Do you wonder what's driving the attractiveness to be long the Aussie Dollar? What are the most fragile currencies as the trading environment stands? Are you prepared for the key risk events that will drive the currency market today? All the answers and many more can be found in today's report...

Quick Take

The Australian Dollar is the top performer as technicals, following a macro breakout of resistance at an index level, and fundamentals, with the US-China trade deal Phase One looming near, aligning as congruent factors supporting the bullish movement seen. The fact that RBA's Governor Lowe didn't sound ready to ease policy in the near term as part of a speech on Tuesday, coupled with in-line Aus CPI numbers, has also benefited the AUD. We shall not forget that 'true risk on' appetite as dominant market dynamics has also been a major contributor to see the outflows in safe-havens (bonds, gold) head into the appeal of the AUD. It means JPY, CHF longs remain the side most vulnerable to further losses, even if a pause and full reassessment of the risk profile is due later on Wednesday as the Fed releases its latest policy decision, with a 25bp rate cut almost fully priced in (94%). This will make the language used by Powell in today's presser critical as the market will be fixated in whether or not more cuts are ahead. The US Dollar is trading quite weak heading into the event as the combo of 'risk on' and a re-adjustment of dovish expectations for this month have taken its toll on long exposure. A currency that saw a major long-liquidation after an impressive run ahead of another key risk event today (BOC) is the CAD, with longs still licking their wounds after a rapid depreciation. On the Sterling front, the overall sentiment was bullish on Tuesday as the UK parliament finally voted in favor of a General Election for Dec 12th after the Labor party. Lastly, the NZD traded in an erratic behavior, first boosted in Asia only to give back all its gains as the New Zealand Treasury said risks exist that the S&P ratings agency could remove their positive ratings outlook on the country, eclipsing the news that the NZ Superannuation Fund is reviewing its FX hedging policy (NZD positive). 

Narratives In Financial Markets

* The Information is gathered after scanning top publications including the FT, WSJ, Reuters, Bloomberg, ForexLive, Institutional Bank Research reports.

UK general election on Dec 12th: The UK parliament finally voted in favor of a General Election for Dec 12th after the Labor party caved in and backed it up. An opposition motion to hold it on December 9th was rejected. As the polls stand, the bookies see the Tories as favorites at the margin, with the probabilities of an outright majority just short of 50%. The Sterling has printed gains, as the market sees a Tory-controlled parliament with a majority as the Goldilocks scenario for the Sterling as BOJO will have it easier to push his Brexit agenda and pass it by the new deadline date of Jan 31st. 

RBA's Lowe does not feed into the dovish rhetoric: RBA’s Lowe, in a much-awaited speech, said negative rates are far from the base case to be expected down the road, while not fully closing the door to QE. Lowe added that so far rate cuts have achieved positive effects. Lowe did not reveal any angst to keep lowering rates in the near term by another 25 bps again, and as a result, the AUD was largely underpinned. Lowe highlighted an aging population, increased risk premia and weak productivity growth as the main culprits for the excess in savings. “These structural factors have had a powerful influence on the setting of interest rates over recent times,'' Lowe said.

US-China trade deal getting closer: According to a White House spokesperson, in what’s simply a reinforcement of the optimism around an imminent trade deal between the US and China, said both countries’ representatives are working through the final text of Phase 1 scheduled to be signed in Chile mid-November. As a mild setback, Reuters reported that the signature ceremony at the APEC meeting in Chile is not a given due to potential timing constraints rather than a lack of commitment on either side.

Risk of S&P downgrade by NZ? The New Zealand Treasury said risks exist that the S&P ratings agency could remove their positive ratings outlook on the country, leading to a retracement on the NZD. The news counteracts the positive news of NZ Superannuation Fund reviewing its FX hedging policy, which may imply less buying of foreign currency.

US consumer confidence a tad lower: The US October Conference Board consumer confidence came at 125.9 vs 128.0 expected, with the expectations component also declining to 94.9 vs 95.8 prior. "Consumer confidence was relatively flat in October, following a decrease in September," said Lynn Franco, Senior Director of Economic Indicators at The Conference Board. "The Present Situation Index improved, but Expectations weakened slightly as consumers expressed some concerns about business conditions and job prospects. However, confidence levels remain high and there are no indications that consumers will curtail their holiday spending."

Australia's Q3 CPI flat-lined: The Australian Q3 CPI came at 0.5% q/q vs 0.5% expected, with the yearly reading at 1.7% y/y vs expectations for 1.6%.  The core inflation weighted median was 0.3% q/q and 1.2% y/y, which represented a very mild bleep lower vs the consensus expectations. Overall, the data does not put extra pressure on the RBA to ease further near term, and as a result, the Australian Dollar was immediately bought up over 10-15 pips to continue its bullish momentum this Wednesday in Asia. 

FOMC, BOC, US GDP Q3 eyed: The major event in the next 24h is without a doubt the Fed meeting outcome at 2 pm Washington time Wednesday, with the market expecting a 25bp rate cut as the base case, while the language used by Chairman Powel will also be closely monitored by the market. The Australia CPI figures (just released), the BoC monetary policy decision (where a neutral stance is still expected) and the US flash Q3 GDP (print of 1.6% is the consensus vs 2% in Q2) are also due.

Recent Economic Indicators & Events Ahead

Source: Forexfactory

A Dive Into The FX Indices Charts

The EUR index, faced with a sticky level of support, rebounded strongly to revisit the neutral midpoint of its long-held range, also breaking the prior swing high in what must be understood as a micro-break of the bearish structure. The focus has now shifted for an eventual target of the topside of the established range, even if a retracement is necessary for value to exist as the index trades at in a rather elongated fashion after the thrust movement off the lows.

The GBP index appears en-route to target higher levels within the content of range-bound conditions, now heading into its second week of a market truly dominated by market makers on the edges. That said, the shallow retracement after the sharp rise in mid-Oct is a clear testament that the sentiment around the GBP, in the grand scheme of things, is bullish. It’s going to take a resolution away from the range to see the next projected target (100% measured moves) come into play, drawn in magenta lines.

The USD index has come under renewed sell-side pressure, landing into a level of support in the hourly chart where a mild bounce has ensued. If one is to keep exposure on the USD, be mindful that the amount of volatility the USD is about to experience will make any technically-derived views rather irrelevant until the FOMC meeting is out of the way. The daily picture is still rather bearish in the index as it keeps trading below its 13d ema baseline.

The CAD index failed miserably at the daily resistance area, selling off very sharply in what I interpret to be a long-liquidation of an overly bullish market. The price landed at an area of former resistance-turned-support. As in the case of the USD, the Canadian currency will also be faced with a high-volatile event in the form of the BOC policy decision. What this translates into is that having CAD exposure ahead of the event, especially if your outlook is short-term, becomes a riskier proposition. Intraday smart money has a tendency to get involved once they are able to analyze and react to the event rather than caught wrong sided ahead of it.

The NZD index has transitioned into a period of consolidation after equal double highs and lows in the last 48h of trading. An impulsive move to the upside was counteracted by an equally fast move back down, with the edges of the range dominating the proceedings by market makers. Looking for the next move in either direction to be to the tune of 0.5% as per the 100% measured move projection. The fact that by mid-Oct we had shorts caught wrong sided before an explosion of price to the upside, makes me think that the current pullback in the last few weeks is part of a manipulative campaign to take prices much higher from here.

The AUD index has cleared a huge level of macro resistance, setting the ball rolling for a fresh macro target over 0.5% higher from the breakout point. So far, the AUD has run up about half that distance before encountering an interim top. The outlook for the AUD has improved considerably and is clearly bullish from here on out, with any dips seen as opportunities. The fundamental landscape, with RBA Lowe reaffirming a more patient stance on rates, alongside Phase One of the US-China trade deal about to be signed, underpinning the currency too.

The JPY index continues to consolidate at the lows with very limited flows going through the books as one would expect ahead of the FOMC, with the JPY having a tendency to be the currency that moves most wildly to the event due to its risk on-off profile. The outlook for the currency remains firmly bearish with no technical evidence at all to hold longs. What we’ve seen in the last 2 weeks is the transition into a period of distribution, which when broken, should lead to a move of about 0.7% based on the 100% measured move projection.

The CHF index has entered a period of consolidation in the hourly chart as depicted by the double bottom, followed by a second rejection of the most recent swing high. The outlook for the index remains firmly anchored to the downside as per the recent market structure of lower lows and lower high, very much congruent with an environment of ‘true risk on’. Any bounce should be seen as an opportunity to reinstate short positions at key resistance levels, which is by far the pattern paying the most dividends since the risk appetite picked up in mid-Oct. 

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