USD On The Retreat, Clear Macro Dominance

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.

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Quick Take

Granted, the thematic of USD strength does not look like it's going to go away anytime soon if one judges by the weekly closes achieved in the DXY and EUR/USD. It was such a pity that the bullish close outside a well -defined 6.70-75 range could not be replicated in the USD/CNH in order to up to a whole new level the prospects of vol in FX. The positive US GDP Q1 headline number, while it hides underlying softness in the details (lots of temporary factors led to the boost), in my view, should suffice to keep the common theme of USD buying flows at steady levels heading into May as the gap between US growth and the RoW widens. Near term though, there is enough evidence through the hourly price action in FX majors to be cautiously bearish the USD, after some technical cracks in the structures, especially in the Sterling, Canadian Dollar, and the Yen. The former may experience episodes of ultra-low liquidity at certain times of the day this week, as Japan goes offline until next Tuesday in celebration of the Golden Week. To start the week, we are seeing further buying pressure on the Oceanic currencies (AUD, NZD) as China's industrial profits published over the weekend printed a 10 month high. The Euro must be included in the pack of currencies with the prospects to print short-term gains vs the USD, even if remains one of the most vulnerable.

Narratives In Financial Markets

• The US GDP Q1 came with a very strong headline number of +3.2%, much higher than the calls for an ambitious 2.3%, bearing in mind the hinders for growth due to the government shutdown. Under the hood, the increase in growth was very much driven inventories, low inflation, and trade, while consumer spending was quite decent. Overall, it enhances the perception that the US is growing at a pace far different from other nations, period.
• The reaction to sell the USD after the US GDP Q1 beat could be partly explained by the temporary factors that led to the increase in the headline number, while hard data the likes of business investment or consumption remains quite soft in comparison. About 1.7% of the total 3.2% increase in the GDP was due to a build-up in inventories, while exports contributed 1%, primarily fueled by a significant slump in imports rather than a boost in exports activity.
• Another line of thinking is that the downside pressure in the USD post GDP release has to do with the low levels of inflation as indicated via the Fed’s preferred PCE deflator (1.3% vs 1.8% exp), which puts the Fed back on the spotlight as a Central Bank that may consider a cut in interest rates down the road if depressed price pressures is combined with tighter financial conditions. The drop in US yields was the clearest manifestation of increased easing odds.
• One of the main talks in the trading floors, according to sources I interact with, is the weekly close above a key level of resistance at 97.60/70 in the DXY. Technicals are favoring an extension of the USD gains beyond familiar levels, which may put further strains on some EM nations having to serve USD-denominated debt at a time of fragile growth. Besides, a bullish macro USD trend can also be perceived to be a positive for a pick up in vol.
• US White House Economic Advisor Larry Kudlow didn’t miss the chance to throw some juicy comments in line with the dovish endorsements of the Trump team for lower rates, noting that “slower US inflation could open the door for a Fed cut”. Again, further evidence of the attempts to politicize the Fed by the current administration led by Trump.
• US President Trump keeps putting pressure on OPEC nations, even if falling on deaf ears for now. The politician stated that he established conversations with OPEC members (one suspects Saudi Arabia) and told them to bring the prices down. Additionally, Trump kept talking his own agenda last Friday by saying China-US trade talks are going well. Again, a fully price-in story by now as reflected by the muted reaction.
• Over the weekend, China released its latest industrial profits data for the month of March, posting the largest rise in 10 months, which should act as a positive input for sentiment. The headlines number stood at +13.9 y/y driven by higher production, sales, and a lower VAT. It is yet more evidence that China is undergoing a clear growth rebound due to recent easing.
• In the Spanish general election, the left-wing Socialist Party (PSOE) won the elections even if way short of a majority in the lower house. It’s going to take a prolonged period of negotiations with other groups to form a coalition before reaching the needed majority. The outcome, at the bare minimum, prevents further unrest in the EU as the far-right stays away from power.

Recent Economic Indicators & Events Ahead

Source: Forexfactory

RORO (Risk On, Risk Off Conditions)

The US equity market, with the S&P 500 at its epicenter, continues to be an island of stability in which share buybacks, low inflation prospects, comparatively higher growth vs G10, US asset repatriation, are all contributing factors to keep buyers in absolute control.

It is precisely the element of low price pressures which is keeping the downside pressure in the US and global yields for this matter; the drop in the US 30-year bond yield from the 3% markdown towards a cycle low of 2.92% can be understood as a return of the pessimism towards global low inflation and subpar growth.

This is a theme that never went away, but it has been somehow reinforced as of late with further easing pricing in Australia, Canada, Sweden, and even Japan, where ultra-low rates are likely to stay at present levels even longer. The depressed PCE deflator in the US last Friday was the ultimate evidence to be a bond buyer.

The higher risk appetite in the US equity space, where the S&P 500 is just a whisker away from culminating one of the most epic comebacks in history by reaching a new all-time high after last year’s 20% drop, has also been reflected in a lower VIX, where sellers rule the roost again.

In credit markets, junk bonds are back in strong demand vs investment-grade paper, another sign of reigning risk-seeking dynamics. In the currency space, it’s not all that rosy, as the rise in the DXY has negative implications for risk, especially when combined with dropping US yields.

In this environment, the JPY can still fair pretty well and find plenty of buying interest especially in a world where even more Central Banks the likes of the RBA, BOC, Riskbank in Sweden are priced to adopt a fresh easing bias cycle.

One of the disappointing notes that makes the prospects of higher vol far from a done deal despite the bullishness in the DXY is the inability of the USD/CNH to close above its 6.70-75 range and join the DXY and EUR/USD in what I’d call a trifecta of breakouts that can result in the re-emergence of a USD bullish trend at a macro level, and with it, higher levels of volatility in the FX arena, something I am sure many non-carry type or range trading players would absolutely love.

Latest Key Technical Developments In G8 FX

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EUR/USD: Bearish Dynamics Fading Near-Term

Short-term, the 3 legs tap formation breaking through the upside of a descending trendline is a technically bullish development to at least see a relaxation of the selling pressure. The vigorous rebound post the US GDP Q1 release has achieved the transition of bearish to neutral dynamics from an hourly perspective, as the slope of the 25-hourly moving average indicates. The range to use as a reference should be roughly 1.1165-70 down to 1.1120-25 with the midpoint of 1.1140-45. Besides, the pop in the exchange rate comes in the form of a counter-intuitive move following the headline beat in the US GDP, which in my view, makes the temporary bottom to potentially initiate a short-term buy-side campaign towards the next 100% proj target at 1.1180-85 all the more relevant.

GBP/USD: Bullish Structure With A 1.2960-65 Target

Even more obvious is the short-term bullish case in the Sterling, despite if it plays against a clear macro bearish context as the descending trendline drawn in the chart indicates. However, from a micro standpoint, the creation of higher highs following a double bottom at 1.2870-75 should be a precursor that topside risks are building up for a short-term buyside campaign towards the 100% proj target at 1.2960-65, where the confluence of the trendline, horizontal resistance, and proj target will pose a major challenge for buyers to make further headway. The current retest of 1.2915-20 old resistance-turned-support occurs amid the upward slope of the 25HMA, reinforcing the notion that the pullback has sufficient credence via momentum to attract further buying interest. As usual, the familiar caveats of Brexit headlines apply, even if the vol around headlines has dialed down for now.

USD/JPY: Technicals & Intermarket Bearish

The way sellers took control of the price action on the aftermath of the US GDP Q1 beat makes me think that any recoveries in the USD should be limited in nature, with 111.80 up to 112.00 the area where selling on strength offers the most value. Additionally, the depressed level of US yields, combined with short-term weakness in the USD expected, makes the rise in US equities as a standalone contributor of bullish tendencies in the USD/JPY exchange not sufficient. Granted, the area of support between 111.40-50 is proving formidably strong based on the failed 4 attempts, which coupled with the week-long holidays in Japan, it makes the prospects of a potential range play a realistic scenario ahead of Tuesday’s US data, including the consumer confidence.

AUD/USD: Ongoing Buying In Lower Timeframes

As manifested in the Aussie price action, the power of a 3 legs tap as a bottoming or topping formation, also referred to as compression, is quite powerful under the right set of circumstances. In the case of the Aussie, the test of the 70c macro support has marked the opportunity for buyers to emerge and initiate what’s until now an ongoing buyside campaign, even if the short-term relief rally could soon very running out of juice given the daily resistance faced, which comes at the exact same level as the completion of the 100% proj target, so expect a major cluster of offers. The first signs of rejection post the US GDP Q1 beat report is a red flag, granted, it hasn’t deterred the efforts by fast money to keep pushing higher as a new week gets underway, partly spurred by the positive economic data out of China, where Industrial profits in March surged to its highest in 10 months. Besides, higher US equities alongside a temporary reprieve in the USD strength is assisting the AUD.

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. The weekly cycles are highlighted in red, blue refers to the daily, while the black lines represent the hourly cycles. 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