'Risk On' Rules Post Strong US NFP

The market remains dominated by a sense of risk appetite, as portrayed by the new all time highs achieved in equities, while US yields remain rather depressed as a consequence of the Fed's admission that low rates are here to stay for years to come. Find out all the latest news and a handful of potential trade setups at play 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, where he runs a 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 market conditions., taking an in-depth look of market dynamics including fundamentals and technicals to determine daily biases and assist one’s trading decisions.

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Quick Take

The combination of a surprisingly strong US NFP last Friday, alongside more tentative evidence that the formalization of the US-China Phase One trade deal is around the corner, were the drivers keeping the bid tone in the equity market with the S&P 500 and Nasdaq making fresh all time highs. As a result, this lingering positive mood in the stock market underpinned the buy-side interest in the high-beta currencies (AUD, NZD, CAD). The market, through its price action, exhibited an immediate recognition of how impressive the US NFP print was, judging by the low expectations ahead of it, leading to the miss in the US ISM print not to alter the 'risk on' mood. The USD, still weighted by the realization that the Fed won't be raising rates any further before Powell's tenure ends - US yields hint this scenario -, and JPY - capped by 'risk on' flows - were the main laggards in the last 24h, alongside a Pound that keeps finding it hard to make further leeway as UK election scenarios gets assessed. The Euro and the Swiss Franc, which have a tendency to move in tandem unless major episodes of risk aversion or the idiosyncrasies of isolated fundamentals play a bigger role, had a solid day. 

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 around to turn Phase One corner: The US and China remain on track to formalize Phase One of the trade deal after White House economic advisor Larry Kudlow said progress continued to be made in fleshing out the details concerning Chinese purchases of US agricultural goods, US foreign ownership in the Chinese financial services industry, and currency stability. Adding to the positive vibes, the Chinese Ministry of Commerce said a “consensus in principle” had been reached.

Risks of back to square one in trade deal exist: As a reminder, last week’s article by Bloomberg that this is a one and done kind of trade deal with slim chances of evolving into a Phase Two has thrown cold water as to how much increase in valuation is actually justified in the likes of the Aussie or Kiwi. Moreover, the uncertainty on whether or not the US will roll back or cancel the planned December Tariffs as per China’s demands could still derail the progress made so far. With that said, the groovy mood in the stock market continues with new all time highs in the S&P 500 or Nasdaq.

US NFP surprisingly strong: The US non-farm payrolls came stronger than expected at 128k vs 85 exp, with the added component of positive revisions. The estimates ranged from +25K to +140K, so the result is to be considered as surprisingly solid, especially considering that the GM strike wasn't as large of a drag after making redundant 41.6K people. Reinforcing the strong report, the unemployment rate stood at 3.6% vs 3.6% expected, the participation rate came at 63.3% vs 63.1% exp, and even the avg hourly earnings ticked marginally higher at +0.3% m/m vs +0.2% exp.

US ISM miss fails to eclipse positive mood: The US Oct ISM manufacturing index disappointed at 48.3 vs 48.9 expected, with the details revealing that production 46.2 vs 47.3 prior and imports at 45.3 vs 48.1 prior, were the main dragger. The good news was the big recovery in the export orders index, to 50.4 from depressed 41.0 in Sept. However, with such a strong US NFP and the market psyche fixated in the layouts at GM, it was treated as a one-off to be ignored this time. The report, which comes accompanied by remarks from businesses surveyed, was clearly dominated by negativity.

Fed's Clarida sticks to the script: Fed vice chair Clarida reiterated that the Fed policy is in a good place, reinforcing the idea that the Central Bank will go through a period of ‘wait and see’ conditional to new data inputs to determine the next move in rates down the line. Remember, in last week’s FOMC, Powell provided a meaningful hint that low rates are here to stay by noting that unless inflation picks up in a sustainable manner - highly unlikely - the Fed is not planning to raise rates for years.

What are the key events for today? Today’s highlights in the calendar include the Australian retail sales, then we move into Europe with the release of the German and EU final October PMIs followed by US factory orders. As a reminder, the Japanese market is closed for holidays this Monday, while in the US, the clocks are adjusted 1h backwards as part of the daylight saving time shift.

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Recent Economic Indicators & Events Ahead

Source: Forexfactory

Professional Insights Into FX Charts

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The one-way street move in the CAD/JPY, which had been sustained for over 4 days in a row, has come to an abrupt end at a level of demand in the H4. What’s interesting about this setup is that on the way down, late sellers are now weak-handed after being faked out in the last break lower before the strong bounce above the prior high (bearish structure violated). What this implies is that any bounce towards the black line in the chart is an area where buy-side action is likely due as liquidity is added by the smart money while shorts bailout. The play offers a 2:1 risk-reward, with the POC from last Friday + the 82.00 round number offering protection, hence one could place the stop beyond this expected wall of bids to better calibrate the risk to reward.

A similar trade setup has emerged in the CHF/JPY, where the traps of short player is even more obvious, with the price initially breaking down through a liquidity area only to see a very commanding rebound towards a 100% measured move area, in a run that perfectly portrays how forex pairs tend to respect the symmetrical projections over and over. A setback in price towards the 109.55-60 should put buyers on high alert for a potential opportunity to reinstate positions aiming for a retest of the prior swing highs for what constitutes a nearly 3:1 risk-reward trade prospect. In this occasion, a stop loss placed sub previous sequence of lows prior to the downside fakeout should act as the absolute cap for the structure to remain valid.

A market where the 100% measured move has served the avid trader very well to predict where a potential bottom rich in liquidity by passive limit orders could be found is the EUR/AUD. What’s so interesting about this market is that the symmetry emerged at the intersection with a critical area of horizontal support in the chart as historical candles reveal. These are pristine areas in the chart where large institutions are looking to engage in buy-side area for potential reversals back to the mean. Note, since these are counter-trend type trades, drilling down into a lower timeframe to find the potential setup under which to engage is a wise way to go about it. To sustain the case of a long bias at the 100% projection, divergence between the 10y bond yield in Germany vs Australia also existed, reinforcing the notion of buying at fair prices.

The last example to bring to the readers’ attention today includes the anticipation of a top in the GBP/USD by, again, drawing a 100% measured move through the latest bracketed area. By breaking down the anatomy of what’s occurring from 1.2965-70 and above, it essentially represents an area (red) where the cluster of passive limit orders (cluster of offers) will be found. This is therefore a juncture in the chart where the effect of buyers taking profits, large capital sitting to take the other side in strategic moves back to the mean, market makers intervention, all convene around the same area, creating downward pressure in the price of GBP.

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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