The pound, the euro and the Swiss franc, were the clear underperformers in the last trading day of the week as the market prices in a deeper recession in the Eurozone area as evidence reveals the manufacturing slowdown is spilling over to the services sector. Is the euro still a buy on dips technically speaking? Find out in today's report...
Quick Take
As we look back at the performance of the last week, the Japanese yen and the US dollar dominated the proceedings, with the Kiwi as an exceptional guest. In the case of the latter, it keeps drawing further buy-side interest as a sentiment play on the back of the RBNZ shift in policy by keeping its powder dry earlier this month against all odds. The story of USD strength is one seemingly characterized by the improvement of its fundamentals, as well portrayed by the pick up we saw last Friday in both the US Market PMI and the Michigan consumer confidence.
Meanwhile, the renewed selling pressure in global yields, with the US 30-year declining every single day last week, inevitably put too much of a stride to those long JPY. The drop in US yields is really telling us that the partial unwinding of the reflationary trade, one where the market envisions growth and inflation picking up in tandem. Not an easy puzzle to solve while the game of brinkmanship between the US and China on trade leads to little clarity on what’s next.
The euro, which up until last Friday, had been one of the currencies leading the G8 FX complex, failed miserably to sustain the buying interest as EZ PMIs underwhelmed as fears build-up that the manufacturing recession may be spilling over into the services sector. The Swissy was also hit by heavy selling pressure in a synchronized move with the Euro. However, the sterling was by far the worst performer after the UK manufacturing and services data shocked the market, rising the chances of a rate cut by the BoE down the pipe.
Lastly, the Canadian and Australian dollar managed to pare some of the ample losses from earlier in the week, the former boosted by better Canadian retail sales numbers., while the Aussie sentiment picked up as Trump made the right type of noise in the US-China trade saga even if there remains no meat in the bone but rather still plenty of ambiguity.
Narratives In Financial Markets
* The Information is gathered after scanning top publications including the FT, WSJ, Reuters, Bloomberg, ForexLive, Institutional Bank Research reports.
Manufacturing recession spilling over to services: The raft of PMI releases in the Euro zone left the impression that the lay of the land in the manufacturing sector remains very weak, but even more alarming, it looks like the fragile state of the manufacturing sector is now spilling over into the services domain. which is not going to contribute in any way, shape or form for the ECB to detach itself from its clear dovish stance. In Germany, where the manufacturing print improved, it was offset by a miss in the services too.
The British recessionary reality sets in: The UK PMI’s (manuf and services) came significantly weaker than expected at 48.3 and at 48.6. respectively, which downgrades further the outlook for the UK Q4 GDP figures. The Pound saw major selling pressure after the release of the figures.
Lagarde calls for deeper fiscal integration: The new ECB President Lagarde continues to call for a mix of policies, very much in line with Draghi’s view, in which fiscal stimulus play a more important role as part of the existing monetary policy framework. What’s more, Lagarde announced a strategic policy review of the ECB’s objectives and tools, the first one in 16 years, which solidifies the idea that there are some big changes in the making.
Canadian data lowers Dec rate cut odds further: Canada’s September retail sales came negative at -0.1% but not as bad as feared (-0.3%). It was the first decline in three months (after revisions). The report will add upward pressure to the Q3 growth reading this coming Friday and solidifies the notion that the BOC will not take any hasty decision in cutting interest rates in December in line with the latest speech by Governor Poloz, in which he implied that the monetary policy setting is about right at this stage while awaiting more data.
US PMI comes upbeat: The US Nov prelim Markit services PMI came better-than-expected at 51.6 vs 51.0, while the manufacturing was 52.2 vs 51.4 expected, a seven month high. The official report by Chris Williamson, Chief Business Economist at IHS Markit, noted “The flash PMI adds to evidence that the worst of the economy's recent soft patch may be behind us. Output of the combined manufacturing and service sectors rose in Nov at the fastest rate since July, spurred by improved inflows of new business.”
US consumer sentiment the icing on the cake: Adding to the positive US fundamentals, the US U Mich November final consumer sentiment index jumped to 96.8 vs 95.7 expected, which should be seen as a good sign for the underlying economy, reinforcing the idea that the Fed will be on wait and see for the foreseeable future.
Trump talks up trade as usual, stocks like it: US President Trump managed to boost stocks by massaging the semantics around the US-China trade talks by noting that a deal with China 'potentially very close'. The comments by Trump were as follows: "We have a deal potentially, very close, he wants to make it much more than I want to make it, I'm not anxious to make it.”
China makes a good-will gesture: In what looks like an attempt by the Chinese government to relax the tensions with the US by addressing one of the main sticking points in the trade talks, it announced that it will increase the penalties for those that violate intellectual property rights, while also looking to lower the thresholds for criminal punishments related to IP thefts.
German IFO eyed: The German IFO will be released today, with the market deeply fixated in the outcome of it following the miss in Friday’s PMIs. The more evidence that the manufacturing recession is spilling over into the services sector, the more sell-side pressure the EUR should suffer.
Powell takes the stage: Fed’s Chairman Powell is due to speak on “Building on the Gains from the Long Expansion” at the annual dinner for the chamber of commerce. It will be interesting to see the remarks by Powell and whether or not he can reveal some new inputs following the meeting with Trump, in which the President kept his criticism about the elevated interest rates in the US vs other developed nations.
Recent Economic Indicators & Events Ahead
Source: Forexfactory
Insights Into FX Charts
As a new week gets underway, my current exposure is nill following my latest trades on the EUR/JPY and CHF/JPY, both ending in break-even outcomes. I want to point out that in hindsight, I miscalculated the placing of my take profit target in the EUR/JPY, I was too aggressive above a level of strong supply. If I had adjusted the take profit a few pips lower, I would have collected a solid 2:1 risk reward trade. See below the trade I refer to.
After the Sunday prep, I include below the trade ideas I am pondering, which as usual, get to be re-assessed based on technicals and fundamentals on a daily basis.
The are 3 positions in particular that should volatility return early in the week, have a higher chance of being filled given the proximity of the current market pricing. I am referring to the EUR/USD, about 45 pips away from a long entry, and then CHF/JPY long and NZD/USD short, both at roughly 70 pips away from where market is exchanging hands now.
Detailing my thinking process one by one in these markets is what follows. Firstly, in the EUR/USD, I aim to be filled at 1.0975 as that’s an area where huge confluence exist. Not only comes at the juncture of a fresh demand off the daily, but the 100% measured move comes at the exact same level, further solidifying the levels as an area rich in liquidity. This is also a position that would be playing into the view of my long outlook in higher timeframes, based on a break of structure in the weekly and a bullish outside candle in October still to play out.
What caught my attention during this Sunday’s prep in the CHF/JPY market is twofold. Firstly, in a context of a bullish market structure in the weekly, I’ve identified where the convergence of fresh demand off the H4 coupled with a 100% measured move after the breakout of the range should increase the likelihood of a response in the 108.25-30 vicinity.
Lastly, a short limit order in NZD/USD. What led me to look for short exposure in this market is the following rationale: The weekly remains in a clear downtrend as per the market structure with lower lows and lower highs with resistance at 0.6480-85. If I then go down to the H4 timeframe and I draw the 100% measured move from the last 2 bracketed areas, notice the projection target for longs is somewhere between 0.6475-80. Plus, right above this level at 0.6485 we find a fresh level of supply on the H4 dating back from August 8th, with the major 0.65 psychological number adding further technical protection to place the stop.
Important Footnotes
- Cycles: Markets evolve in cycles followed by a period of distribution and/or accumulation.
- 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.
- 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.