Posted on: 09 Dec, 2019
Will the market defy the negative seasonal pattern in the US Dollar by propping up the demand flows on the back of a blockbuster US NFP report? What to look out for this week? Are you prepared for the main drivers affecting the currency market this week? China tariffs deadline, UK general election, ECB and Fed policy meetings... Today's report helps you to contextualize where we are at.
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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.
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Have we seen a meaningful bottom in the US Dollar? As the chart below reflects, the currency was by far the biggest loser during the course of last week even if the US NFP blew it out of the park by showing a huge positive divergence against the expected print. This contrast in technicals vs fundamentals could easily lead to think holding a USD bullish stance this week offers value, and I wouldn’t disagree, but as it’s usually the case in trading, one must be mindful to pick the right combination of currencies and at what particular level to bank on this premise. I offer a tease of my view in today’s chart section to get an idea of the outlook I hold in USD-related pairs. Remember, in terms of currency seasonals, the USD tends to suffer from aggressive bearish tendencies in December, which judging by the performance so far, is proving to be a decent predictor of the overall interest in the Greenback. Besides, this week’s ebbs and flows will see a handful of currencies the likes of the GBP (UK general election), EUR (ECB meeting), AUD & NZD (Chinese tariffs deadline) face idiosyncratic-type gyrations. The USD will also be injected extra volatility as it responds to the outcome of the FOMC on Wed. Therefore, it’s a week charged with plenty of fundamental events, which is why, as a trader, you want to be timely and manage your positions adequately as the success or lack thereof in your plays this week will heavily hinge on your ability to execute a plan that accounts for these risks coming up.
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 Information is gathered after scanning top publications including the FT, WSJ, Reuters, Bloomberg, ForexLive, Institutional Bank Research reports.
The US NFP headline number blows it out of the water: The US Non-farm payroll for November came at a blockbuster headline of 266K vs 180K estimate, with the unemployment rate at 3.5% vs 3.6% estimate. The average hourly earnings saw a modest 0.2% m/m vs 0.3% estimate, while the average hourly earnings y/y edged up to 3.1% vs 3.0% estimate. The labor force participation rate stood at 63.2% vs 63.3% last. As a response to the jibs data, the USD saw immediate demand inflows, while the US yields were too marked higher with the 10 year up more than 3 basis points. Also in the US, the U of Michigan sentiment for Dec came upbeat at 99.2 vs 97.0 estimate, which adds to the positive sentiment.
The Canadian job figures a reckoning moment for the BOC? The Canadian net change in employment for November came in stark contrast to the US NFP, as the reading showed a loss of 71.2K jobs vs +10K estimate, representing the biggest monthly fall in a decade. When looking at the break down, the full-time employment change came at-32.8K vs 15K estimate, while the part-time employment change was -38.4K vs +10K estimate. The unemployment rate soared to 5.9% vs 5.5% estimate. In terms of hourly wage rate, it came modestly lower at 4.4% vs 4.5% estimates. As per the participation rate, it fell to 65.6% vs 65.7% estimate, which makes the fall in the jobless rate even worse. The CAD was hammered as the market backtracks the premise that the BOC will be comfortable holding rates steady.
BOC Boss headed for the exit door by mid next year: Bank of Canada Poloz announced his decision to step down as Governor of the Central Bank in June 2020 when his mandate expires. Remember, in the last meeting, the Bank of Canada kept rates unchanged at 1.75% with Poloz & Co. sounding more sanguine. However, the employment data today at of Canada may have represented a water-shed moment for the policy-maker to potentially re-consider the rate setting as the fall was too dramatic to ignore. The bank will be monitoring very closely if this becomes a one off or develops into a trend.
Brace for high vol in GBP this week: The Pound will gather most of the attention this week as the market awaits to reshuffle portfolios based on the result of the general election on Dec 12. According to the election polls, Tories maintain a comfortable lead over Labour as the campaign enters the final days. If the reader wishes to find out who’s ahead, the Guardian offers some handy visuals via an opinion poll tracker. The Guardian notes that “the Labour have tightened the gap but the Tories still have a significant lead, while the Lib Dems and Brexit party have seen their support slump.” The results of Thursday’s UK General Election will be known in the Asian time zone on Friday.
Stories of green shoots in China continue: Over the weekend, there was further evidence of green shoots in the Chinese economy, this time in the form of a pick up in imports activity. It is the first time since April that Chinese imports rise, coming at +0.3% y/y vs -1.4% expected, while the exports came at -1.1% y/y vs +0.8% expected. The total trade balance stood at $38.73B vs $44.50B expected. While too early to speculate on how big of a deal this is to conclude that China’s economy has turned an important corner, it starts to paint a tentatively rosier picture as it follows a recovery back into expansion in last week’s Chinese PMIs (both the government and Caixin-sponsored).
The ‘risk on’ feel returns after the US NFP: US equities and bond yields both came back up in tandem to re-calibrate the environment firmly into ‘risk appetite’ conditions again. The US NFP report saw the S&P500 come a hair away from the November 28 record closing high after a rise of +0.9% on the day. As the current context stands, it should be quite negative for the appeal towards funding currencies (JPY, CHF, EUR).
China tariffs deadline by next Sunday, eyes on binary outcome: The more evidence that exist of green shoots in the US and Chinese economies, the more both US and Chinese Presidents can afford to take a ‘hands off’ approach and leverage that by not rushing into a trade deal, which as of today, still remains the overarching theme. This week will be crucial to read the semantics ahead of Sunday’s current deadline for imposing new tariffs on China. As the situation stands, the US is due to enact further tariffs worth $160bn on Chinese imports if the ‘Phase 1’ trade deal fails to be agreed upon. Watch this space closely.
Oil prices catapulted as OPEC exceeds market expectations: Oil saw a spike in prices on Friday after the leaks from the previous day turned out to be true and OPEC+ confirmed it had agreed not only to maintain existing production cuts, but on top of that, Saudi Arabia showed a commitment to cut an additional 500,000 barrels, alongside a pledge by other OPEC+ members to reduce production by 400,00 barrels on aggregate.
FOMC, ECB policy meetings eyed: Besides the UK general election (vol injector isolated to GBP), the Chinese tariffs (to reverberate across all asset classes), the market will be treated with an additional two high-stakes events, even if this time, the expectations for a change in stance are low. In the US, the FOMC meets Wednesday, while in Europe, the ECB meets the next day, in what will be Christine Lagarde’s first event at the new President, which will make the press conference a very interesting one in order to frame further her thinking process in policy terms.
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EURUSD: Still interested to play longs early in the week (mon, tues, wed) as the daily and weekly structures remain constructive. I will be watching a retest of the 100% proj as the potential termination point of the current correction lower. I want to see a deep retracement before commiting longs as the combination of upbeat US NFP numbers + the break lower in the EUR index warrants extra caution to pay deep discounted prices. See the yellow box as the ideal area I’d like to see retested before pondering the idea of longs if price action agrees. If looking to gain exposure in the pair this week, be mindful that the FOMC and ECB will cause all type of vol, so you want to manage your position and risk accordingly once these events take place.
GBPUSD: The pair has reached its 100% proj target on the daily, which can be seen by graphically by drawing a fib extension from the bottom to the top of the range that was broken last week. The level of 1.3166 is approximately where I’d have expected the rally to terminate and a period of distribution to follow ahead of the UK general election outcome. I am personally not interested to engage in positions as the ‘easy gains’ have now been made. A retest back down into the backside of the broken range top will have my attention but that view will have to be carefully managed and well time not to overlap with the UK election-inspired vol on Friday.
USDJPY: It has my attention this week as long as I can first see the market collecting long-side USD inventory at the point of liquidy sub 108.25-30. If that initial down target can initially be met, I am expecting smart money to potentially step in as counterparties buying cheap off late Joe sellers on the breakout of the support as it would trigger sell stop orders, which is the fuel large institutional order flow requires to enter the market. So to recap, looking for longs BUT only off the lows once the market managed to trip sell-side stops. Note, the market structure of higher highs and higher lows in the daily and bullish remains in place, with the added positive development of a strong US NFP, which has boosted the US yield levels. The 100% proj target reached in the USD index (equally-distributed) is another hint of a possible USD bottom.
AUDUSD: The structure off the weekly and daily on the pair is in congruence with my view that playing longs is still favored, but not at any price. It requires first a deep retracement for the daily to first enter what I’d consider to be an equilibrium point or 50% retracement. The weekly pattern shows the potential for a squeeze into higher prices in coming weeks as long as the previous low circa 6750 is not taken out. FOMC and tariffs deadline will be the next catalyst for the pair, so it’s safe to assume that once the time the market finds out about the Chinese tariffs, a reset in the AUD valuation will ensue, leading to a spike in vol subject to the outcome. If a deep retracement cane be seen earlier on the week, Mon, tues, Wed best time to trade the pair. Once the FOMC and the Chinese tariffs decision approaches, erratic moves more present.
USDCAD: I am unable to pair confluent signals when cross checking the weekly and the daily. The two timeframes are not painting the same picture, with this view exacerbated by the contrast in jobs data out of the US and Canada, which makes me be bullish fundamentally, a position that interferes with the rather bearish outlook off the daily as per market structure, and the neutral to bullish outlook I hold of the weekly timeframe. When no clear view, I stay out.
Final note, in some of the pairs where I am looking to engage in short USD inventory at a deep discount, I am accounting for the poor performance of the currency during the month of December. As the chart below illustrates, this month tends to see sellside flows dominate.
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