The Daily Edge - A Complete Cross Asset Analysis

QUICK TAKE

The EUR was sold aggressively after the German PMI printed its weakest level in 10 years, which raises the alarm bells of a technical recession in the country. The poor results in the manufacturing sector out of France and the EZ as a whole were a further baggage for the EUR, as was the realization that in Germany, the sluggish manufacturing performance is now spilling over into the services sector as well. The Pound remains in a correction lower aid the tepid action in the Brexit news flows. The USD and CAD indices are both in a constructive path from a technical perspective. Meanwhile, the market prepares to embrace further volatility in the AUD and NZD as RBA Lowe speech and the RBNZ monetary policy meeting come into focus in the next 24h of trading. Lastly, the risk sensitive currencies (CHF, JPY) are both facing major resistance levels, so if holding long exposure in these currencies, be aware that in an indices basis, out performance of these currencies is not the base case.

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QUICK TAKE

The proceedings for a formal impeachment inquiry on President Trump by Democrats is officially underway after a press conference by House Speaker Pelosi, which led to a major setback in risk trades as equities and bonds yields experienced sharp falls while the price of gold jumped, in part driven by broad-based USD weakness.

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Quick Take

The confluence of receding risks of an impeachment ever making it through the Republican-controlled Senate coupled with US President Trump talking up the immediacy of a trade deal with China on the sidelines of the United Nations, resulted in a healthy recovery in risk sentiment as the abrupt reversal in the CHF, Gold depicts. The valuation of the JPY held surprisingly steady even as equities/bond yields rose. The USD and the CAD were the currencies attracting the most demand by market forces, while the European complex, without exception, was the complex most punished, especially the GBP as the UK parliament returned to business as usual, followed by the EUR, which accumulates 5 days in a row losing values in its index, with the net change in the CHF minuscule for the day but nonetheless impressive the turnaround it had. The Oceanic currencies, especially the NZD, also went through reversal days, after the RBNZ-induced gains petered out as the market still prices in further rate cuts down the road. The Aussie, in the meantime, has recovered some of its lost ‘mojo’ at a critical area of demand in its index as part of an improving risk context, which should see it better bid.

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QUICK TAKE

There is a sense of charged uncertainty in financial markets as the Trump - Ukraine saga continues with the release of a whistle-blower complaint, alongside the news that the US is unlikely to extend waivers for US firms to supply Huawei, which further depressed sentiment as reflected by the surge in demand for US bonds as a vehicle to protect one’s portfolio. It didn’t matter for the interest of the USD, which stood well bid this time, in line with the bullish outlook in the index. The most noticeable movers in the last 24h include the EUR, which remains under free-fall ever since the terrible German PMI print on Sept 23 (new yearly low in EUR/USD), and the NZD, re-invigorated by the upbeat tone of RBNZ Governor Orr, who hinted at unlikely the need for ‘unconventional’ policy tools. The Sterling, like the Euro, is also under selling pressure, as the impasse to make the next political movement on the Brexit conundrum drags on. The Aussie keeps finding pockets of tepid demand at a macro support area in the index, while the CAD has put on another decent performance but is now faced with a major daily resistance in the index. The Yen has traded in a compressed manner, reflecting the state of uncertainty in US politics, while the Swissy extended its selling bias in the last European session only to find emerging bids that have so far overwhelmed sellers since the US.

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Quick Take

The New Zealand Dollar is the main mover today as traders react to a disastrous ANZ business confidence, around a decade low. The Kiwi, alongside the Sterling, are the two currencies with the poorest performance in the last 24h, even if the British currency has landed into a pivotal daily demand imbalance area. The surprise move by BOE hawk member Saunders into the dovish camp has deteriorated the outlook for the Pound at a fundamental level, as the market prices in a bigger role from the Central Bank as an influencing factor for the currency as hints were given that the Central Bank may start being more proactive in its policy setting regardless of a Brexit resolution. The USD and the CAD continue to move in bullish tandem, with the correlation between the two North American currencies at very elevated levels. It’s important to note that at an index level vs G8 FX, the Canadian Dollar has now officially broken into fresh highs for the year. Short NZD/CAD has been a spectacular trade this year. The Swissy has found renewed buying interest, underpinned by the return of demand for Euros last Friday, alongside the sell-off in US equities as chatter builds the US may limit investments into China. The Japanese Yen remains quite indecisive at an index level, compressed right in the middle on a week-long range that must first breakout to establish a more lasting bias. This week includes volatile events to influence currency valuations, including the RBA policy meeting on Tuesday, Canadian GDP, US ISM Manuf, US NFP or Fed’s Powell speech.

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Quick Take

It didn’t matter that the pendulum swung from risk off late on Friday to a more benign profile on Monday, neither made a difference to experience month and quarter end flows, the buy-side activity in the world’s reserve currency (USD) and the Canadian Dollar continues relentless, with the latter printing fresh yearly highs at an index level, while the US Dollar is just at a stone’s throw from achieving this same milestone. But in the next few hours, the Australian Dollar is the currency set to command the market’s attention, as the RBA prepares to release its latest monetary policy decision, with the overwhelming consensus agreeing that a 25bp rate cut will be delivered. Meanwhile, on the other side of the USD, CAD spectrum, we find the NZD, EUR, CHF. The former troubled by terrible back-to-back business confidence prints on Mon and Tues, while the Euro feels the heat of a market now more decisively discounting the ECB perma QE stance, reinforced by the German CPI miss on Monday (QE linked to inflation). Lastly, the Sterling has found robust buy-side interest once again, as the currency retests the origin of its aggregate demand back on Sept 13 as shown in today’s index analysis.

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QUICK TAKE

The Australian Dollar has lost a significant amount of value on the back of a well-telegraphed 25bp rate cut by the RBA, with the one-way street bias in the Oceanic currency since the event a clear manifestation of the build up in expectations for further easing by the Central Bank. The NZ Dollar acted as a slower version replica of the movements seen in the AUD, as the market expects the RBNZ to follow suit with lower rates now that the RBA has made a move again. The US Dollar was another notable mover after a decade-low print in the US ISM Manufacturing PMI, which has led to a quick re-assessment for a lower valuation in the world’s reserve currency as bets for further cuts by the Fed in October are back on the rise. The Sterling also suffered its fair share of volatility, with the sell-side pressure predominant since the European session, only to see a major bounce of a daily demand area after a rather dubious, which later turned out to be devoid of substance, that the EU was considering time limits on the Brexit backstop. The main beneficiaries were the Yen and the Swissy as a by-product of the sell-off in bond yields globally, while the Euro also put on a meritorious turnaround day. Last but not least, the Canadian Dollar index deserves a special mention as it continues to make history by printing fresh highs (this year).

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Quick Take

You wouldn’t have guessed it was a true ‘risk-off’ environment out there as the EU-US trade war escalates by analyzing the performance of the NZD and the CHF. The former ended up as the main winner, only surpassed by the perky Yen, while the latter succumbed to a depressed inflation print out of Switzerland, which increases the risk of further negative rates by the SNB. Again, risk sentiment matters as much as fundamentally-derived flows. But the NZD performance is one I still scratch my head. The utter evaporation of longs in the CAD off fresh yearly highs is also quite an X-file to ruminate about, without much of a particular catalyst other than the fall in Oil prices, which in my opinion, does not justify the annihilation of CAD longs. The USD saw solid demand right off the gates in Europe, but gave it all back as capital flows entered in the US. Meanwhile, both the Euro and the Sterling were well underpinned by demand flows, the latter driven by the subtle positivism so far around UK PM’s plan to solve the Irish backstop. Last but not least, the most volatile currency on Tuesday, the Australian Dollar, saw slow fluctuations as the short-side interest dries out after its overextended move.

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Quick Take

This week’s back-to-back disappointments in the US ISM prints, both the manufacturing and services, have swiftly shifted the narrative from a Fed thought to be firmly sidelined this October to a rapid build up of expectations for the Central Bank to ease again when they meet in Oct 31st. A lot still can happen until then but that’s where we are at today, with the chances of a 25bp rate cut almost fully priced in (~90%). Amid this scenario, it’s no wonder that long bets in the USD have evaporated this week, with the CAD mark-down phase even more dramatic, partly due to the strong correlation between the two North American currencies, which also plays into the view that sooner or later, the Canadian economy will be hit by the slowdown in the US, which will force the BOC to ease policy in line with the global theme we are seeing. The AUD and the NZD were surprisingly strong once again, as it the market suddenly found comfort in short-term long plays as an alternative option amid the debacle of the two darlings of the Forex market until this week, referring to the USD and CAD, both at fresh yearly highs prior to Tuesday’s onset of the epic rollover. Meanwhile, the Euro found renewed selling pressure off the highlighted hourly resistance in what should be considered as a very choppy day, with the Sterling attracting solid bids as UK PM Irish border proposal gets assessed by the EU and the Irish government, with not yet an official rejection. Lastly, the Yen held firm as one of the main beneficiaries of the woes in the US PMIs, while the Swiss Franc has gone through a whole different phase, depressed ever since the major miss in Switzerland’s CPI on Wednesday, raising the alarm bells of lower rates by the SNB.

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QUICK TAKE

With the US NFP failing to act as a driver to set the next directional bias in currencies, it’s going to come down to this week’s China-US trade talks and Trump’s impeachment saga as the major catalysts to inject volatility into the Forex arena. The US NFP was seen, as the Fed funds pricing attests, as a glass half full on the back of a jobless rate that hit a 50-year low, a headline number around expectations, in a nonetheless environment of low wage growth. However, this week’s gap down in risk is a timely reminder that US-China trade negotiations are set to dominate the proceedings, with Bloomberg reporting that the Asian giant won’t budge on key sticking points. The Japanese Yen and the Swiss Franc were bought from the get go, extending Friday’s gains, which in the case of the Japanese currency, has evolved into a constructive daily uptrend. The US Dollar has been trading on the back foot with an ephemeral US NFP-induced spike unable to find follow through. The Euro remain in no man’s land. The Pound has been under pressure as of late with the key ‘hard’ questions on Brexit still up in the air as the divorce deadline approaches. Meanwhile, the oceanic currencies the likes of the Aussie and the New Zealand Dollar are starting to give up some of its upside from last week .Special mention deserves the Kiwi, which has had a solid run. Lastly, the Canadian Dollar finally found buying interest off its weekly low after a relentless selling that last for over 48h in a row since mid last week in light of the US ISM manuf/non-manuf shockers.

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Quick Take

Even if traders should re-calibrate any over-optimistic expectations of a big trade deal between the US and China this week, the market has so far treated the news that China is only willing to mid halfway from all US demands as yet again, another glass half full type of event. To draw some parallels, just as the market treated the law that forces a no-deal Brexit to be delayed as a positive development for the GBP, the same way seems to be interpreted if the US and China can agree to another truce that would avoid the next increase in tariffs scheduled for October 15, as it would remove an immediate risk out of the way, even if the underlying issue will remain. The behavior by the Yen tells us there is clearly some build up of expectations that yet another vague temporary ceasefire can be agreed upon, although by connecting the dots, one should be in high alert, as Trump has reiterated in multiple occasions that either the US pulls off a big deal with China or he’d rather have no deal at all. It implies partial complacency by Mr. Market. I mention partial because the Aussie and Kiwi were in the losing group of currencies on Monday, which you wouldn’t expect if a truce is being priced in. Bottom line, I think the movements in the Oceanic currencies are a better reflection of the dicey environment. The US Dollar, the Canadian Dollar, the Swiss Franc and the Euro were all, in a larger or lesser extent, the beneficiaries of Monday’s flows, while the British Pound is once again under tepid pressure as UK PM Johnson gets a devastating rejection of its Irish plan.

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Quick Take

As a large Chinese trade delegation readies to catch a plane en-route to Washington, the US administration is not setting the stage for the most optimal collaborative environment, a view that this time was unquestionably vindicated by the risk averse flows hitting stocks and bond yields. This demoralized outlook ahead of the trade talks took its toll on those keeping short-side exposure on funding currencies the likes of the JPY or CHF, this time both enjoying rampant demand in tandem. On the flip side, the Sterling was absolutely annihilated in early European hours as it finally transpired, via the horse’s mouth (UK PM Johnson) that a Brexit deal is ‘nearly impossible’ following a disastrous telephone call on Tuesday morning with German Chancellor Angela Merkel. The USD held firm following a neutral speech by Fed’s Chair Powell in which no hint was given that the Central Bank will be lowering interest rates again at the end of this month, despite this view plays against the market pricing. The Aussie and Kiwi have recently been characterized as stubbornly firm currencies, immune to the bad omen of this week’s trade talks. One would think these currencies are set to suffer the most from the poor prospects of a ‘no trade truce’ with China. What’s interesting is that the latest actions by China, be it via sending the largest trade delegation out of all trade talks so far, or a stronger Yuan fixing today, is sending a message to the US that they have a genuine intention to find some middle ground for both nations to find a compromise. Lastly, price action in the Euro and the Canadian Dollar was desperately uninspiring, with the former still finding solid resting offers on strength.

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Quick Take

It’s all about the US-China trade outcome, with the erratic swings in currencies a testament of how unpredictable trading around these high-stake events can be. The latest we’ve learnt reflects the confusion and state of uncertainty. On one hand, reports suggest that the US and China made no progress on key trade issues, leading to speculation that the Chinese delegation will cut the trip short to just one day of meeting with their US counterparts. On the the other hand, a report via Bloomberg said the US is considering a currency agreement with China. The instruments most intertwined with risk aversion (Gold, bonds, Yen, Swissy) caught a solid bid ahead of the Tokyo open before an epic reversal, while the likes of the Aussie or the Kiwi were marked down only to fly higher on the speculation of a currency accord. Meanwhile, in the Brexit saga, the usual dose of algo-led volatility in the Pound was observed, although the net result was an acceptance of lower levels, prove that the market is not buying into a resolution of the Brexit conundrum. The USD put on a combatant performance to reverse its early losses on Wednesday, even if it’s now under some pressure. The Euro broke higher on Wed.

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Qucik Take

The Pound stole the US-China ‘trade talks’ showdown after the UK prime minister and the Irish leader, as part of a joint statement, agreed that “they could see a pathway to a possible deal”. This is a big deal as it opens the doors for the UK to leave the European Union by Oct 31st deadline time without the need for an extension. It’s far from being baked in the cake, but the reaction in the British currency, up by over 2%, does indeed make justice to the major milestone this event in itself is to unlock the stalemate. Meanwhile, the high-beta currencies (AUD, NZD, CAD) had a field day, emboldened by the prospects of some sort of deal between the US and China; the fact that Trump is scheduled to meet Chinese Vice Premier Liu He on Friday is a testament that willingness to make a deal is an outcome strongly considered. The Euro joined the bullish party temporarily but could not sustain the rapid acceleration above the USD 1.10 round number, eventually giving back most of its gains. Lastly, the USD, JPY, CHF went through a rough patch, especially the Japanese and Swiss currencies as the favorite funding currencies to borrow at times of rampant risk appetite as it was the case on Thursday.

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Quick Take

Given the risk-off ahead of the trade talks as evidence mounted that neither the US nor China was setting the stage for a fruitful outcome, the rampant risk reversal after another truce was reached is perceived as part of a market caught wrong-footed and overplaying what’s been achieves so far. The Yen, Swissy and US Dollar were punished the most, while the Sterling remains on fire.

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Quick Take

In this guide, Ivan Delgado, Market Insights Commentator at Global Prime, introduces the most essential areas you must understand to achieve success in trading.

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Quick Take

By checking the chart attached in the report below, where I depict the performance of each individual currency vs a pack of G8 FX, what should be most immediately noticeable is the out sized fluctuations in the value of the Pound and the Yen as a by-product of the relative optimism that surrounds the US-China trade & Brexit negotiations. The rest of currencies remain encapsulated in a rather compressed manner, although by distilling the more micro movements, we can observe a well-bid tone especially in the AUD and CAD, which again, is a reflection of a market more keen on seeking out exposure into long carry trades, even if these days the positive swap in the AUD is not what it used to be. The Kiwi, surprisingly, has been a notable under-performer even if the positive rhetoric would suggest greater demand flows were to be expected. The USD and CHF, while not punished to the same extend as the CHF, not even close, have also shown bearish tendencies as of late. Lastly, the EUR has been rather uneventful in the last 24h.

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Quick Take

The Pound remains the superstar in the Forex arena as talk filters through the market that that the EU and U.K. negotiators are closing in on draft Brexit deal. We saw in the case of the overoptimism int the US-China trade deal, where plenty of details must still be ironed out, that reversals tend to occur as the dust settles and the market takes a step back to analyze the real merits of the headlines. In the case of the Brexit saga, there is still a high bar to meet in the arithmetic side of the equations. An example of the risk for setbacks is the warning from Germany that no matter the outcome of this week, Brexit will still need to be delayed until next year, which goes against the promises of UK PM. The Brexit narrative has so far assisted in the recovery of risk, even if there are still some cracks that must be addressed in the US-China trade deal, despite the disconnect by US President Trump, which is busy talking about Phase Two of the deal when even Phase One is not yet baked in the cake as China demand the removal of Dec 15 tariffs. All in all, brace yourself for wild swings in the market, especially in the Sterling, where the implied vol is at its highest in 12 months. The Yen, as the favorite vehicle to express risk conditions, will also see volatility crank up significantly, while the rest of the currencies pack should see more limited movements. The Oceanic currencies are trading on the back-foot in the early hours of Asia on Wednesday, as negative Chinese headlines related to the HK conflict and RBNZ comments weight.

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Quick Take

We are probably at the most crucial week in this whole Brexit mess ever since the saga first kicked-off more than 3 years ago. It’s therefore no wonder to see an excess of volatility in the Sterling as the market keeps re-adjusting to the positive expectations of a deal, which so far has resulted in a tsunami of buy-side pressure as momentum, algo traders pile into longs while at a more macro level, corporate and commercial hedges are unwound and market makers remove tight interval offers amid rising imp vols. It’s going to come down to the wire whether or not the UK can pull enough strings to make this new proposed deal happen. There are still a lot of unknowns and the arithmetic for the UK PM to garner enough support from MPs, let alone to get the final blessing from the EU, is certainly a tall order. The next 2 days in the Pound won’t be for the fainthearted type, that’s a given. Elsewhere, the Yen remains under pressure as optimism that a Brexit can finally happen builds up. The Kiwi and the Canadian Dollar were notable under performers too, as the RBNZ deputy governor Geoff Bascand threw a curve ball by noting reasonable prospect for the cash rate going lower. The US Dollar, which has been on a downward trend since early October, kept that directional bias intact as US retail sales disappointed (first decline in seven months). The Euro, on Brexit groovy vibes, alongside the Aussie, boosted by a strong jobs report, were the out performers, joining the King of Forex this week (GBP).

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Quik Take

If one thing characterizes the Brexit saga right off the gate more than 3 years ago is the defiance of all odds. What UK PM Boris Johnson has been able to pull off by sealing a new improved deal, even if it may not satisfy all parties, is noteworthy and borderline miraculous. Now, the DUP and SNP not being on board makes the arithmetics a near impossible endeavor for the deal to go through the extraordinary sitting of the UK Parliament this Saturday evening. At this stage, if one is to maintain exposure in GBP over the weekend, do ask yourself, do you believe in a miracle and the ongoing defiance of odds in the form of the deal getting the green light from the UK Parliament? If so, long GBP exposure sure can pay off big bucks, while on the flip side, if one can’t conceive such outcome, the GBP may be set to suffer from here on out. Either way, the important point to make is that holding exposure in the GBP over the weekend will carry extraordinary risks of ample gaps at the open of markets in Asia next Monday as interbank dealings will font-run the best quotes to enter before retailers have a chance to transact in the Pound. That’s why in most legit brokers that look to safeguard the interest of its clients, including of course Global Prime, GBP FX pairs leverage is likely to be reduced, in our case 1:33 (3% margin requirement) over the weekend in anticipation of increased volatility surrounding the Brexit process. Shifting gears, the free-fall in the US Dollar continues to be a hot thematic too, as the world’s reserve currency falls to the lowest in 2 months at an index level. The increased odds of a Fed rate cut before year-end + hopes of Brexit are the main culprits. The Japanese Yen is another unloved currency as risk on picks up. The Euro and the Swissy both found enough demand to stay underpinned in the grand scheme of things, although high-beta currencies (AUD, NZD, CAD) have received the most attention in terms of demand flows, as the market keeps acting as if what’s been achieved on Brexit over the last few weeks is meritorious enough to be long risk, independent of the outcome in the UK parliament, which would still most likely guarantee a Brexit deadline extension until next year. The Aussie’s extra boost of demand can also be explained due to the better-than-expected jobs report on Thursday, which allows room for the RBA to keep the powder dry in rates short-term.

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