True 'Risk On' Boosts High-Beta Currencies

The conditions in the broader financial markets keep improving, and proof of that is the new all-time highs in the S&P 500 and the Nasdaq, as major macro risk events (Brexit, US-China trade) are removed from the equation in the near term, allowing the groovy mood to extend. In today's report, I will break down how these events are playing out in the currency market...

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.

Let’s get started…

Quick Take

The attitude towards the endorsement of high-beta currencies continues at a steady pace, as reflected by the out-performance of the AUD and CAD, with the preponderance of evidence suggesting that the US and China are a few steps from the first finishing line (Phase One trade deal inked). The removal of the no-deal Brexit risk in the near term, officiated by EC President Tusk in an announcement on Monday, coupled with solid earning reports in the US, kept the funky mood intact. As a result, the JPY and CHF suffered the consequences by seeing further outflows, with the USD unable to sustain its bullish momentum as diversification into the European currencies (EUR, GBP) ensued as the market was finally re-assured that there won't be any final minute setbacks in the Brexit saga, with a general election mid Dec the consensus view now. Lastly, the NZD was unable to find enough buyers to revert its bearish moves, initiated last week, even if a fundamental-led trigger has resulted in renewed buying in the last few hours as news broke out that the NZ Superannuation Fund is reviewing its FX hedging policy, which may imply less selling of NZDs offshore (less buying of foreign currency). 

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.

Trump reinforces positive 'risk on' vibes: Adding to the optimism that the US-China trade deal Phase One is nearing its final touches before the signature ceremony, Trump said negotiations are “ahead of schedule”. Both the US and China’s President have, in theory, the intention to sign the Phase One of the trade deal in the November 16-17 APEC summit in Chile. Trump’s comments imply that the signing of the deal may even come sooner than expected, although he didn’t elaborate further.

Stanve on tariffs key issue to be resolved: As a reminder, the US Treasury Dept said that “China and the US are closer to finalizing some sections of the trade deal, with conversations to continue at a deputy level before principals have another call.” These comments from the US camp were accompanied by congruence in the message shared by China's Ministry of Commerce, noting that "the technical consultations of some of the text agreement were basically completed" even if they are reportedly still pushing for a rollback and the removal of planned Dec 15 tariffs before the deal can be inked.

Positive earnings underpin stocks: The risk appetite to keep buying US stocks remains very high, as the S&P 500 and the Nasdaq Composite both make fresh all time highs as the market continues to buy into the notion that the US-China trade deal Phase One is around the corner, coupled with positive earning reports.

Brexit delay a near-term risk removal: The dimensions of today’s ‘risk on’ moves, with the Japanese Yen the most punished currency, were amplified by the rampant rise in US bond yields as investors also show less concerns about Brexit after the EU formally confirmed a 3-month deadline extension until the end of Jan.

UK PM to push agenda for election: Notwithstanding that the ‘flextension’ on Brexit was granted, the UK Parliament rejected for a third time the UK PM’s call for an early election on Dec 12th. A tweet from Tusk read: “"The EU27 has agreed that it will accept the UK's request for a #Brexit flextension until 31 January 2020. The decision is expected to be formalised through a written procedure." Boris Johnson will continue to push his election agenda hoping to eventually get the numbers. Johnson’s plan is to publish a bill that would only need a simple majority to pass as opposed to two thirds as the requirement to meet in today’s failed attempt. a new vote is expected this Tuesday.

US to ramp up pressure on Iran: US Treasury Secretary Mnuchin said the US will ramp up more on Iran sanctions, noting that while “we have executed on a maximum pressure campaign for sanctions, we will continue to ramp up, more, more, more…” The comments follow a meeting with Israel, a key US allied who’s been pressing the Trump administration to keep flexing its muscle on Iran. The more pressure the US exerts on Iran, the higher the risk of destabilizing geopolitical events.

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Recent Economic Indicators & Events Ahead

Source: Forexfactory

A Dive Into The FX Indices 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.

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The EUR index found sufficient demand out of an area of support on the hourly, where market makers collected enough contracts before a rotation back up away from the liquidity obtained. The structure of the market remains in a broad range, although one must be in high-alert that for the past 6 days, any attempts to break higher have led to fade outs, with sellers keeping the upper hand by putting a lot more pressure on the index below the midpoint of the range.

The GBP index exhibits no changes in its encapsulated price action, as market makers remain in full control of the proceedings by engaging at the edges of the 2-week long range. To gain clarity on this market, further price action is necessary, with a resolution away from the range a prerequisite. Whenever that occurs, the projected target can be found in magenta lines, which constitute a 100% measured move away from the established range in play.

The USD index tested a resistance area which was anticipated to face increased sell-side pressure given the amount of confluence it had found, including a test of a broken-support-turned resistance horizontal line in the daily, alongside the 13d ema, all combined with an area of supply a per the departure of price down on Oct 18. There are near-by support lines at various intervals down below, acting as liquidity pockets (magnets for price).

The CAD index kept pushing into loftier levels, just be cautious that the global flows tracked as part of the index suggest the chart has reached an inflection point (daily resistance). The 100% measured move from the last bracketed region prior to the breakout, however, implies that another final push higher may be in store before market makers take over and a reversal back to the mean can start being speculated with a higher degree of conviction as per market structures. For now, the technical evidence is clear, the CAD remains a buying market.

The NZD index sold off until it met its 100% measured move, from where multiple rebounds were seen before the selloff resumed, although in Asia Tuesday the Kiwi is now attempting to revert the dominant bearish cycle as news breakout that the NZ Superannuation Fund is reviewing its FX hedging policy, which may imply less selling of NZDs offshore (less buying of foreign currency). Should the recovery continue, the two levels of resistance highlighted in the chart is where the most predictable turning points are expected, while to the downside, there is a significant void area if the sell-side pressure were to resume.

The AUD index has reached a major macro level of resistance once again, which implies that sell-side pressure is likely to return as we are starting to see. A speech by RBA Lowe around the European open can potentially act as a strong catalyst to see a pick up in AUD flows, so be well aware of this risk event. For now, the price has traveled all the way to its 100% measured move, which reinforces the case for offers to keep overpowering bids ahead of Lowe’s event.

The JPY index remains trapped in range-bound conditions with the latest sell-side pressure now seeking out the next area of liquidity through the most recent lows. The bearish trend remains in place, and the question is, whether or not the period of distribution is mature enough for another mark down in price away from the current range status. Selling Yen on weakness has definitely been the way to go amid the steady risk appetite dynamics present. Overall, the Yen remains one of the most vulnerable currencies out there based on technicals and intermarket.

The CHF index has reaffirmed its bearish outlook by breaking into new lows, setting into motion the targeting of the next macro level as per the 100% measured move from the previous bracketed region, allowing for 0.6% of losses projected until the next target is met. As the market structure stands, any rebound is expected to face areas of resistance nearby, where selling opportunities may arise for a continuation of the established downtrend. 

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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