In today's report, I touch on the main theme driving currencies, which has temporarily shifted from Brexit (on standby), as we await a decision to extend the deadline by 3 months, to fresh hopes of an imminent Phase One trade deal between the US and China. A cautious approach, based on the sheer amount of potential volatile events, is also something you'll notice I stress in today's write up.

Quick Take

Calmness in the currency market should be the dominant dynamics this Monday before things start to heat up as new developments in Brexit transpire, we find out the latest stance by RBA Governor Lowe or the latest inflation figures Down Under, but most importantly, the market takes a stance to the latest Fed policy decision (FOMC) on Wed. If that's not enough, market will have to contend with the preliminary US GDP Q3, BoC and BoJ policy calls, China/US PMIs, and to top it all off, US NFP on Friday. Ahead of the wild swings that are to come, the risk appetite made a comeback last Friday as the US and China edge closer to finalize Phase One of the so-called trade deal. The latest demand flows into the currency markets have benefited, in order of magnitude of gains, the Canadian, Australian and US Dollar. The Japanese Yen, despite traded in a 'risk on' environment, managed to eke out marginal gains at an index level ahead of the volatile moves that await ahead. The European currency complex (EUR, CHF, GBP) came under renewed sell-side pressure as sell-side systems dominated amid the negative vibes around Brexit as the EU delays a deadline extension until this Monday. Another currency that did not behave in congruence with the improving risk conditions was the NZ Dollar, faced with steady sell-side pressure, unlikely to last under the current conditions. 

Narratives In Financial Markets

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

Brace for a big week: It is going to be a big week for financial markets with the events ahead to provide an opportunity to reassess the valuations in G8 FX. The release of the latest monetary policy decisions by the FOMC, BOC, and BOJ will concentrate most of the attention. We will also get an update on the US GDP for Q3 alongside Friday’s US Payrolls. Sandwiched in between we have the US Manufacturing ISM, AU CPI, RBA Lowe speech, China PMIs to make sure we face a solid dose of volatile moves. 

Positive vibes in US-China trade: The risk appetite is back as positive headlines on the ‘Phase-One’ US China trade deal emerged. According to the US Treasury Dept, “China and the US are closer to finalizing some sections of the trade deal, with conversations to continue at a deputy level before principals have another call in the near future.”

US trade hawk Navarro swings upstream: In a story run by CNBC, the news outlet reports that Trump advisor Peter Navarro is fighting ‘Phase One’ of China trade deal, sources say. As CNBC notes, “Navarro has taken particular issue with the shelving of certain protections for intellectual property and technology that appeared in earlier versions of the deal, according to these three sources.” So far, no cracks have transpired that the market is aware of as per the latest positive price action. 

China reaffirms negotiations in the right direction: On Saturday, China's Ministry of Commerce said that "the technical consultations of some of the text agreement were basically completed", which reinforces the notion that the Phase 1 of the deal could be signed in mid-November. However, they also point out that other challenges lie ahead as China aims to rollback some of the existing tariffs and the removal of planned Dec 15 tariffs before the deal can be inked. China is willing to resume heavy agricultural purchases but only if the US is ready to stop the planned tariffs.

Awaiting news on Brexit, election the base case: The Sterling has been under mild sell-side pressure as the Brexit uncertainty continues with the Labour party so far blocking any attempts of PM Johnson’s December 12th election call. The opposition wants the certainty of no-deal off the table before it gives the blessing, which now relies on the decision by the EU to offer a 3-month Brexit extension to start with.

EU set to extend Brexit deadline until end of Jan 2020: According to the Financial Times, there is leaked information that an extension will be given out until January “with earlier exit available on December 1, 2019, or January 1, 2020, if the withdrawal treaty has been ratified,'' the report notes. Besides, the EU is preparing to take a hard-line stance by ruling out any further renegotiation of the deal.

Major pump in the price of Bitcoin: The digital asset surged over 30% since Friday, peaking just over $10,000 in what’s been reported as the third-largest one-day percentage move in Bitcoin history (as per Saturday’s move). News outlets seem to be pointing at a speech by Chinese President Xi Jinping to the Political Bureau of the Central Committee as the main driver of the move. The policy maker said that China needs to "seize the opportunity" of blockchain technology. "We must take the blockchain as an important breakthrough for independent innovation of core technologies," Xi said, adding that "[We must] clarify the main direction, increase investment, focus on a number of key core technologies, and accelerate the development of blockchain and industrial innovation."

German IFO fails to be a driver: In terms of economic data, Friday’s German IFO failed to act as a market mover with the business climate largely unchanged from September although some cautious optimism is warranted as we saw a slight improvement to the outlook, although in the grand scheme of things, it’s still under a context of a struggling German economy. In the US, the final University of Michigan Consumer Sentiment was revised to 95.5 from the preliminary 96.0. 

China data disappoints: China’s industrial profits fell 5.3% y/y in Sept, which represents the 2nd consecutive month of declines after Aug -2% y/y. According to the National Bureau of Statistics (NBS), the fall was mainly driven by a decline in the ex-factory price of industrial products and slowdown in sales growth. With stimulus by the Chinese authorities likely to provide a cushion, there is probably going to be even more pressure for China to get a phase 1 trade deal with the US done in order to revert this trend.

Recent Economic Indicators & Events Ahead

Source: Forexfactory

A Dive Into The FX Indices Charts

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 EUR index printed the 2nd drive down following the topping formation from last Thursday, with the close of the index at the very low of the day below a previous swing low far from encouraging as it communicates acceptance to seek out lower liquidity. Should the follow through continuation eventuate, there is limited room (roughly 0.15%) before the index is confronted with a major level of support where a cluster of bids is expected (Oct 15 low). Any recovery from the index should be seen as a potential opportunity to sell the currency on strength as the market structure holds a clear bearish outlook in the hourly.

The GBP index failed to attract strong flows as the Brexit saga remains in standby until a formal decision by the EU to extend the Brexit deadline another 3 months is confirmed, alongside a resolution to call for a UK general election for Dec 12th. The index remains in a range-bound structure, what’s also referred to as a market makers’ auction process, with liquidity providers controlling the proceedings by engaging in buy and sell-side business at the edges. A breakout of the consolidation phase through the highlighted green lines of support/resistance is projected to see a measured move of around 1% in either direction as represented by the magenta lines.

The USD index has gone up in 3 drives, with each leg being weaker in magnitude, which should be a red flag that the buy-side conviction is fizzling out. If we then combine it with the fact that the index is retesting the backside of a broken daily support-turned-resistance, at a location where the 13-d ema (baseline) intersects, a potential reversal of the index is a real risk. Expect flows into the USD to be rather limited on Monday as it’s typically a slow day of trading with institutional trading not expected to pick up until the FOMC this Wednesday.

The CAD index has been defying gravity as of late as the currency netted its 5th day of gains in a row as the demand flows going through the books remain remarkably steady. The index is now retesting the highest level of the year, with the latest macro successful rotation suggesting that another 0.15% may be in store before a more meaningful top is found. This market remains music to the ears of momentum traders, who will be looking to jump into the bandwagon of the currency. Just be aware that the value to be a buyer at these levels is absolutely appalling unless as a trader you are going to engage in quick scalping/momentum-based strategies.

The NZD index broke to the downside on Friday, with the extension finding a cluster of bids populated over NZD pairs at the 100% measured move as represented by the index. Besides, special weight must be given to the location where the price landed to, as it aligns with an area of previous resistance-turned-support as depicted in a blue line in the chart. I wouldn’t be surprised if the NZD found sustainable buy-side pressure from this level as it definitely offers a location where market participants may find value to initiate a buy-side campaign.

The AUD index, after breaking a brief consolidation area mid last week, saw selling pressure pick up, in what’s been so far a 2 legs drive down, with a pronounced rebound last Friday extending all the way up to grab liquidity at the previous swing high, where value exists to remain a seller as the last swing developed with an improved magnitude and speed. As expected, a rejection off the highs has ensued, and from here, the most likely scenario is that the index enters into a consolidation phase dominated by market makers before setting the next direction, which will be largely dependent on the fundamental events this week (RBA Lowe speech, FOMC, NFP…).

The JPY index doesn’t provide new clarity as the flows into the currency were rather limited in what remains a market firmly dominated by market makers. The overall outlook remains bearish as the sustained fall from early October has been followed by over 7 days of consolidation at the lows, with every push higher being quite shallow in nature. The market is undoubtedly in a wait-and-see mode until the major risk events this week (FOMC, BOJ, NFP) determine the next directional bias. The conditions in the JPY index are best defined as the calm before the storm.

The CHF index printed a fresh leg lower, marginally breaking into new multi-month lows before a mild rebound to end the week. The outlook for the currency, as per the market structure present, is clearly bearish, which supports the notion of rebound facing the prospects of solid sell-side interest. Let’s not forget that the latest mark down in price came in a strong impulsive fashion with a magnitude that validates it as a very convincing successful rotation lower. This is the type of dynamics that trend and momentum traders seek out to reinstate offers in this case for an eventual resumption of the bearish trend, especially after the breakout of a range.

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 trendlines 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