The USD Is King In January

Friday's ebbs and flows were characterized by a re-resurgence in demand towards the king of currencies this January, that is, the US Dollar. Meanwhile, on the other side of the spectrum, the British Pound continues to succumb to weakening fundamental news. If you'd like to understand the latest market dynamics and outlook for G8 FX, then this report aims to do just that...

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.

Let’s get started…

Quick Take

We start a new week with the US Dollar at the forefront of trader’s mind amid the steady demand flows it’s shown through the course of January in line with positive seasonals. The fundamental news out of the US, with a huge 17% jump in housing starts aiding the trend, as together with the US-China phase one trade truce, reaffirms the neutrality of the Fed policies. The Swissy, after meeting its 100% measured move at an index level, has seen buy-side interest petering out as the fast money-type accounts take the foot off the gas pedal. The Canadian Dollar is the third best performing currency this year, piggy-backing the rise in the USD, and opening up a significant gap with the Euro, which follows as the 4th best currency. In the bottom half, I must say that amid very depressed volatility conditions, the outlook is mixed, with only the Japanese Yen displaying the cleanest downtrend. The Aussie, the Kiwi, and the Pound, are all confined in ranges of difference dimensions from an index standpoint, even if the British currency was the most punished in the last 24h following a dismal UK retail sales. Judging by the ebbs and flows seen as of late, the USD and CAD look best positioned to capitalize on the current market conditions, while the JPY and the GBP, with risk-on flows (S&P 500 keeps making record highs) and UK fundamentals deteriorating at a rapid pace, appear to be the most vulnerable currencies this week. Remember though, today’s trading activity is likely to be much more quiet than usual, as US stock and bond markets are closed to commemorate the Martin Luther King Jr. holiday. Later in the week, things will spice up as we get the moneta policy decision by the BOJ, BOC, ECB, Aussie jobs, Canadian/NZ CPI and EZ manuf numbers.

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.

A dismal UK December retail sales: The headline number came at -0.6% vs +0.6% m/m expected, has led to a jump to 73% in the chances of a BoE rate cut at the end of this month. The Retail sales (excl autos, fuel) fell by -0.8% vs +0.8% m/m expected. What’s worse, the numbers portray a worrying pattern of 5 consecutive month of recess in retail sales in the UK.

Fitch affirmed Germany at AAA: The rating and outlook (stable outlook) were left untouched, which is welcoming news. If Germany’s high rating is ever going to be challenged, that would have been after last year’s poor growth numbers, worse in the last 5 years. One of the reasons Fitch maintains a constructive outlook in its report is due to the fiscal surplus the country has.

US Dec housing data keeps surprising to the upside: The US December housing starts shocked, in a positive way, by jumping almost 17% to 1608K vs 1380K expected, with single family starts up to the tune of 11.2%. It constitutes the largest one-month increase in over 3 years. To the rude health of the jobs market in the U, even if the jobs created overall are poor quality, must now be added a thriving housing market. If one adds the US-China trade truce as part of phase one deal, the Fed will take comfort of all these inputs by being sidelined.

The Oil price is up after the Libyan conflict: The rival government shut down half of the oil exports, which translates into about 800,000 barrels/day of supply out of circulation. Reports indicate that the Libyan commander of the rival government Khalifa Haftar ordered to block oil exports at ports under his control. As long as these exports remain shut down, the play has been to adjust the outlook for Oil as it represents a deficit of near 1% of the world production.

The risk appetite mood won’t stop: Judging by the incessant rise in US equities, the lead that Asian traders are taking from the performance by the S&P or the Nasdaq indices could not be more encouraging, with rises of another 0.3% and 0.5% respectively to fresh record highs. Interestingly, despite the rallies, the Yen shrugged off the positive dynamics by appreciating last Friday, which marks the end of a 7-day losing streak at an index level.

China data stabilizes: China published a raft of y/y indicators last Friday, including the Q4 GDP, which came in line with expectations at 6% for the year even if it marks the lowest read in 29 years. The December activity also included Industrial Production beating estimates at 6.9% vs 5.9%, Retail Sales also coming above estimates by the smallest margin at 8% vs 7.9% and Fixed Assets Investment, which also managed to come above expectations by printing 5.4% vs 5.2%.

What’s ahead?
Today’s trading activity in the US should be much more quiet than usual, as US stock and bond markets are closed to commemorate the Martin Luther King Jr. holiday. In New Zealand, the Wellington market is also on holiday. In terms of economic news, today’s line-up of events is dominated by 3rd tier data that is highly unlikely to affect currency valuations.

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Recent Economic Indicators & Events Ahead

Source: Forexfactory

Insights Into FX Index Charts

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. The idea of this analysis is to complement one’s daily bias by accounting for this holistic analysis.

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The EUR index poked into a higher level of liquidity before reversing its course of action back to the downside, reaffirming the range-bound nature of the market. This consolidation profile must be taken as part of the context of a macro bearish trend as per the weekly market structure. As pointed out last week, the rise in the index was never accompanied by a bullish slope in the compounded tick volume via the 13ma applied to the OBV, showing dubious commitment by buy-side accounts, and by now confirmed that the intention was to collect EUR short inventory at more attractive prices before the release of the sell-side pressure kicked in. The volatility in the EUR-pair, a recurring theme across FX, remains very depressed. No changes there. The rise in the EUR last week was also challenged by January’s seasonal pattern, negative for the EUR.

The GBP index failed to sustain any upside momentum after the catastrophic UK retail sales reading, which brings to the forefront the prospects of an immediate rate cut by the BoE. In the last few weeks, the price action in the index portrays a market confined in a range below a critical pivot level of resistance that has been respected for a couple of times. Despite fundamentals for the GBP have started in an appalling way this 2020, the daily price action is yet to confirm a breakout. What we are seeing so far is the Pound holding extraordinarily well judging by the plethora of negative news is receiving amid a stand-by in Brexit headlines. The price action candle from last Friday is bearish and puts the recent lows at risk. The volatility in the GBP, as in the case of the rest of G8 FX, remains suppressed below the monthly average.

The USD index is just a whisker away from confirming the first breakout of structure on the daily that would formalize the bullish outlook even if the bias I’ve subscribed to since the beginning of the year has been one of optimism for rises to materialize as elaborated in this report daily. The breakout higher may come any hour, and with it, it would tick all the boxes one can think of to shift the focus to fully and unambiguously bullish on the USD. We’d then be able to align the smart money tracker (enhanced moving averages) pointing up, the structure of price confirming the bullish flows, the volume pressure ditto, and USD seasonals also in favor. Full circle for bulls.

The CAD index is one of those markets that I sincerely have little to update you with as it also continues to play out the script that I had envisioned and telegraphed through my daily report. Whenever you see my chart annotations barely modified, that’s a good sign, as it means the scenarios have or are panning out as I would have anticipated based on the analysis performed. To me, the CAD is a market that one must approach from building long inventory on weakness, and as a reference where to consider a plan of engagement, I’ve endorsed to be a buyer between the 38.2% to 50% fibonacci retracement at the index. Last week, we saw the dips being bought up the moment the former fib was tested and the price never looked back. All the stars are aligning, especially after Friday’s bullish engulfing price action to see new highs created. The seasonals for the CAD are positive in January too, as in the case of the USD.

The JPY index is without a doubt the most bearish currency and with the risk flows so firmly bullish as per the record highs in the S&P 500 as the bellwether, it’s hard to make a case for an adoption of a long bias in the currency except if spells of risk-off episodes hit the currency or sellers ponder the idea of taking profits more aggressively. All the technical elements keep the bearish bias intact, with the price structure bearish and the risk sentiment adding pressure to the Yen, alongside the compounded tick volume slope (13ema to OBV) pointing bearish. However, and I reiterate, the only ‘but’ is that the tapering of tick volume on the way down is not a good sign, as neither it is that this is happening at a macro support. This is my only concern, as if the currency is to find legs to the upside, this would be the ideal location to engineer a buy-side campaign as the price is definitely very cheap by historical standards.

The AUD index, as in the case of the CAD, I have no much else to add, since the market continues to play out in the way I envisioned. That is, the rise of the currency run out of steam at the intersection of the midpoint of its macro range, a juncture that has proven to be a tough nut to crack for the Aussie ever since the formation of this range occurred back in Sept last year. Therefore, until violated to the upside, any objective technical call in the Aussie cannot be justified as placing too much optimism on the prospects for the currency. At best, I’d personally retain a neutral to bearish bias with a steadier outlook unfounded at this point. As a positive note for the Aussie though, the last 4 days of falls have carried a taper of volume. The seasonals are positive to the tune of +0.54% in Jan since the early 1980s for the Aussie though.

The NZD index, and at the risk of sounding like a broken record, does not show any significant action that would make me change in any way, shape or form my neutral to bullish outlook. Why this stance? Because I consider this to be a market established in a short-term range in the broader context of a bullish trend. Therefore, under this structural profile, buying weakness at support levels has definitely paid good dividends so far. Remember, in ranges, the signals can be more conflicting, so I wouldn’t add that much weight to the positioning of the compounded tick volume pressure as assessed by the 13ma off the OBV nor the enhanced moving averages tracking the smart money flows. As in the case of the EUR or GBP, the NZD also shows a range as the most accurate profile at play, with the advantage of being formed on the back of macro bull flows. The volatility to be trading NZD pairs has fallen below the usual monthly average.

The CHF index, on the back of reaching its 100% proj target, continues to find it a struggle to keep attracting further buy-side flows as one would anticipate at this symmetrical location. Despite the measured move is now complete, it remains very premature to call this the ultimate top as the fast money will probably not give up that easily in a currency that has put on a spectacular rally, which is even more meritorious, judging by the absurd low volatility elsewhere, and that half the other G8 FX currencies are trapped in ranges (EUR, GBP, NZD, AUD). If my view is any indication to go by, I’ve subscribed to the idea that this market has been driven by fast money scalping or short-term intraday trend trading strategies. Once we step out of the smaller time frames, this market is out of whack and with the positive swap offered to short CHF, these levels are incredibly interesting for the patient traders.

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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