The euro keeps garnering further upward traction in the Asian session this Wednesday as the conviction over the boldness of the stimulus by the ECB is in recess. We have another 24h of technically-oriented EUR trading before all the bets go off when Draghi takes the stage on Thursday. The USD index, which finds itself in a value location (I elaborate on it in the charts section), may start to get more attention in what’s still arguably one of the healthiest macro trends in FX, even if the CAD is looking to challenge that status by making further strides from a technical perspective, as the index just broke out a key resistance level to print fresh yearly highs (not seen since Oct 13 ’18). The yen and the Swissy continue out of love as the risk appetite is retained, mainly courtesy of a surge in global yields this time. The effects of ‘risk-on’ conditions are failing to have the same positive repercussions in the Oceanic currencies or the Pound as compared to the dynamics from the last week, with the CAD and the EUR taking up the slack.
Narratives In Financial Markets
* The Information is gathered after scanning top publications including the FT, WSJ, Reuters, Bloomberg, ForexLive, Institutional Bank Research reports.
Repricing underway in the global bond market: There is currently an aggressive global bond repricing going on after the more constructive sound bites by Chinese officials about the Oct trade talks. Bond traders are seemingly having a change of heart by anticipating a reduced probability of a protracted global slowdown should the US and China be able to make strides when they meet again, even if it remains a tall order. Besides, the stellar bull run in bonds also justifies a run to the exits for now ahead of the major high-impact vol events to come in the next week (ECB on Thursday and FOMC next week).
Overdone chatter of ECB QE big bazooka? Bond traders may also be noticing the risks that the ECB may underdeliver on the QE front. The preponderance of evidence when accounting for the intervention of all ECBs members’ opinions on policies remains skewed slightly to the downside. While ECB member Rehn endorsed the idea that a bold QE was needed when interviews by the WSJ in mid-August, the members voicing concerns about a large QE program or refraining from it altogether, which included Weidmann, Knot, Nowotny, Lautenschlaeger, Villeroy, Muller, and Holzman do exceed in number.
China-US trade headlines sending the right sound bites: The overall risk appetite has been underpinned by further positive rhetoric from China, as a report revealed that the US and China are in active discussions to draft an interim deal. “As part of the discussions, China has offered to buy American products in exchange for a delay in a series of US tariffs and easing of a supply ban against Chinese telecommunications giant Huawei Technologies. The source said China could also offer more market access, better protection for intellectual property and to cut excess industrial capacity, but would be more reluctant to compromise on subsidies, industrial policy and reform of state-owned enterprises.” The report notes that since the leadership in China is putting the focus on the longer term, a trade deal should be seen in the context of another trade war truce to gain time.
Credible MNI carries article ECB may underdeliver: The MNI is speculating that the ECB is considering two potential options, which include a delayed start to QE, or alternatively a resumption of QE conditional on more evidence of a slowdown in Europe. The behavior of the EUR ahead of the event suggests high uncertainty indeed.
Bolton fired by Trump: The US President announced on twitter that John Bolton, US National Security Advisor, is out: “I informed John Bolton last night that his services are no longer needed at the White House. I disagreed strongly with many of his suggestions, as did others in the Administration, and therefore I asked John for his resignation, which was given to me this morning. I thank John very much for his service. I will be naming a new National Security Advisor next week.”
Crude Oil reacts negatively to Bolton’s news: Oil prices fell sharply after news broke out that Bolton was fired as US National Security Advisor as he is seen as a hawk in the Middle East, hence his departure implies the chances of military actions are reduced. The price of the Norwegian Krone was hit the worst on the Oil drop. Not so surprising should be the stubborn rise by the Canadian dollar, which continues to show sizzling fundamentals, with Tuesday’s housing data no exception, hence helping to keep the bid.
Germany sticks with balanced budget: Germany’s 2020 budget came without a fresh fiscal stimulus package after German finance minister Olaf Scholz presented the budget in parliament following some chatter that the country was looking to destine some off-balance-sheet expenditure measures as part of what was dubbed a ‘shadow budget’ should it be necessary to stimulate the economic activity. The budget is aimed to make a substantial contribution in investments but the bottom line is that the news is a negative input for the Euro, as the market had glimmers of hope that Germany may go out of its way with some extra fiscal spending to support its economy. Not the case.
The BOJ may be mulling further easing: According to Reuters, the BOJ, scheduled to meet on Sept 18-19, may be shifting closer to further easing, with the report citing unnamed sources. “The pickup in global growth is taking longer than expected, which could affect Japan’s output gap and hurt domestic demand. If risks to Japan’s economy are deemed too high, there’s a chance the BOJ may act,” one source said. Among the options discussed it’d include further negative rates or a mix of policies.
What’s next in the Brexit saga? With the UK parliament prorogued, the Brexit saga will take a respite in terms of immediate risks to assess by the market. After the Brexit delay bill and Parliament gone for one month, we seem to be now heading into a ‘quieter’ period of GBP vol until the European Council summit of 17-18 October, where an extension of Brexit is the most likely outcome, followed by a potential UK snap election afterward. In the meantime, UK PM Johnson will not be seeking an extension but instead will try to get a Brexit deal. Remember, UK lawmakers will be summoned back to their seats in parliament for the Queen’s speech on 14 October. What remains to be seen is whether or not Boris Johnson can pull off a few tricks to convince European leaders to renegotiate May’s withdrawal agreement. If there is no deal by 19 October the legally-binding enforcement of the delay Brexit bill will come into effect, which will leave the UK government no choice but to request an extension until 31 January 2020.
Recent Economic Indicators & Events Ahead
A Dive Into The Charts
The EUR index has found enough demand to set out a recovery off a confluent area of support (100% fib proj + horizontal line) and it looks increasingly likely that as highlighted in yesterday’s note, we may have a retest of the baseline ahead of the ECB meeting on Thursday. Remember, all the best will be off the moment Draghi takes the stage, which will be a time to reassess one’s positioning in line with the outcome of the event, which is expected to inject high vol as the debate of how aggressive the CBs easing measures will be remains up in the air.
The GBP index is predictably struggling to break through a macro level of resistance, where the index had already found difficulties to re-take, and it was actually the area that precipitated the Pound into its final slump in the 2nd half of August before its current relief rally. The retest of the resistance has been so far in low aggregate tick volume, which is not an encouraging sign that implies much commitment to breaking the area at this stage. It’s been 2 days in a row of back-to-back low volume taps into the level, which may look like a warning signal and reversal strategies may see it as a potential opportunity to play technical shorts. Still, as per my model, we are in long territory but far from getting an entry on the daily.
The USD index has shown little signs of life, which doesn’t change my technically constructive picture at what I consider one of the best areas to engage in USD long-side action if you are a swing trader. Personally, I’d rather wait for a re-take of the baseline as per my own trading approach, but expecting a bounce off the 50% retracement of the previous balance area is definitely another possibility that offers a decent risk-reward alternative. As I wrote in yesterday’s note, the retest of the area has come amid tapering volume, which communicates that the selling pressure is running out of juice. The three tails printed into the level should also be a hint that buyers have taken the opportunity to fill buy-orders for a potential accumulation.
The CAD index is one of the indisputable leaders alongside the Oceanic currencies as the index break through a key level of resistance, hence opening up a new horizon of upside ambitions. From a macro standpoint, the breakout is projected to offer up to 1.5% of additional gains based on a 100% proj target from the swing low with most interaction through the breakout point. The resolution into higher levels has also transpired on higher aggregate tick volume even if it remains below the historical average as the chart shows. All in all, the CAD looks the best positioned, technically and fundamentally, to keep printing gains in the short-term.
The NZD index remains in bullish territory even if the decreasing participation by buyers on the way up (tapering aggregate tick volume) is starting to take its toll on the bullish momentum. A retest of the baseline should lead to renewed interest to bid the Kiwi in light of the ‘risk-on’.
The AUD index is fast approaching a huge macro resistance that should see a slowdown in the ascend we’ve seen in the last 2 weeks. The sentiment is still in favour of AUD longs but one would think that most of the ‘easy gains’ have already been made as the index also keeps rising with lower than usual buy-side pressure as the aggregate tick volume suggests. The bottom line is that the Aussie remains a hot bullish currency at unattractive prices unless scalp-like entries.
The JPY index continues to slide further as not only the environment has turned ugly for the likes of funding currencies the likes of the yen, but speculation that the BOJ may be considering further easing is a factor that I’d expect to weigh on the currency as well. The next key horizontal level of support for the index is still another 0.9% away, which should facilitate the exploitation by the sellers of the void area currently available until the next strong demand area.
The CHF index shows no signs of abating its downward pressure with Tuesday’s attempt to bounce off the lows met with ‘sell on rally’ strategies as the large upper shadow candle depicts. There is still further leeway to the downside, roughly accounting for a -0.4% move, before the 100% proj target is met, where I’d be expecting profit-taking by CHF buyers combined with greater buy-side activity by market makers for an eventual retest of the baseline.Charts Of The Day
There were two entry triggers fired off my trading model, one to enter a long position in the S&P 500 index and another aimed to short the NZD/CAD. In the first trade, the index is ticking all the boxes in my checklist, except the fisher transform is not yet turning bullish (one candle short). However, under the context of a bullish outside print as is the case in the last H8 print, I allow myself to also enter the trade if the rest of the conditions also agree. The reason is that an outside candle under the right context (trend up) communicates an order book sweep, which to me is a strong testament of a sea change in sentiment, which ultimately is what the fisher transform helps me to decipher too. With regards to the NZD/CAD, it has absolutely all I need to see to go for a short position (break of the baseline on increased tick volume, no obstacles of SR levels, etc). The one nuance that I am aware of is that I will be trading two bullish indices, which is why I must limit my risk to half what I’d normally put on under the circumstance where I am trading a strong vs weak currency index.
- 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