Trump Talks Up China As Impeachment Risk Recedes

The combination of receding fears of an impeachment ever succeeding on Trump alongside hopes that a trade deal with China could be closer than previously thought (in words of Trump himself), led to an abrupt reversal in risk dynamics, with safe-haven currencies giving back early day gains. The North American currencies were in steady demand, with the European complex under pressure.

The Daily Edge is authored by Ivan Delgado, Market Insights Commentator at Global Prime. The purpose of this content is to provide an assessment of the market conditions. The report takes an in-depth look of market dynamics, factoring in fundamentals, technicals, inter-market in order to determine daily biases and assist one’s decisions on a regular basis. Feel free to follow Ivan on Twitter & Youtube. You can also subscribe to the mailing list to receive Ivan’s Daily wrap. 

Quick Take

The confluence of receding risks of an impeachment ever making it through the Republican-controlled Senate coupled with US President Trump talking up the immediacy of a trade deal with China on the sidelines of the United Nations, resulted in a healthy recovery in risk sentiment as the abrupt reversal in the CHF, Gold depicts.  The valuation of the JPY held surprisingly steady even as equities/bond yields rose. The USD and the CAD were the currencies attracting the most demand by market forces, while the European complex, without exception, was the complex most punished, especially the GBP as the UK parliament returned to business as usual, followed by the EUR, which accumulates 5 days in a row losing values in its index, with the net change in the CHF minuscule for the day but nonetheless impressive the turnaround it had. The Oceanic currencies, especially the NZD, also went through reversal days, after the RBNZ-induced gains petered out as the market still prices in further rate cuts down the road. The Aussie, in the meantime, has recovered some of its lost 'mojo' at a critical area of demand in its index as part of an improving risk context, which should see it better bid. 

The indices show the performance of a particular currency vs G8 FX. An educational article about how to build your own currency meter 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 ducks impeachment risk, talks up China trade deal: The combination of receding fears of an impeachment on Trump alongside hopes that a trade deal with China could be closer than previously thought (in words of Trump himself), led to an abrupt reversal in risk dynamics, with safe-haven currencies giving back early day gains.

Democrats' case for impeachment weakens: We learned that the allegations about Trump’s involvement to push Ukraine for political favors appear to be rather weak at this stage. The released Trump-Ukraine call records showed no wrongdoing, according to the US Justice Department. The judicial body determined that the call transcript with Ukraine President Zelenskiy does not violate campaign finance laws. If one reads the transcript linked above, what’s interesting, and what’s keeping the impeachment procedure alive, is the fact that Trump did urge Ukraine to work with Attorney General Barr to investigate Biden and his son, as Politico reports. 

Maths don't add up for Trump to be out of office: Nonetheless, the Speaker of the House Pelosi has gone ahead with the impeachment inquiry on the President, even if the behavior of the markets is far from communicating investors care much about it. Getting the necessary votes in the Senate where the GOP has the majority is a tall order, and if you throw into the mix the recent evidence that seems to be exonerating Trump from any known violations, the market mentality at this stage is that the efforts on this impeachment process are highly unlikely to succeed. 

Trump shows optimism on China: Trump massaged the rhetoric once again in favor of a recovery in risk assets by stating that “a trade deal with China could happen sooner than you think”, adding that “we are getting closer and closer…there is a good chance US and China will make a deal”. The comments led to rampant movements back up in equities and US yields. In recent days, Chinese companies have started to make arrangements to buy more US pork, while state and private Chinese enterprises were given a waiver to purchase US soybeans without tariffs. The next high-level trade meetings are scheduled for the 2nd week of October.

Fed speakers on duty: The conclusion after hearing a line up of Fed speakers in that the reinforcement of the view that the Central Bank will no longer be as aggressive in cutting rates unless things go downhill quite rapidly. The combination of a more benign US-China trade rhetoric, firm US economic data, and the refusal by the Fed to cut further to  encourage further leverage on Trump is playing into the view that the base case, as Fed’s Powell pointed out in the last FOMC, for a ‘wait and see’ approach.

Fed's Evans (dove) reiterates bar higher for lower rates: Fed’s Evans (dove, voter) said that even if he is “open minded to additional action.. at the moment we are well positioned”, adding that he doesn’t project further cuts.  Fed’s Brainard, a voter and known dove, said that trade policy uncertainty has “a material negative impact on the health of the economy”, while Kashkari (non-voter) reiterated a more dovish stance by saying “I could easily see justifying 50bps lower than it is today”. 

A discordant ECB board: In what should be seen as a worrying message of growing division at the helm of the ECB, the executive board member Sabine Lautenschlaeger  resigned from the executive board effective Oct 31 due to her contrarian position towards further bond purchases. The news didn’t impact the EUR at first glance, even if the currency has been trading weaker this week as more evidence gathers that the EU is in a very weak spot economically speaking, especially the German manufacturing. 

RBNZ keeps powder dry: The RBNZ kept rates unchanged as widely expected, noting “new information since the August Monetary Policy Statement did not warrant a significant change to the monetary policy outlook”. The Statement was interpreted by the market as neutral, even if expectations for another rate cut in November remain at elevated levels, with further pressure to act should the RBA make a move first by easing further. The NZD initially rose but has since given back all the gains and some more.

Back to business as usual in the UK parliament: The House of Commons in the UK reconvened on Wednesday with PM Johnson still undeterred by the calls to resign, judging the ruling of the unlawful suspension of the Parliament as “wrong”. His focus still appears firmly skewed towards an eventual general election, which would happen if 2/3rds of MPs agree on it, although there appears to be a tactic of buying time for now until the UK PM formally requests a Brexit deadline extension. UK Labour Leader Corbyn declined to say when he would put forward a no-confidence vote in PM Johnson, which will happen once he has more certainty that a no-deal is off the table. 

Oil sells-off as Saudi Arabia restores oil production capacity: According to Saudi Aramco, the oil production capacity has been restored to pre-attack levels, which resulted in further US Oil downside pressure. The news is a justified market moves as it reveals faster progress than initially expected. About 1 week ahead of schedule.

Recent Economic Indicators & Events Ahead

Source: Forexfactory

A Dive Into The Charts

The indices show the performance of a particular currency vs G8 FX. An educational article about how to build your own currency meter can be found in the Global Prime's Research section.

The EUR index came under renewed downside pressure for a fifth day in a row with Wednesday’s candle print carrying an increase in aggregate tick volume activity, which is a bad omen for the outlook of the index. Besides, the close of the index accepted quotes below the previous swing low on Sept 16, which increases further the risk of follow through supply imbalances. Sellers are clearly in control with an availability of about 0.2% (from Wed’s closing price) worth of further declines where I’d expect reduced buy-side activity until the next area of daily support is met.

The GBP index, after rejected off the 100% proj target on a backside retest, has now found support at the intersection of the baseline (13d ema) + a level of support, most visible through the H8 chart, hence why it’s colored in blue. This area of support is definitely a candidate to see buy-side pressure returning to the market, even if the close at the low of the day with a slight increase in tick volume activity does not bode well. However, in the context of an uptrend, it is nonetheless the most attractive buy-side level quoted for weeks now. Note, the GBP has very unique idiosyncratic dynamics due to the Brexit newsflows. If trading it, you must adapt to it. 

The USD index made headway by successfully completing a bullish rotation, which occurs when the price breaks through its previous swing high. The acceptance of price at the very high of the day is a testament of the vigorous amount of demand flowing back into the Greenback. The bullish close sets the stage for dib-buying activity to potentially be well-rewarded. There is absolutely no indication that suggests the index won’t keep its course northbound from here. The next target eyed is over 0.4% higher from Wed’s close at the 100% proj target, which coincidentally, happens to align to perfection with this year’s high in the index. 

The CAD index found an upside resolution away from ts range, printing a very commanding buy-side candle which sets into motion a more than likely retest of the yearly highs. The level overhead has proven to be a tough nut to crack in the index, but remember that the more a level gets tested, the weaker it tends to get, especially if the last rejection of the level failed to achieve a break of structure in the market, as it was the case back in Sept 11. Any retracement towards the blue area of support outlined in the chart represents a genuine opportunity to engage in buy-side action against weaker currencies. 

The NZD index looks poised to test its trend low after a failure to sustain its post RBNZ gains at the intersection of the daily baseline (13d ema). Those adding NZD short-side exposure on the retest of this powerful dynamic resistance area are now sitting in some handsome profits. The close of the daily candle couldn’t be more bearish, with the printing of a sizeable bearish outside day reminiscence of the type of candle on Sept 12 that led to a 2% fall in the index. The downside available before the recent low is tested is a rather attractive 0.5%. 

The AUD index has been rejected away from a macro support area as outlined in red in the chart. This is an area that acts as a clear onset for a change in price dynamics, with a retest of the baseline my projection in the short term. If this assumption holds true, it would allow for an appreciation of over 0.35% in the Aussie in coming days. The daily candle print rejecting the macro support area is evidence that demand is coming back into the Aussie as anticipated. The currency looks positioned to be an outperformer based on both where it finds itself (daily demand) but also likely to benefit from the improved risk sentiment. 

The JPY index has come to a standstill with little price movements as it continues sandwiched between a daily level of resistance and an ascending baseline. A resolution in either direction must first occur before the technical landscape clears up. One can clearly notice through the chart that both areas highlighted (baseline + resistance) have acted as the delimitation that keeps the price in a compression status. An uncertain outlook as the bullish price action above the baseline has now come to a level (daily resistance) where supply pressure could take over.

The CHF index came to an abrupt hold with an eventual reversal after the buying pressure petered off at a supply zone in the chart, leading to a large upper shadow in the daily. The failure of the index to close above what I characterized as a critical level of resistance places the immediate risks to further losses towards a retest of the baseline now, which would most likely act as the next buy-side point of interest as it is confluent with an area of horizontal support. The fact that the daily candle ended with losses on an increase of tick volume adds weight to the notion that the downside pressure may not be over as buyers clearly failed on the last auction.

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.
  • Correlations: Each forex pair has a series of highly correlated assets to assess valuations. This type of study is called inter-market analysis and it involves scoping out anomalies in the ever-evolving global interconnectivity between equities, bonds, currencies, and commodities. If you would like to understand more about this concept, refer to the tutorial How Divergence In Correlated Assets Can Help You Add An Edge.
  • 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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