Spell Of Risk-Off As Trump Signs HK Bill

There has been a sudden change in behaviour following the news that Trump signed a controversial HK bill that supports protesters in what represents a gross offense in the eyes of China. As a result, risk-sensitive assets the likes of Gold, the Yen or the Swissy caught a strong bid as the ramification could be a setback in the trade talks. Meanwhile, the Pound has taken the front seat again as the currency leading the G8 FX pack as polls put Johnson firmly on the lead for a majority. Did you know the GBP index is making fresh highs? Find out what's the state of affairs in FX by reading 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 rare dynamics of trading the forex market based on hard data as market reacted positively to upbeat US core durable goods and US growth figures,  while the US-China trade headlines were put on the back-burner, ended the moment news broke out that US President Trump signed the HK bill. Remember, this bill supports protesters in HK and the immediate reaction of the market has been to price the risk of retaliation by China as it’s plausible to expect that this act of formalizing the HK bill may potentially derail  some of the progress made in trade between the US and China, which the stock market has priced to perfection. The Yen, Swissy and Gold were bought off the lows, even if the net effect when accounting for Wednesday’s groovy vibes is still negative. The Pound remains trading at the tune of its own drums, emboldened by the latest YouGov survey, which predicts a big majority for Tories in the upcoming UK general election. The Australian Dollar and New Zealand Dollar, as the market discerns the implications of Trump signing the HK bill, were taken to the woodshed, which clearly portrays the risk of China retaliating in some way. Lastly, the USD and CAD, are both unfazed so far by the worsening of the risk profile in the market. Remember, it’s going to be a long weekend in the US markets in celebration of Thanksgiving and Black Friday.

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.

GBP boosted by UK poll of polls: The Sterling keeps finding further bullish momentum after the latest YouGov MRP model, which has been drawn from a 50,000 strong survey panel, predicts a big majority for Boris Johnson in the upcoming UK general election. Even before the news broke out, Cable had been on a steady rise after a Tweet from Labour activist and Guardian Journalist Owen Jones speculated, citing a reliable source, that the YouGov survey would show a significant Tory majority.

Trump signs HK bill: In breaking news that just crossed the screens, US President Trump has signed the bill in support of Hong Kong protestors, leading to an immediate shift in market sentiment, with the usual suspects (Gold, Yen, Swissy) all bought while the Aussie and Kiwi suffer the most.

US data set the tone on Wednesday: Before Trump signed the HK bill, there had been a rare shift in dynamics whereby the market, for once, moved away from trading based on US-China trade headlines and instead behaved positively in response to encouraging US fundamentals. The US data includedOctober preliminary durable goods orders at +0.6% vs -0.9% exp with Capital goods orders non-defense ex air +1.2% vs -0.2% exp. Besides, the US Q3 GDP second reading was also revised higher at +2.1% vs +1.9% exp.

Seldom tranquility, it didn’t last long: As said, prior to the HK bill signing, there hadn’t really been any major headlines crossing the screens and making unnecessary noise in the US-China trade talks. However, it didn’t make a difference to the US stock market, which remains incredibly steady making fresh all time highs as it taps into any excuse to justify the hefty levels. This time, the S&P 500 kept the momentum as US data came much firmer-than-expected.

Beige book outlines solid economic outlook: According to the latest Beige Book in the US, activity expanded modestly from October, outlining that the outlook going forward remains generally positive. Employment continued to rise slightly overall even as labor markets remained tight across the country. Vast majority of 12 districts continued to note difficulty in hiring workers. In terms of inflation in wages, it noted that wage pressures rose at a modest pace, while stable to moderately growing consumer spending and increases in Auto sales and tourism were seen across several districts.

BOJ keeps market in-check: BOJ member Sakurai warned that if the Japanese economy keeps weakening, there will be a need to prepare for further easing. Remember, the toolbox by the BOJ is pretty much empty after deploying very aggressive easing programs over the years, including a radical approach to control the yield curve in order to re-calibrate banks’ profitability. By simply jawboning the possibility, they are keeping the markets in-check.

Westpac calls for QE in Australia by H2 2020: The Economics team at Westpac updated its outlook on the RBA, now expecting the bank to cut the cash rate to 0.25 by June 2020, with QE to follow in H2 2020. The news led some selling pressure in the Australian Dollar even if it remained rather moderate in the big picture, as the topic of QE won’t fully take center stage until the market starts pricing in 2 new cuts in the next 12 months, which implies further deterioration in the Australian data. For now, the market is only assuming that another 0.25bp rate cut will be necessary by the RBA. If QE were to come, it would largely be centred around the purchase of Australian government securities.

Pressure to make a trade deal with the US mounting: China's industrial profits data showed a 9.9% fall y/y in October, adding to the previous two months of declines. The reading is a dramatic fall and the worst printing seen since 2011. China's NBS senior statistician Zhu Hong said: “The fall in profits was mainly attributable to an expanding decrease in producer prices for manufactured goods, slower production and sales growth.” The line of thinking is that the worse the Chinese data comes, the more pressured the government is going to be to formalize the Phase One trade deal, still being negotiated.

US markets closed due to Thanksgiving: Remember, trading for the rest of the week will be much more choppy, in theory, as the market heads into a much thinner liquidity period due to the closure of US markets in celebration of Thursday’s Thanksgiving, with the stock market also closed early for Black Friday.

Aus Capex up next: Today’s calendar only sees two events of relevance. Firstly, there is likely to be a response by way of increased vol in the NZD based on the ANZ Nov Activity Outlook, while in Australia the Q3 Capex is due, expected to show a slowdown.

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The EUR index remains incredibly quiet with absolutely nothing new to report. The dullness in trading the currency is well portrayed by the level the index trades at, in what I consider to be no man’s land, between the midpoint of a broad range and the bottom of it. It is very unlikely that the equable trading conditions in the EUR will change in the short-term as there is a lack of stimulus, especially in the next few days as we head into a long weekend in the US.

The GBP index is definitely much more alive, to the point that a new milestone has been achieved in the currency by breaking into fresh highs at an index level. The latest YouGov MRP model, one of the most reliable to abide by given the size of its sample, calls for a big majority for Boris Johnson in the upcoming UK general election, and since we are trading opinion polls in the Pound for quite some time, this has given the Sterling a major boost. The trend is your friend in the GBP, in other words, core longs is the safest bet as technicals stand.

The USD index, despite going through a positive path of domestic data, remains unable to break a sticky resistance right overhead. Until the area is cleared, one should remain cautious on the outlook for the world’s reserve currency. Remember, you want to align fundamentals, which are currently improving in the US, with a concurrence of technicals.

The CAD index finally made it all the way to poke into the origin of a huge supply imbalance area in the daily chart, from where the clustering of offers has blocked further progress. The easy gains in the currency have been made with the risk of a setback a clear risk now that the daily area of supply has taken control of the proceedings. The next key event to inject volatility into the Canadian Dollar will be Friday’s Canadian GDP.

The NZD index has been on a tear and while Wednesday’s price action reflects the early stages of a potential exhaustion, we are far from this signal being validated. All the bearish pin bar communicates, based on where it has occurred in the index chart, is that some profit-taking may have kicked in as the market took profits by closing juicy profits ahead of the holidays. In the grand scheme of things, as in the case of the GBP, this market is a buy on dips.

The AUD index continues to be pressured as the change of heart by Westpac is an opinion the market cares to hear, leading to an extension of the decline, even if it’s going to represent a challenge to break the current area of demand (origin of a strong departure Oct 16). To make matters worse, the signing of the HK bill by Trump has exacerbated the pain for the AUD, which finds itself caught in a bearish storm as China may soon retaliate this action.

The JPY index has been emboldened in early Asian trading after Trump signed the HK bill. This event can potentially have major ramifications for the prospects of the US-China trade deal as it will without a doubt anger the government of China. The market’s immediate reaction to buy the Yen is a foretelling sign that the risk of a setback in the US-China trade has increased. So, despite the weakness seen in the Yen, one cannot forget that the overarching theme for the market is the US-China trade sage, hence as a sentiment trade, looking to buy Yens off these lows makes an awful lot of sense if the risk-off settles in heading into this Friday.

The CHF index is another market that faces relatively solid prospects of appreciating from here on out should the risk profile continue to worsen. The Swissy has landed into a major level of horizontal support after achieving a successful rotation in its latest upcycle, which makes it a very interesting proposition looking to engage in buy-side campaigns. The risk to reward is quite attractive from a technical standpoint, with the backing of the risk profile also in favor now.

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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