Quick Take

The currency that stands out above any other is the Kiwi, with the pricing out of rate cuts since the last RBNZ policy meeting having set out the currency for a distinctive short-term trend at a time when the rest of Central Banks have been sounding unambiguously more bearish. The rest of the currency fluctuations make for a more complicated jigsaw to solve, as the USD and the JPY still enjoy macro bullish trends due to the spells of risk aversion from last week, although this week’s abrupt reversal towards appetite to seek out riskier bets has sunk the currencies as the 2nd chart shows. But no currency shows more variable and irregular gyrations than the GBP, taken hostage by the never-ending Brexit quandary. The Canadian Dollar starts to show signs of life again, with the onset of its solid performance originated off last Friday’s back-to-back blockbuster Canadian jobs report. The Aussie has also been faring quite well despite the recent blow in yet another Australian data (consumer confidence). In short, continue to pay much more attention to the developing micro trends to increase the odds of being on the right side of the flows. This is not a time to take much guidance from the macro-developing trends as the irregularity of the risk swings coupled with the absence of central bank policy divergences create an environment where flows remain king vs macro positions.

Key Narratives in Financial Markets

• The Brexit vote on the revised May-Juncker deal was rejected in the UK parliament, with the next focal point a vote on Wed about blocking a ‘no deal’ Brexit and Thursday’s vote on ‘Article 50 extension’. These outcomes are still conditioned to the EU’s position (an absolute mess!)
• Australia’s NAB and Westpac surveys, paired with the latest finance approvals, raises the odds of the RBA eventually cutting the benchmark rates. The pricing is for 2 cuts so far in the next 12 months, with the Aussie still not reflecting such pessimism in its pricing.
• The US inflation data came a tad softer than expected despite the market has definitely 'moved on' as the price action demonstrates and no longer pays close attention to the rather benign CPI readings (the era of deflationary pressures goes on). CPIs are not a driver for markets at this stage.
• US trade representative Lighthizer said to be looking for a ‘sweet spot’ to remove Canada and Mexico tariffs while protecting the US industry.
• US trade representative Lighthizer notes critical stage in the US-China trade talks, and that a solution to current outstanding issues must be addressed if a deal is to be inked between the US President Trump and Chinese President Xi.
• Saudi Arabia has proposed to extend Oil output cuts until year end according to Tass and Interfax. The news has been well telegraphed in recent weeks and should be interpreted as almost fully priced in by the market, even if residual demand for Oil still observed.

Recent Economic Indicators & Events Ahead

Source: Forexfactory

RORO - Risk On Risk Off Conditions

From a risk perspective, the soothing of fears in equities continues as the marginal gains in the S&P 500 after a midday rebound demonstrate. The 0.4% gains in the benchmark index add to the vigorous rise from Tuesday, which has resulted in both the micro and macro slopes to turn bullish. A completely different picture can be observed in the fixed income market, where if we take the US 30Y bond yield as the barometer to take the pulse of the dynamics in global yields, the trend is firmly bearish, with fresh lows printed as the US30Y breaks (marginally) the 3% level amid the seemingly global coordinated pattern of new easing measures considered by G10 Central Banks. The rapid appreciation in the pricing of US bonds (lower yields) is also weighing on the appeal towards the US Dollar, as the overall micro risk appetite mood seen in stocks underpins the sell-side bias in the DXY. The latest dynamics, therefore, are best described as ‘broad USD weakness’, which makes the direction of the equity market all the more relevant to determine the susceptibility towards risk. However, with the DXY now retesting the ECB-induced demand area amid a compressive price pattern, should the USD regain its mojo, we’d be realigning the macro ‘weak risk off’ environment with that of the micro landscape, which would not be welcoming news for risk amid a clear downtrend in yields. Overall, the dynamics are benign for risk-seeking strategies but pay attention to the next fluctuations of the DXY as they may be key to determine commodity-linked FX and the Yen.

Dashboard: Intermarket Flows & Technical Analysis

Summary: Intermarket Flows & Technical Analysis

EUR/USD: ECB-Led Liquidity Removal Retested

• The ascendancy in the exchange rate keeps playing out in line with the spike in the German vs US 10yr bond yield spread, by far the most correlated asset to the pair.
• The latest bullish market structure on the hourly keeps respecting technicals levels with pristine precision as the backside retest and rejection of the descending trendline shows.
• The upside should get far stickier as the exchange rate returns to fill offers at an inflection point circa 1.13 psychological level (origin of the ECB selloff catalyst last week).
• The short-term bullish structure, if one takes as reference Dow theory, will not be compromised until sellers can take out the latest swing low at 1.1250 and find acceptance below.
• Interestingly, the German vs US 10-yr yield spread trades slightly higher than its pre-ECB level, suggesting that the present levels appears a relatively well adjusted value area.

GBP/USD: Barrage Of Vol, Bears Take Control

• Yesterday’s UK vote was a time to throw micro technical level out of the window as vol picked up. Relatively lower levels of vol today, so expect micro techs off hourly to be more respected.
• The latest swings worth over 3c. in either direction are a clear testament of the poor liquidity and algo-induced intervention in a market fully driven by a Brexit headline by headline basis.
• The latest aggressive sell-off, combined with a double rejection off 1.3150 clearly states the bearish intentions of the market amid the defeat of UK May’s Brexit agreement in parliament.

USD/JPY: Hostile Intermarket Backdrop To Be Long Commited

• The micro slopes in the DXY and the US bond yields (US30Y as reference) indicate unfriendly dynamics for further upwards extensions.
• The macro bullish trend in the DXY paired with bullish equities underpins the downside as demonstrated by the ‘buy on dips’ mentality off the ascending trendline.
• The move up has been slow in nature, which is indicative of what’s often referred to as corrective order flow. A break of the ascending trendline may see the next bear cycle initiated with impetus justified if the DXY + US30Y bear micro slope can prevail.
• The recent directional ‘risk off’ or ‘risk off’ movements in our RORO model have led to a significant decoupling of the DXY as a key driver of this market near term.

AUD/USD: Negative Aus Data Mounts, Knocks Down Yield Spread

• The macro bond yield spread correlation runs above 50%, so the renewed sharp drop in Aus yields should lead to more negative capital flow dynamics that may weight in the Aussie.
• The level of the Aus-US bond yield spread is back down approaching its year-low of -0.75bp, time when the exchange rate touted 0.70c. It now remains considerably higher, which implies a decent sell-side value level if equities or the DXY trends can revert its current course.
• The micro backdrop is not conducive of follow-through selling as the performance of equities, DXY , Yuan continue to be an impending factor capping the downside.
• The breakout of an ascending trendline, at the bare minimum, should see the market profile permutate into range-bound conditions following the poor Westpac consumer confidence.

USD/CAD: One-Way-Street Bearish Run

Gold: Congruence In Intermarket Flows Leads To 1.3k Breakout

• The sell-off in the US yields has led to bullish dynamics in both the micro and macro slopes, further asserting the constructive technical view in the precious metal.
• The fortified position by bulls has been vindicated by the bearish backdrop in the DXY, which continues to suffer from the rise in equities and the lower yield spread advantage vs G10.
• Watch the level of resistance at 1,305.00 although judging by the latest flows derived off intermarket studies, the level looks fragile to be broken.
• For those that buy into the thesis of 2019 being a bullish year for Gold, the current levels to engage in buy-side action remain attractive with the developing structure supporting this view.

AUD/JPY: Enters Noisier Spell As Equities/Yields Diverge

• The opposite directions by the S&P 500 and the long-dated US yields since the last US session have resulted in a period of more erratic gyrations in the exchange rate.
• The latest sell-off, courtesy of Westpac’s downbeat consumer confidence, sees the exchange rate landing at a critical intersection (3rd touch ascending trendline + horizontal support).
• Buying on dips far from a clear cut as any setback in equities may see intermarket microflows re-anchored towards the bearish side, with the added caveat that selling interest derived from the latest Aus negative fundamentals may accelerate the move down.

EUR/AUD: Bond Yield Spread Rules Dynamics

• The importance of monitoring the correlation coefficient can’t be sufficiently overstated as a precursor to understanding what makes a market move. In this one in particular, it’s all about the German vs Australian bond yield spread vs Yuan or equities.
• The rough patch of fundamentals by both the EU and Australia have resulted in a market confined in a fairly tight range and market participants turning all absolute attention towards any developing yield spread advantage as the ‘leading’ indication to set out the next directions.
• The upward slope in the German vs Aus bond yield spread from a micro and macro standpoint is a clear signal that any weakness should be potentially perceived as buying opportunities.
• If bulls are to take more decisive control of technicals, a breakout and hold above the 1.60 round number (currently tested in Asia) is absolutely necessary.

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. The weekly cycles are highlighted in red, blue refers to the daily, while the black lines represent the hourly cycles. 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