Ivan Delgado | Oct 31, 2018 11:04PM ET
Authored by Ivan Delgado, Head of Market Research at Global Prime. The purpose of these institutional-level chart studies is to provide an assessment of the market conditions for the next 24h of trading in order to assist one’s decisions on a regular basis. It, therefore, aims to anticipate the next cycle structures based on volume activity, order flow, correlations, and levels. The analysis is equally relevant for intraday, swing and position traders, as I break down the charts from the weekly down to the hourly.
Risk sentiment model: DXY and equities move up in tandem
The breakout through the descending trendline in the S&P 500 was materialized in the first hour of cash trading. That was the missing piece to confirm our thesis of a constructive risk environment, encapsulated within a USD strength context, as per the active up-cycles in the DXY and US yields. It was the last day of the month, so the market had to contend with FX rebalancing flows, which would always make this day more unpredictable in nature.
We should now be reverting back to a clean slate in terms of risk sentiment dynamics, hence judging by the cycles I am seeing, I expect JPY crosses to remain on the backfoot, while the USD should continue to find grateful buyers on dips. The present context would still justify European currencies (EUR, GBP, CHF) to trade heavy against the likes of commodity FX as the recovery in equities extends, but the positive Brexit headlines in the last 24h are likely to distort this view.
EUR/USD: USD buy-side flows confirm fresh hourly down-cycle
Correlations & Volumes: The risk of an exhaustive move is fading as the latest 24h of tick volume activity show an increase in commitment, which reinforces follow-through downside risks. The absence of profit-taking at 5pm NY is another negative input, as it is the fact that sellers keep buyers trapped on the wrong side of the market judging by Wednesday’s POC (1.1344). In terms of correlations, the German vs US 5-year yield spread keeps trending lower, just a stone’s throw from claiming new multi-year lows. Meanwhile, the other key driver (Italian premium vs German) is consolidating, which reduces the risk of acting as a key driver.
Drivers & Risk events: The Euro continues pressured via lower growth expectations in the EZ (poor showing in the latest EZ or Italian GDP), which raises the risks of a more cautious ECB. Besides, the Italian and Brexit conundrum is also weighing. In the last 24h, positive USD flows on month-end rebalancing and upbeat ADP employment data anchored the currency further, as does the USD strength environment highlighted above. It’s a public bank holiday in both France and Italy on Thursday. In the US we get the US manufacturing PMI.
GBP/USD: First validated swing high in over 2 weeks
Correlations & Volumes: The sequence of volumes fails to provide sufficient intentional clues in the last 24h. On the contrary, the depressed UK vs US 5-year yield spread valuation makes a test of 1.2930 a compelling opportunity to consider a re-engagement in short-side action all else being equal. Considering the USD strength environment we are in, it should assist this thesis.
Drivers & Risk events: Renewed Brexit optimism is behind the recovery in the Pound after UK’ Brexit Minister Raab put a date (Nov 21) to a potential deal with the EU. In the coming 24h, UK manuf PMI and the BoE monetary policy are scheduled, while in the US we get the US manufacturing PMI.
USD/JPY: Risk profile and daily structure suggest dip-buying
Correlations & Volumes: Wednesday’s low volume bearish candle is far from being a concern for the interest of buyers. Besides, the risk environment should still see the market emboldened with an appetite to gain short yen exposure, especially amid up-cycles in the DXY and US yields, leaving aside higher equities. It’s a perfect scenario to see yen crosses retaining the buy-side bias.
Drivers & Risk events: On Wednesday, the Bank of Japan kept its status quo and therefore acted as a non-event. The Yen seems to have benefited from month-end flows but nothing else to chew here. The upward bias is further supported by Wednesday’s positive ADP (NASDAQ:ADP) number out of the US. Today’s US ISM manuf PMI is the next risk event to monitor. I’d personally be looking to buy the dip.
AUD/USD: Stubborn Aussie stuck mid-point of the daily range
Correlations & Volumes: As I reiterated several times, as correlations stand, one shouldn’t expect the Aussie to be an outperformer by any means under this environment. Yes we have equities heading higher again, but gold is selling-off (AUD -), DXY is up (AUD -), the Yuan keeps weakening towards the USD/CNY 7.00 mark (AUD-) and AU vs US yield spread remains depressed (AUD-). No much to read from volumes in the last 24h.
Drivers & Risk events: The reduction in EM volatility alongside potential macro bids ahead of 0.70 are elements allowing the Aussie to stay better bid. The failure to go lower even as equities got wreaked havoc in recent weeks has been a strong statement of the market’s determination to hold the ground above 0.70. Australian trade balance came better than expected for Sept, giving a boost to the Aussie once again early Thursday. Later in the US, the ISM manuf is the next key risk to monitor.
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