Markets On The Defensive, US-China Trade Deal At Risk?

Can risk-off currencies keep strengthening as the risk of a collapse in US-China trade talks looms? Or will the market continue to be priced for an almost perfect outcome as stock valuations imply? Do you understand the forces at play keeping the AUD and the CAD as the clear outperfomers in recent weeks? Why the case for CHF longs is emerging? Read on to find out...

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 Japanese Yen, alongside a re-invigorated Swissy, are the main winners in the last 24h of trading as the market is starting to get fatigued from all the noise in the US-China trade. The passage of the HK bill by the US in support of protesters threatens a derailing of the trade talks, hence why the market has understandably went on the defensive. The EUR added a 5th consecutive day of gains at an index level, while flows into the USD remain steady, with the currency barely affected from the FOMC minutes after it revealed no new insights on the policy outlook. From a macro economic perspective, the lingering sell-side flows into the Australian and Canadian Dollar perfectly manifests the change of heart by Mr. Market has had to re-price the resumption of an easing bias by the RBA (big miss in Aus jobs, RBA minutes dovish), while odds of a rate cut in Canada is an outcome traders continue fixated with. When one takes a step back to analyze G8 FX performance since the beginning of last week, these two currencies are the clear out performers. On the other side of the spectrum, the Kiwi is still drawing solid buy-side flows from the re-evaluation of positioning after the RBNZ held rates unchanged, a call in great conflict with the consensus. The Pound keeps attracting decent buying interest as the idiosyncratic driver of Brexit and political polls dominate. 

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.

US-China tensions heat up over HK bill: There is a sense of betrayal by China that the US has stepped over the line by the passage of a HK bill in support of HK protesters. China said the US should stop interfering in Hong Kong and China affairs . The bill would require Congress to make an annual assessment about the state of Hong Kong as a region that remains with special administered rights and independent of Chinse influence, which is obviously a slap in the face of China’s pride, as it perceives the decision as the US muddling in its internal affairs.

No Phase One trade deal this year? Reuters reports that the US-China trade deal may not be completed this year, an incendiary headline that made the market behave on tenterhooks as the state of uneasiness increases. Reuters notes in the report that “ US-China 'phase one' talks are getting more complicated and could slide into next year, citing “people close to the White House.” The report details that “Trump and Lighthizer recognize that rolling back tariffs for a deal that fails to address core intellectual property and technology transfer issues will not be seen as a good deal for the U.S.”

The optimistic version the market stick with: Bloomberg is also out with a more sanguine rhetoric, noting that while the talks between the two superpowers are at a key juncture and can fall apart at any time, there is a silver lining, which the market continues to hang on to, noting they're 'making progress in key areas'. As a reminder, reports yesterday outlined that the US was still considering rolling back tariffs as far back as May or even earlier. It’s definitely become challenging to keep up with all the noise.

Market at risk of depricing perfect US-China trade deal: As a consequence of the deterioration in the diplomatic relationships between the US and China as news outlets confirm the House approved the HK bill with enough votes that not even Trump can veto the outcome, the market is at risk of accelerating the pricing of this setback acting as the trigger point that may derail the trade negotiations, as manifested by the declines in US equities and the US 30yr bond yield.

The White House continues to talk up markets: A turnaround in stocks came after the White House stated: "Negotiations are continuing and progress is being made on the text of the phase-one agreement." Even if the headline has clear intentions to sustain the positive mood in equities without necessarily reflecting with accuracy the remaining differences, the market reacted positively to it. The fact we have heard that “US commerce department confirms it has begun issuing some licenses for some US companies to supply non-sensitive goods to Huawei technologies” also contributed to the pick up in stocks. 

FOMC leaves no doubts of its neutral stance: We saw the publication of the FOMC minutes, with the main headline that captured my attention stating that “most officials saw rates as well-calibrated”, reinforcing the notion that the Fed has transitioned, as telegraphed by Powell, to a phase of ‘wait and see’ subject to economic data. The minutes added that “most judged level now appropriate barring a 'material' reassessment of the outlook”, in other words, no cuts near term unless signs of a 'significant slowdown'.

Canada's CPI to delay BOC rate cut case? Canada’s October CPI came flat-lined at +1.9% vs +1.9% y/y expected. The Canadian Dollar barely budged after the news even if it remains the main underperformer as the balance of probabilities for the BOC to lower its interest rates in the shorter-term (Dec or early 2020) has gone up after BOC’s Deputy Wilkins said the Bank has room to maneuver. That said, today’s CPI numbers don’t strengthen the case for lower rates in Dec as CPI is very close to the BOC target.

Eyes on ECB minutes, BOC Poloz speech: In today’s calendar, we get another rather quiet day. The EZ consumer confidence, alongside the ECB minutes and the Bundesbank financial stability report are the highlights, while in the US we have the Philly Fed survey and weekly jobless claims. Also note, BOC Governor Poloz is due to speak about economic change and the path forward at a fireside chat hosted by the Ontario Securities Commission, which may offer further hints on the policy outlook.

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Recent Economic Indicators & Events Ahead

Source: Forexfactory

Professional Insights Into FX Charts

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Today’s analysis of the market starts with a long position I entered on the CHF/JPY out of a demand area in the H4 chart. Find below the synthesis of why I found the level a very attractive proposition as I anticipated a major accumulation of liquidity (cluster of bids) available.

  • On the weekly, we’ve validated a double bottom after the market rebounded away from a demand area, with a 5-week distribution period ensuing (acceptance of higher levels)
  • On the daily, we can deconstruct this period of distribution by defining the edges of the range between 109.20-25 and 110.15-20 (major stack of bid/offers beyond).
  • The retest of the bottom-side of the range on Wednesday was anticipated to find unfilled buy-side orders as the departure of price on Oct 28th was very impulsive, in a move that constituted a fresh level of demand yet to be penetrated .
  • The first two attempts for price to come close to the mentioned area of demand led to back-to-back abrupt responses in favor of the buyers. Reinforced my conviction.
  • In terms of technical backing that can protect the position if the plan goes awry, I liked the fact that the 109.00 round number and the 100% measured move intersected at the same level, allowing me to place my stop beyond this structural point in the chart.

In the transition between the NY and Tokyo, I was filled in long on EUR/JPY after what I refer to as a ‘trapped traders’ pattern, others call it stop loss hunt. What matters is that when i see this formation, I am expecting a shift in order flow with buyers keeping now the upper hand. My rationale to enter long on a 50 retracement can be found below.

  • The daily is in a clear bullish phase as it prints higher highs and higher lows, hence it grants the ability to go into lower timeframes to find setups if I can match up the bullish picture I am seeing in the higher timeframe with setups in the more granular analysis.
  • I was paying laser-focus attention to the 110.00 round number to see what type of behaviour we’ll get out of it. Once I noticed the upthrust candle snapping prices back up and breaking the intraday bearish structure, that’s all I needed to see.
  • The target that I’ve set for this trade is just ahead of the 50% measured move as that will give me the 2:1 risk reward I aim for in these type of trades. I am looking to move to break even on a retest of Wed’s high, with a stop loss below the hourly demand area.

On the CHF long position in particular, an aspect that helps to strengthen my base case in a particular currency. When I turn my attention to the CHF index and the picture I see developing remains bullish, as it’s the case as I illustrate below, it reinforces my view that going long CHF has a higher chance of working in my favour. This is what I see:

  • The index has bounced off a weekly area of demand in recent weeks, point from which a successful rotation to the upside on the daily was confirmed last week.
  • The area in the daily where the imbalance of demand was originated from was tested for the first time on Wed, leading to a snappy rejection of the level.
  • I’d be anticipating that the CHF can develop a fresh leg up from here as the market structure is very much constructive with this view at present time.

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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