPY, be aware that it is not a positive sign when you see the index failing at the same level for two times in a row, as that communicates a debilitating technical picture. There is no technical support in the index until the market retests the recent lows, about 0.5% away from the current pricing.

The CHF index is at a crossroads as it comes into contact with a key support level after a successful rotation to the upside. Whenever that happens, this is a potentially premium area from where to initiate buy-side campaigns at the most attractive level to accomplish the best risk reward scenario. One just needs to find what currency may face the most supply based on the ebbs and flows anticipated, with technicals helping us to decipher that. As I mentioned, the CAD could soon be a candidate. Watch out CAD/CHF shorts opportunities.

Important Footnotes

  • 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
  • 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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