Risk-Off Dynamics On Trade War Negativity

There has been a sudden change of heart by Mr. Market after a Bloomberg article revealed China finds it hard to anticipate better outcomes beyond Phase One of the trade deal with the US. In today's report, I explain the repercussions this had on G8 FX and I serve you with a special treat of multiple trade setups that were available in the last 24/48h. Enjoy the reading.

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. 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 market conditions. The report takes an in-depth look of market dynamics including fundamentals and technicals in order to determine daily biases and assist one’s trading decisions.

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Quick Take

Yen longs had a field day after news broke out that China has some serious skepticism to achieve further trade progress beyond ‘Phase One’. The Swiss Franc, amid the deleveraging in financial conditions and the dial down of carry trades, saw supporting demand as a result too. The likes of the North American currencies (USD, CAD) continue to succumb to the most recent dovish turns as the Fed telegraphs it's left with two option going forward, to hold rates steady or keep cutting, while the BOC finally opens the door to discuss an insurance rate cut following what they state to be "worsening global conditions affecting business investment." The Aussie went through a realty check, selling off aggressively in response to the negative headlines carried by Bloomberg on China's trade. The Kiwi held much steadier as domestic data in NZ is picking up (building permits, business confidence) coupled with growing calls for the RBNZ to keep its powder dry until next year (last bank to revise dovish outlook is Westpac). When it comes to the European currencies, the Sterling continues to attract decent buy-side flows while the Euro traded weaker despite the European data (GDP, CPI) wasn't that bad this time. 

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.

Sudden change in risk dynamics: The risk-off mood returned with a vengeance in the Forex market after Bloomberg reported that China won’t budge any further to Trump’s demands as part of a more comprehensive trade deal or ‘Phase Two’, leading to an immediate deleveraging in stocks and buy back of global bonds as a safety net, and as a result, the Japanese Yen topped the leader-board in FX.

Phase One deal on track: Meanwhile, it what’s seen as largely priced in by the markets, Trump said the US is working on new site to sign Phase One deal after the APEC meeting in Chile was canceled. “China and the USA are working on selecting a new site for signing of Phase One of Trade Agreement, about 60% of total deal, after APEC in Chile was canceled due to unrelated circumstances. The new location will be announced soon. President Xi and President Trump will do signing!”

BOJ hints further easing, market calls it a bluff: The BOJ, a bank running out of options to meet its inflationary mandate, appears to be flirting with the idea of introducing further easing heading into 2020. Its Governor Kuroda said on the presser following the unchanged BOJ policy decision not to hesitate to ease further if risks rise. The comments follow an adjusted forward guidance due to the probability of further easing, adding that “the BOJ has various policy options when it comes to further easing.” The reaction in the Yen on Thursday, strengthening despite the theoretically negative input of more easing, reinforces the notion that the market sees the future measures as a desperate attempt of a bank that has lost control of its mandate and hence the trust of the market.

Q3 EU GDP improves at the margin: Eurozone Q3 preliminary GDP came at +0.2% vs +0.1% q/q exp, which is a tad better than expected but far from a report that should rock expectations for lackluster growth going forward. The outlook for European growth is far from encouraging as we head into 2020. Comments by ECB's de Guindos saying that the monetary policy hasn't reached its limits is a reminder that the ECB is miles away from shifting its rhetoric to a more positive beat.

EU CPI nothing to be excited about: The Eurozone October preliminary CPI came at +0.7% vs +0.7% y/y exp, representing the weakest level since November 2016, even if the small core inflation saw a mild improvement to +1.1% vs +1.0% y/y exp, which may give the ECB a slight sense of consolation for now.

SNB's negative rates policy here to stay: The Head of the Swiss Central Bank (SNB) Jordan said exemptions to negative rates would reduce their effectiveness, citing dangers of shrinking interest rate spread. Besides, Jordan added that negative rates and readiness to intervene in FX is still essential to keep pressure on franc and that he cannot predict when Switzerland will return to positive rates. In other words, there is no end in sight for CHF negative swap when trading it if long the currency.

Canada goes for the double whammy: Canada’s August GDP came at +0.1% vs +0.2% exp, which has been interpreted as a rather softish report with the details revealing that the wholesale sector dragged growth lower. The news adds to the negative sentiment towards the CAD after yesterday’s BOC bombshell after the market learn that discussions to lower interest rates as an insurance measure were initiated. As a result, there has been a major negative re-adjustment in the Canadian bond yield curve.

Trump's impeachment into deeper measures: While the market continues to treat the impeachment process of Trump as a non-event since Republicans are set to block any progress in the Senate, the US House managed to get enough votes to back deeper impeachment measures. This sets up the mechanism for a House committee to draft articles of impeachment, with public hearings to follow.

US Chicago PMI surprises to the downside: The much weaker than expected Chicago PMI, declining to 43.2 from 47.1, represents a major setback in the outlook for the manufacturing sector, already in crisis mode in the US as the US-China trade war continues to hit sentiment and business investment intentions. A drop of orders for Boeing may be one of the reasons for such weal reading, placing some obvious risks to tonight’s US Manufacturing ISM, seen as a key barometer of the manufacturing sector health.

Westpac's RBNZ rate call underpins the NZD: A change by Westpac on its RBNZ call, no longer expecting a cut in Nov but instead next February, led to an initial boost in the NZD, adding to the momentum post the FOMC. As a reminder, the market has been dialing down expectations for near term easing expectations by the RBNZ and TBA, a key driving factors supporting both AUD, NZD in recent weeks. The improved building approvals or business confidence in NZD sustains this view.

What's ahead today? The three major events in the market today include the Caixin China PMI, which comes on the back of a poor Chinese official PMI on Thursday, alongside the US October payrolls, followed by the US Manufacturing ISM. On the US NFP, the forecast on the headline number has been adjusted considerably to the downside after the GM strike to just 85k median estimate, with the expectations for a pick up in payrolls growth rather subdued.

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Recent Economic Indicators & Events Ahead

Source: Forexfactory

Professional Insights Into FX Charts

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The first recent opportunity to bring to your attention is a short on AUD/CHF after longs got caught wrong-sided intraday following a sudden order book sweep from the highs after the market took out the stops at an area rich in liquidity (red box) as the equal double highs were a sign that stop loss buy orders would be accumulated. The abrupt reversal trapped many long traders, representing an excellent opportunity to enter on a retest of the breakout order block, with the price retesting the prior lows for what represents so far a 2:1 risk reward.

    The USD/CAD, ahead of the BOC bombshell, also gifted the avid traders with a fantastic opportunity to jump onto the bandwagon of longs in a play in which the script was to enter against trapped shorts following the major reversal off the lows breaking the market structure. The accumulation of liquidity at the lows was very obvious after multiple rejections, only for the market to induce further selling via a breakout lower before the sudden change in flows, essentially trapping all those shorts, with now a need to reverse their positions. Engaging at the 50% retracement ahead of the BOC would have paid incredible dividends. It goes without saying, this position required a tight trade management ahead of the event.

    In the last 24h, we’ve also seen a great setup emerge in the Silver market, where the FOMC induced short-side business to pick up before a sudden change in flows. The decline in the metal led to a major liquidity grab, filling plenty of sell stop orders. Once the price managed to recover above the prior swing high, shorts knew they were in big trouble, so any opportunity to bail near the breakout entry point to mitigate losses, would be a welcome outcome. Once the price retraced back to the 50% retrac, it was off to the races for bulls. The risk reward on this trade by playing long and placing the stop loss below the series of multiple lows was just phenomenal.

    If there has been a market going absolutely gangbusters this week, that’s the NZD/CAD, rising almost 200 pips and the good news for those looking to adopt a trading style conducive with paying the right price for your pair is that this week we were offered a huge chance to buy the pair at very cheap prices when compared to the value of the NZ vs CA bond yield spread. Notice how price had achieved a breakout of structure only to retest the lows at a time when the divergence with the bond yield spread was very obvious? That has written all over the wall opportunity, one that should have been screaming at you if paying enough attention.

    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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