US-China Trade Talks To Set The Tone In Currencies

The risk dynamics are on the retreat in early Asia as Bloomberg reports China will not consider negotiating some key sticking points as part of the trade talks due this week. According to a Bloomberg report, China is reluctant to negotiate neither on industrial policy reform nor government subsidies. The Yen and the Swissy saw demand flows in early Asia.

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

With the US NFP failing to act as a driver to set the next directional bias in currencies, it's going to come down to this week's China-US trade talks and Trump's impeachment saga as the major catalysts to inject volatility into the Forex arena. The US NFP was seen, as the Fed funds pricing attests, as a glass half full on the back of a jobless rate that hit a 50-year low, a headline number around expectations, in a nonetheless environment of low wage growth. However, this week's gap down in risk is a timely reminder that US-China trade negotiations are set to dominate the proceedings, with Bloomberg reporting that the Asian giant won't budge on key sticking points. The Japanese Yen and the Swiss Franc were bought from the get go, extending Friday's gains, which in the case of the Japanese currency, has evolved into a constructive daily uptrend. The US Dollar has been trading on the back foot with an ephemeral US NFP-induced spike unable to find follow through. The Euro remain in no man's land. The Pound has been under pressure as of late with the key 'hard' questions on Brexit still up in the air as the divorce deadline approaches. Meanwhile, the oceanic currencies the likes of the Aussie and the New Zealand Dollar are starting to give up some of its upside from last week .Special mention deserves the Kiwi, which has had a solid run. Lastly, the Canadian Dollar finally found buying interest off its weekly low after a relentless selling that last for over 48h in a row since mid last week in light of the US ISM manuf/non-manuf shockers. 

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.

China sets the wrong tone ahead of trade talks: The risk dynamics are on the retreat in early Asia as Bloomberg reports China will not consider negotiating some key sticking points as part of the trade talks due this week. According to a Bloomberg report, China is reluctant to negotiate neither on industrial policy reform nor government subsidies. The leverage of China has now increased as Trump is caught in a crossfire of corruption accusations which  led to the initiation of an impeachment process.

Industrial policy or subsidy changes out of the trade equation: As the piece from Bloomberg notes: “Vice Premier Liu He, who will lead the Chinese contingent in high-level talks that begin Thursday, told visiting dignitaries he would bring an offer to Washington that won't include commitments on reforming Chinese industrial policy or the government subsidies that have been the target of longstanding U.S. complaints.” The trade talks are set to resume on October 10-11 (Thursday and Friday).

US jobless rate at 50-year low: Last Friday’s US jobs report was hardly a major influence for the USD, as the headline came close to expectations at 136k vs 145k, with positive revisions to the tune of +45k for July/August and an unemployment rate now at a 50-year low of 3.5%. However, on the flip side, inflationary pressures on wages are nowhere to be found, with the yearly average hourly earnings came at 2.9% y/y vs +3.2% exp, which marks the lowest since July 2018.

US NFP seen as glass half full: The latest employment report, with the headline meeting expectations, positive revisions and a lowering trend in the jobless rate, shows the economy is in an overall good position. Even if the low inflation provides partial justification for the Fed to ease further if the tightening of financial conditions were to accelerate, the market has so far put more weight on the tighter labour as the chances of an easing in the Fed policy were lowered marginally to 70% last Friday.

Watch Trump's impeachment saga: The impeachment against Trump is a development to monitor closely as a potential catalyst of further market volatility, as a second whistleblower with more-direct knowledge of Trump's Ukraine controversial dealings may step forward, according to a weekend article by the NY Times. As the article notes, “the second official is among those interviewed by the intelligence community inspector general to corroborate the allegations of the original whistle-blower, one of the people said.” The plot has thickened further as the US Secretary of State Mike Pompeo failed to meet Friday's subpoena deadline to deliver required Ukraine-related documents.

Fed's Powell turns out a non-event: The latest speech by Fed’s Chair Powell on Friday taught us nothing new regarding the stance of the boss at the Fed regarding monetary policy. Powell said the US economy is in a good place despite some longer-term challenges, adding that “when rates are too low, we have less room to cut rates if there is a downturn”, which may be taken as to suggest the rate of rate decreases will slowdown from clear on out. The Q&A session didn’t lead to new insights, as didn’t the interventions by other Fed speakers the likes of Bostic, George or Rosengren.

UK PM seeks legal battle against stopping no-deal Brexit: According to the UK Telegraph, UK PM Johnson is seeking legal consent from the Supreme Court to ensure Britain can leave the European Union this month with no deal. As a reminder, the UK parliament ruled as unlawful for the UK Prime Minister Boris Johnson to leave the European Union on October 31 deadline unless there is a deal in place that prevents a no-deal Brexit. Johnon is looking for creative alternatives to bypass parliament “in an effort to avoid having to write a letter asking for a delay to Brexit, as set out in the Benn Act”, the UK Telegraph notes.

UK PM remains as defiant as ever: Over the weekend, in an op-ed by UK PM Johnson in the Sun and the Daily Express, the politician reiterated that the UK is leaving the EU on October 31 deal or no deal. Johnson wrote: “After decades of campaigning, three years of arguments and seemingly endless months of pointless delay, it is now just 25 days until the United Kingdom's membership of the European Union comes to an end. We will be packing our bags and walking out on October 31. The only question is whether Brussels cheerily waves us off with a mutually agreeable deal, or whether we will be forced to head off on our own."

RBA FSR outcome outlines lower housing risks: According to the team of Strategists at NAB, “a key takeout from the RBA’s Financial Stability Review was the Bank seeing risks relating to the housing market having “receded somewhat” over the past six months, given the uptick in housing market activity. The RBA called on banks to be “not overly cautious in the implementation of current lending policies”, a nod perhaps to some further easing up on APRA/ASIC’s interpretation of lending standards.”

FOMC minutes this week likely a non-event: This week’s FOMC minutes of the September meeting will hold little weight and be looked from the rear mirror given the major disappointments in the US ISM manuf and non-manuf readings from last week, which has obviously altered the market’s perspective on where the Fed should stance regarding policy, hence treating the prior meeting as a rather obsolete outlook.

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.

The EUR index needs to unravel its obscure technical outlook by first finding a new directional bias before traders can regain further clarity. To the upside, a tested supply imbalance has so far proven to be the region where a top was found as part of the hourly bullish cycle, while to the downside, a cluster of bids where an imbalance of demand is expected to be found reside about 0.2% from Friday’s closing price, coincidentally the same distance from the last resistance hit. Bottom line, the index faces the prospects to be contained in a fairly tight range this Monday, with relatively small movements in either side (+/- 0.2%) to find imbalances of demand/supply.

The GBP index has established a week-long range as the market awaits new developments in the Brexit saga. The current trading dynamics imply volatile yet directionless movements ahead within a 1% range potential until the index finds equilibrium outside the box. Engaging in buying or selling strategies in the Pound out of the range extremes has been a strategy paying dividends, especially for buyers, as the multiple times that the daily demand imbalance got rejected clearly proves. Note, the support has been tested enough times to think the cluster of bids might have been dialed down, especially if the lates bounce doesn’t at least achieve a return back to the middle of the range as a testament of the lingering residual buy-side interest.

The USD index finds itself in a tested level of demand imbalance, which has so far led to a 0.2% rejection off it, although since the bounce didn’t achieve any significant break of structure, I’d be especially careful to keep buying off the daily demand until there is renewed evidence. That extra evidence would come in at least a retest of the prior swing high in the hourly. If the retest of the low carries the tapering of aggregate tick volume, it may also provide clues that the move into new lows may exhaust, considering how much weight there is in the test of any daily level.

The CAD index is not yet meeting the minimal technical evidence to consider the recent bottom as an area strong enough to expect sufficient demand. The reason why the horizontal support has not been picked until a region further down is because the previous lows on Thursday and Friday have so far failed to achieve any break of structure on the hourly. Which means anyone with a buy-side interest would be buying a retest off the lows in a clear hourly downtrend. These are situations, that is, trading against the trend, to avoid, unless we are faced with a fresh imbalance on a higher timeframe, which is why a near-by daily support was picked instead.

The NZD index has stopped in its tracks at the 100% projection level on the hourly, from where a movement worth over 0.4% to the downside has eventuated. Remember, well-selected target projection areas as part of the principle of market symmetries is an excellent way of anticipating when a reversal back to the mean is likely to occur. I’ve documented my findings here. The key part in selecting this type of levels to trade from is to assess the market context in a higher timeframe, as the best opportunities occur when we have a counter-trend 100% proj movement as part of an underlying trend in the opposite direction in higher charts as it’s the case in the NZD index. Should buyers regain the upper hand again, the 100% proj won’t hold as much weight as so far there has been no break of structure on the way down. The next level of demand imbalance does not come until 0.4% lower, corresponding to the hourly breakout point.

The AUD index has extended its recovery beyond the 100% proj level as the US NFP-led volatility saw offers pulled out from the market at such a critical point, allowing the index to make further progress into a major daily supply imbalance, which remains untested. Any further bounces in the index should be confronted with strong offers around 0.3% to 0.4% from the current price at the open of Asian markets this Monday, while the downside has an obvious area of demand off the hourly around 0.4% lower. The AUD opened with a downgap this week as the negative headlines on China not willing to negotiate certain US complaints filter through.

The JPY index has been neglected once again from trading above a 8h supply imbalance at the opening of markets in Asia. The level has now tested several times, which implies it may get debilitated on each subsequent test unless every passing rejection achieves a break of structure. The latest pullback in the last few hours occurs in the context of a prior impulsive departure, which added credence to expect residual supply to still come through. The next critical area where JPY demand should be expected on a first test is found via an hourly level 0.4% lower, which considering the trend is up based on where the baseline is, it should attract big attention.

The CHF index has come to an expected area of supply as buy-side flows are confronted with a set of confluent factors in the form of a 8h horizontal supply imbalance, a 100% proj target and the daily baseline, which has so far resulted in a retreat to the tune of 0.2%. Subsequent expectations of supply imbalances upon a retest of the area without previously breaking the recent low set after the topside rejection would be a riskier proposition. Meanwhile, buyers are most likely to emerge on a test of the hourly support level underneath, which would represent a fresh level after the impulsive rejection of the low that led to a breakout of that swing high.

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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