Quick Take
The Aussie and to a lesser extent the New Zealand dollar, were the best performers, followed closely by the euro. It was a bit of a disjointed affair, as even the JPY performed relatively well against its peers despite the persistent rise in equities, taking the S&P 500 as our barometer (up 0.6%). The sterling succumbed to the lack of progress between the UK government and the DUP to be able to re-table the divorce deal. Meanwhile, the Canadian dollar remains under clear sell-side pressure amid a substantial deterioration in the Canadian bond yields, now inverted up to 10y. The USD traded mixed for the day awaiting further stimulants.
Key Narratives in Financial Markets
- Markets on hold ahead of Brexit developments and the FOMC monetary policy minutes.
- UK Speaker prevents UK PM May to re-table the same divorce deal that was rejected last week, hence no further meaningful vote can proceed unless changes made.
- The negotiations to get the DUP on board by adjusting to some of their backstop demands so that an amended divorce deal can have another vote are still ongoing. However, an increasing number of reports suggest May is failing in efforts to yield any substantial results, which will lead to Theresa May not risking a third meaningful vote (not even allowed).
- UK junior Brexit Minister notes that if EU doesn’t grant an extension to the UK after this month’s Brexit deadline, the country will leave with no deal.
- Indications of the complicated state of affairs in the ongoing US-China trade deal negotiations keep emerging, as the South China Morning Post reports that a signing ceremony to ink a potential agreement by the US and China President may not take place until June, assuming they do hash out a deal.
Recent Economic Indicators & Events Ahead
Source: Forexfactory
RORO - Risk On Risk Off Conditions
The rampant mood in equities has continued to build up, taking the S&P 500 into new yearly highs as technicals in what remains a fairly well structured and orderly bullish stepping formation dynamics. The micro and macro slopes are reflective of a market in buy-only mode. When it comes to US yields, the long-dated 30-year is going through a period of very low vol after finding a floor circa 3%, with the low activity leading to the micro and macro slopes turning more flattish ahead of the FOMC. Meanwhile, the DXY appears to have found enough buying interest to potentially setting up a short-term range as it attempts to recovery off 96.40, allowing the micro slope to revert back to neutral terrain. Overall, the current market conditions are still best defined as USD weakness in a context of risk appetite, but be aware that we really are in a holding pattern ahead of vol events later this week.
Dashboard: Intermarket Flows & Technical Analysis
Summary: Intermarket Flows & Technical Analysis
EUR/USD: Hourly Bullish Cycle In Place
- Demand imbalance through the European session leads to the formation of a new up-cycle even if the conviction half-hearted judging by the abrupt rejection of 1.1350 resistance.
- Any pullback should find a cluster of bids touted between 1.1315-25 (Friday’s POC + trendline) ahead of the next critical support at the 1.13 area.
- The reversal lower in the German vs US bond yield spread does not promote further rises by the end of business in NY as the micro slope fails to keep the upward momentum.
- The volume profile structure shows a single distribution-type formation with the price closing below Monday’s POC (highest volume accumulation), suggesting a neutral/rotational bias.
GBP/USD: Trapped In A Range Until New Catalysts
- For 3 days in a row, GBP has been confined in a relatively tight range between 1.3210 and 1.3330 with market makers dominating the edges amid lack of fresh Brexit news to latch on.
- Other than the micro slope in the UK vs US bond yield spread, which has turned south, the rest of intermarket indicators (micro/macro DXY + macro yield spread) support the bullish bias.
- Vol is set to pick up considerably from March 21st when the Brexit Summit gets underway. For the next 24h, as dynamics stand, engaging at the extremes of the range with the synchronicity of intermarket flows in one’s favor looks like the best course of action.
- The only event, outside Brexit headlines, that should bring some minor injection of vol to the sterling, is the publication of today’s UK employment report.
USD/JPY: Testing A Key Ascending Trendline
- Monday’s volume profile structure (P shape) has trapped longs, with the close at the lows of the day set in motion a flurry of offers to test a key level to the downside.
- … that key level is the third touch of an ascending trendline, which makes the context of the pullback still to occur under a relatively benign price action structure.
- Unfortunately for the interest of buyers, the intermarket flows are far from supportive due to the bearish slopes in the DXY and US yields (both micro and macro).
- The rise in equities still provides a respite that should see residual pockets of demand at key levels of support, but most likely to lack the impetus to shift the momentum unless we start to see higher US yields backing the trend in equities for a return of ‘true risk on’.
AUD/USD: Hourly Bullish Trend Still Underway
- The upthrust bar breaking the 71 cents market has validated a new up-cycle in the hourly chart, with a movement quite strong in magnitude and velocity as stop got triggered it was reported.
- The area of support between 0.7090/0.7100 has become the first potential accumulation point for buyers to re-group for a retest of the most recent swing high.
- If you are looking to engage in long-side action, wait for at least 2 out of 3 correlated instruments to be in alignment. Currently, equities support the uptrend, bond yield spread does not, so the make or break determiner should be the DXY + yuan indicator.
- Monday’s volume profile structure resulted in a single distribution with the price closing around the same level as the POC. It still provides credence to be a buyer.
USD/CAD: Range-Bound Conditions Amid Lack Of Catalyst
- Yo-yo type movement in the last 4 days of trading, with a well-defined range between 1.3290 and 1.3370 with most of the volume concentrated at the midpoint of 1.3330-40.
- The intermarket analysis fails to support the upward bias given the bullish trend in Oil and the bearish momentum seen recently in the DXY. On the flip side, the US-CA bond yield spread does promote higher prices, which may transpire if the DXY can recover its footing.
- Monday’s volume profile formation shows a single distribution, which is encompassed within a wider range, so all signs are pointing for further rotational dynamics until the FOMC.
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