Turkish Lira’s Plunge Throws Institutional, Economic Challenges Into Sharp Focus

Scope Ratings has ranked Turkey as among its “Risky-3” out of a sample of 63 economies most at risk of a balance of payments crisis, given the lira’s history of significant volatility and the high proportion of government and private sector debt denominated in foreign currencies.

The rating agency downgraded Turkey’s credit ratings to B+ from BB- on 10 July to reflect growing risks to external sector stability and deterioration in the governance framework including risks stemming from long-run foreign-exchange reserve depletion. The lira trades presently 33% below an August 2019 peak against the dollar. The Turkish currency also hit fresh all-time lows against the euro this past week, before making up some losses after evidence of policy tightening.

Early signs of reversal in the direction of policy tightening, but unlikely enough

Friday’s closure of the one-week repo financing window forces central bank funding of banks to the costlier overnight window – an effective 150bp hike. Next, regulators are expected to ease an unorthodox “asset ratio”, effective since 1 May, which has compelled lenders to raise lending activities unsustainably. Lira lending from the consolidated banking system rose 45.9% YoY as of July. The banking supervisor this week, moreover, announced easing of some rules that restrict foreign banks from access to lira liquidity, under strict conditions in regard to the use of such liquidity.

“So, we’ve now sort of returned to the 2018 lira crisis response playbook of backdoor rate hikes via shifting funding between central bank windows, to avoid unwanted attention for central bankers from President Recep Tayyip Erdoğan were policy rates themselves hiked, whilst, moreover, easing foreign exchange reserves deficits via funding from foreign sources like Qatar,” says Dennis Shen, lead analyst on Turkey at Scope. “Unfortunately, what ultimately eased the crisis in 2018 more tangibly was a return towards conventional policymaking and a significant hike in the policy rate itself.”

“In consideration of elevated inflation of 11.8% in July, Turkey’s real policy rates remain among the world’s lowest. However, a rate hike will not be straight-forward given politicisation of the central bank and interventions from the President, who has a stated preference for low rates. A significant rate hike would be helpful in stabilising current exchange rate devaluations; however, tightening would also come at some price to Turkey’s fledgling economic recovery.”

The lira’s recent weakness against the dollar and other major currencies comes even as global risk sentiment has improved since a March ebb, which should otherwise support emerging market currencies.

Lira’s decline exacerbates macro imbalances

“Deterioration in the value of the lira not only raises inflation, but also undermines debt sustainability given 50% of Turkey’s central government debt denominated in foreign currency, up from 27% in mid-2013,” says Shen.

“Any sustained deterioration in the exchange rate can spiral increasingly easily into a problem for the government’s future servicing capacity of its public debt,” Shen says.

Turkish general government debt is set to rise to more than 40% of GDP this year, up from a comparatively low 28% in 2017. Non-financial companies have a significant net foreign currency debt position of USD 165bn as of May 2020.

The impact of the Covid-19 pandemic in curtailing Turkey’s income from travel and tourism receipts impairs private sector foreign exchange reserve liquidity as well as the current account – the latter which returned to a deficit of just above 1% of GDP in the year to May 2020.

Inadequate foreign exchange reserves have been diminished further

Ankara has diminished what were already inadequate foreign currency reserves this year in trying to defend the exchange rate. Gross official reserves (including gold) fell to USD 90.2bn as of 31 July, compared with USD 105.7bn at the start of 2020.

“However, we need to net out central bank foreign-exchange liabilities to domestic banks and, importantly, bilateral short-term foreign-exchange swap liabilities.”

FX swaps stood at a record high USD 54.4bn at end-June as the central bank has entered such arrangements with domestic financial institutions, including state-owned banks, to artificially elevate gross reserve levels. Swap-corrected net reserves declined to a record low of negative USD 32.5bn in June, a turnaround from positive USD 18.8bn at end-2019 and USD 56.0bn at a 2011 peak.

“Absent the roll-over of such swap arrangements, the country’s reserves are negative – in other words, Turkey’s balance of payments is precarious unless the country’s underlying economic and external sector weaknesses are swiftly corrected,” says Shen.

For a look at all of today’s economic events, check out our economic calendar.

Dennis Shen is a Director in Sovereign and Public Sector ratings at Scope Ratings GmbH. Matthew Curtin, Senior Editor of Economic Research at Scope, was a contributing writer for this comment.

Dollar Bounces, Gold Slips, while Equities Hold Their Own

In the emerging market space, the liquid and accessible currencies, like the Turkish lira, Mexican peso, and Russian rouble, are down the most. The lira has fallen 1% after intrasession volatility that pushed it to a record low against the euro yesterday. That seems to be the source of the pressure on the lira against the dollar.

The South African rand is among the weakest among emerging market currencies today even though the IMF approved a $4.3 bln loan, the most granted so far to assist in combatting the virus. Despite the correction in the foreign exchange market, equities are mostly firm. In the Asia Pacific region, only a few markets could not sustain gains.

Japan, Taiwan, and Australia were among them. South Korea led the region with a nearly 1.8% gain. Europe’s Dow Jones Stoxx 600 is up almost 0.5% after falling for the past two sessions (~2%). US shares are little changed. US bond yields backed up yesterday, with the 10-year yields popping back above 60 bp. This exerted upward pressures in Asia and Europe. Gold reached $1981 before the profit-taking pushed it to about $1907 from where it is recovering. September WTI is little changed around $41.50 a barrel.

Asia Pacific

China is resorting to local lockdowns to combat the new outbreak in the virus. The 61 cases reported Monday were the most in four months. Separately, New Zealand became the latest country to suspend the extradition treaty with Hong Kong. That means that of the intelligence-sharing Five Eyes, only the US has not done so, though it has threatened to do so.

India has banned almost 50 Chinese apps to largely check the workaround the 59 apps banned last month. Another 250 apps are under review. India has cited threats to user privacy and national security. This is a new front in the confrontation with China. The US and Japan are considering their own bans on some Chinese apps.

The dollar is in a quarter of a yen range on either side of JPY105.45, as it is confined to yesterday’s range. The upside correction does not appear over, and the greenback could test previous support and now resistance near JPY106, where an option for $600 mln expires today (and a $1.8 bln option expires Thursday).

The Australian dollar is little changed as it moves within the $0.7065-$0.7180 range that has confined it for around a week now. It has held above $0.7115 today, but it may be retested. The PBOC set the dollar’s reference rate at CNY6.9895 today, nearly spot on where the models suggested. After falling to a four-day low near CNY6.9870, the dollar recovered back above CNY7.0. China seems intent on not allowing the US to get an advantage by devaluing the dollar, something that President Trump has advocated. A stable dollar-yuan rate in a weak dollar environment means that the yuan falls against the CFETS basket. Against the basket, the yuan is at its lowest level in a little more than a month.

Europe

News from Europe is light and the week’s highlights which include the first look at Q2 GDP (median forecast in the Bloomberg survey is for a 12% quarterly contraction), June unemployment (~7.7% vs. 7.4%), and the first look at July CPI (median forecast is for a 0.5% decline for a 0.2% increase year-over-year) still lie ahead.

Today’s focus is mostly on earnings and bank earnings in particular. European banks are being encouraged to extend the hold off of dividend payout and share buybacks that were first introduced in March. This may be worth around 30 bln euros. The UK is fully aboard too. In terms of loan-loss provisioning, European banks are expected to set aside around the same amount as they did in Q1, which was about 25 bln euros. In comparison, the five largest US banks have added a little more than $60 bln in the first half to cushion sour loans.

Fitch lowered its five-year growth potential for the UK from 1.6% to 0.9%. It also took EMU’s potential to 0.7% from 1.2%. This could weaken the resolve of asset managers, where industry surveys suggest a desire to be overweight European stocks and the euro on ideas of economic and/or earnings outperformance. That said, the number of analyst upgrades has surpassed the number of downgrades in Europe for the first time this year.

The euro reached $1.1780 yesterday. As the momentum stalled in Asia, some light profit-taking has been seen that saw it briefly dip just below $1.17 in early European turnover. Intraday resistance is seen near $1.1740-$1.1750. In the recent move, the session high has often been recorded in North America, and we’ll watch to see if the pattern holds today. The market may turn cautious ahead of tomorrow’s outcome of the FOMC meeting.

Sterling poked above $1.29 yesterday for the first time in four months. It made a marginal new high today (~$1.2905), but it too is consolidating. Support is seen in the $1.2830-$1.2850 area. As the euro was trending higher against the dollar yesterday, it also rose to about CHF1.0840, its highest level here in July. However, today’s consolidation has seen the euro slip back to around CHF1.0775. Look for it to find support above CHF1.0760.

America

The US reports house prices, Conference Board consumer confidence, and the Richmond Fed’s July manufacturing survey. Even in the best of times, these are not the typical market movers. The focus instead is three-fold: corporate earnings (today’s highlights include McDonald’s, Pfizer, and 3M), the negotiation over the fiscal bill, and the start of the FOMC meeting. Canada has not economic reports, while Mexico’s weekly reserve figures are due. It continues to gradually accumulate reserves. They have risen by about 4.5% this year after a 3.5% increase last year.

The Economic Policy Institute estimates that a cut in the $600 a week extra unemployment insurance to $200 a week will reduce aggregate demand and cut the number of jobs that were projected to be created. It expects a loss of about 2.5% growth and 3.4 mln fewer jobs. After this week’s FOMC meeting and the first look at Q2 GDP, the US July employment report is due at the end of next week.

It is one of the most difficult high-frequency economic reports to forecast. Still, the outlook darkened after last week’s increase in weekly initial jobless claims, which covered the week that the non-farm payrolls survey is conducted. Another increase, which is what the median forecast in the Bloomberg survey expects, is only momentarily going to get lost in the excitement around the GDP report.

The relatively light news day allows us to look a little closer at Mexico’s June trade data that was out yesterday. Mexico reported a record trade surplus of $5.5 bln. Yet, it is not good news. Mexico is hemorrhaging. The IGAE May economic activity index, reported at the end of last week, showed a larger than expected 22.73% year-over-year drop. The 2.62% decline in the month was nearly three times larger than economists forecast. With the virus still not under control, the government’s forecast for a 9.6% contraction this year is likely to be overshot. The record trade surplus was a function of a larger decline in imports (-23.2%) than exports (-12.8%).

Auto exports are off more than a third (34.6%) this year, to $47.5 bln. Other manufactured exports are down 3.4% to $113.8 bln. Petroleum exports have fallen by nearly 42% in H1 to $8.0 bln. Agriculture exports edged up by 7.3% to $10.5 bln to surpass oil. The peso’s strength reflects not the macroeconomy but its high real and nominal interest rates in the current environment. Yesterday, the dollar fell below MXN22.00 for the first time this month. The June low was near MXN21.46.

The US dollar initially extended its losses against the Canadian dollar, slipping to CAD1.3330, just ahead of last month’s low (~CAD1.3315) before rebounding to almost CAD1.3400. The upside correction could run a bit further, but resistance in the CAD1.3420-CAD1.3440 area may offer a sufficient cap today. The greenback found support against the Mexican peso near MXN21.90 and bounced back to around MXN22.07. Resistance is seen near MXN22.20. The peso is up about 4.5% this month, but within the region has been bettered by Chile (~+6.75%) and Brazil (~+6.15%). The Colombian peso’s almost 2..2% gain puts it in the top 10 best performing emerging market currencies so far this month.

For a look at all of today’s economic events, check out our economic calendar.

Central and Eastern Europe: Monetary Policy is easing Covid-19 Capital Market Disruption

“The capacity to implement bond-buying programmes and interest-rate cuts by central banks has varied considerably across the Central and Eastern Europe (CEE) region, while government borrowing rates have risen in some countries with elevated external-sector and public-finance risks alongside observation of sizeable portfolio outflows,” says Levon Kameryan, an analyst at Scope and author of a new report on CEE capital markets developments.

Overall, in the case of euro area CEE countries, low borrowing rates and investors’ relatively sanguine sovereign risk assessments reflect actions undertaken by the ECB – notably the large-scale asset-purchase programmes – in addition to the euro’s reserve-currency status. 10-year yields for euro area CEE governments increased only modestly so far in 2020 at currently around 0.6% for Slovakia and Slovenia, and below 0.3% in the case of the three Baltic states.

Monetary easing in non-euro EU CEE has abetted fiscal stimulus programmes

Among non-euro area EU CEE, large-scale fiscal stimulus packages in Poland, the Czech Republic and Hungary are backed by central bank policy responses that mitigate the tightening in financial conditions. Quantitative easing by the countries’ central banks might amount to as much as 10% of GDP in the case of Poland and 3% of GDP for Hungary.

The National Bank of Poland also reduced its reference rate by 50bps twice this year to 0.5% effective from April. The Czech central bank, on the other hand, has not announced quantitative easing so far, but has reduced its benchmark two-week repo rate three times to 0.25% by early May, from 2.25% in February. Hungary’s local-currency 10-year yield has reverted to January levels at 1.9% at time of the writing, after picking up to 3.3% mid-March. On the other hand, Czech and Polish yields of 0.8% and 1.3% respectively are currently somewhat lower than they were in January pre-crisis.

In the region, Romania, however, has less room for a bolder policy response due to elevated exchange-rate risk given a high proportion of foreign-currency public- and private-sector borrowing, as captured in Scope’s BBB-/Negative ratings for Romania.

The Romanian central bank cut its policy rate by 50bps to 2% in March and started its first-ever QE programme in April, although the size is modest. The central bank is unlikely to make further aggressive interest rate cuts that would risk weakening the value of the leu. Romania’s local currency 10-year government bond yield had increased to 4.4% at the time of the writing, from 4.1% as of January lows despite the policy rate cut, reflecting the country’s weak public finances, exacerbated by higher spending triggered by the 2020 crisis.

Severe external risk in Turkey

External risks in Turkey are further exacerbated by economic mismanagement, with real interest rates in negative territory after incremental rate cuts, which have amplified weakness in the exchange rate. The Turkish lira is currently trading around 10% lower against the dollar and 7% weaker against euro compared with end-February. Turkey’s 10-year lira government borrowing rates have increased sharply in 2020, to 13.3% at time of writing, from January lows of under 10%, despite cuts of 250bps in central bank policy rates over the same time period.

Additional fiscal measures and rate cuts forthcoming in Russia

In contrast, Russia’s fiscal stimulus has so far been modest, with additional fiscal measures and interest rate cuts likely to be forthcoming given its substantial liquid reserves (National Wealth Fund assets of 11.3% of GDP) and policy space. Direct purchase of government bonds on the secondary market is not expected to be on the central bank’s agenda, but longer-term repo funding of banks to support such purchases is possible.

Russia’s 10-year yield fell to 5.4%, supported by monetary easing, after picking up to over 8% mid-March, when Brent crude oil prices fell below USD 30 a barrel.

Russia’s reserves cover almost five times outstanding short-term external debt and support the external resilience of the Russian economy. On the other hand, Turkey’s official reserves cover only about 70% of short-term external debt, which poses a significant risk of a deeper balance-of-payment crisis if lira depreciation gets worse.

Read more in the rating agency’s report on CEE markets

Levon Kameryan is an Analyst in Public Finance at Scope Ratings GmbH.

Yuan Slumps as US-Chinese Tensions Rise

India was an outlier, suffering a 2.4% loss, and Taiwan’s semiconductor sector was hit, and the Taiex fell 0.6%. European markets are off to a strong start with a 2% gain in the Dow Jones Stoxx 600 to cut last week’s loss in half. The benchmark is approaching a two-week downtrend line near 399. US shares are higher, and this could lift the S&P 500 to test the key 2945-2955 area.

The US 10-year yield is little changed near 64 bp, but European bonds are lit with peripheral yields off 4-8 basis points. The dollar is mixed. The dollar-bloc currencies and Scandis are firm, while the European complex and yen are heavier. Risk appetites are also evident among emerging market currencies, where the South African rand, Mexican peso, Turkish lira, and Hungarian forint are higher.

The JP Morgan Emerging Market Currency Index is in a sawtooth pattern of alternating gains and losses for more than a week. It fell before the weekend and is higher now. The Russian rouble has been helped by the continued recovery in oil prices, where the July WTI traded above $31. Gold racing higher after pushing to new multi-year highs at the end of last week. The yellow metal is extending is advance for a fifth session and tested the $1765 area in Europe.

Asia Pacific

Japan reported its GDP contracted by 0.9% in Q1 or 3.4% at an annualized rate. It was a little better than expected though the Q4 19 loss was revised slightly to show a 1.9% quarterly contraction (earthquake and sales tax increase). This quarter understood to be considerably worse with expectations of a quarterly decrease of around 5.0-5.5%. Separately, even if not totally unrelated, the latest Asahi poll shows support for Prime Minister Abe is off about eight percentage points to 33%, the lowest in two years. The two big knocks include the handling of the virus and efforts to secure the power to appoint senior prosecutors.

At the same time that the US was announced a tighter ban on the sales of chips to Huawei, China took steps to dramatically increase its output of 14-nanometer wafers. Taiwan Semiconductor Manufacturing Corporation (TSMC) plans to build a wafer fabrication plant in Arizona needs to also be understood in this context too. The US prohibited without a license the sales of chips to Huawei if designed or made by US-produced technology and hardware. That would apply to TSMC, whose biggest customer is Huawei.

The US export controls were circumvented by servicing Huawei out of foreign fabrication facilities. The new actions seek to close the loophole, and it seems that China had been preparing for this be stockpiling in semiconductor chips.

The dollar is confined to less than a third of a yen range above JPY107.00 and is within the pre-weekend range. So far, it is the first session in four that the dollar held above JPY107.00, though this could be challenged in the North American session today. On the top side, a $2.2 bln option at JPY107.50 expires today. After settling on its lows before the weekend, the Australian dollar bounced back to test the $0.6455 area. Resistance is around the pre-weekend high near $0.6475.

The option for roughly A$635 mln at $0.6495 that expires today looks safe. A closed blow $0.6440 would likely signal that the corrective forces remain in control. Given the heightened tension between the US and China and the greenback’s strength seen late last week, today’s PBOC fix was closely watched. The dollar’s reference rate was set at CNY7.1030, which was a bit stronger than the bank models suggested. The dollar reached its highest level since it peaked on April 2 near CNY7.1280. The highest close was on March 25 near CNY7.1150 and is under threat today.

Europe

Bank of England Governor Bailey reportedly denied that zero interest rates were under consideration last week. And the BOE’s chief economist Haldane seemed to suggest that negative interest rates were among the unconventional measures that were being considered. We suspect that the contradictory signals are more apparent than real.

With the base rate at 10 bp, unconventional policy options are being discussed. Haldane was making this more academic point. Bailey was signaling the policy thrust, which is to say that expanding its asset purchase program holds more promise. The UK 2-year yield, which fell below zero last week, is now near minus five basis points.

The economic data highlight of the week is the preliminary PMI reports. The aggregate composite is expected to rise from the record low of 13.6 in April to 27.0 in May, according to the median forecast in the Bloomberg survey, as both the manufacturing and service sectors are forecast to improve. Ahead of the report, the European Commission is slated to announce its policy recommendations for a recovery package for next month’s meetings.

The euro is trading heavily but within the pre-weekend range. It has found a bid at $1.08, where a nearly 530 mln option will expire today. On the topside, the pre-weekend high was near $1.0850, and the 20-day moving average is just below there, likely keeping the $1.0875, expiring option for about 565 mln euros out of play. Sterling gapped lower (below $1.21) on the back of the talk of negative rates, but recovered to $1.2125 in the European morning.

It is struggling to maintain the downside momentum that has seen it fall for five consecutive sessions coming into today. Note that the lower Bollinger Band is found near $1.2115 today. The Turkish lira‘s short-squeeze is extending for its eighth consecutive session. News that Clearstream and Euroclear will not settle lira trades appears to have encouraged further buying back of previously sold lira positions. The US dollar found support near TRY6.81, as domestic demand (for debt servicing?) emerged.

America

The US calendar is light today. The highlight of the week includes the Philadelphia Fed survey (the Empire State manufacturing survey rose to -48.5 from -78.2) and the preliminary PMI (which is also expected to improve). April housing starts, and existing home sales will also be reported, and no fewer than eight Fed officials speak, including Powell (and Treasury Secretary Mnuchin) before the Senate Banking Committee tomorrow. Canada reports April CPI and retail sales figures this week. Mexico’s data highlight is the April retail sales report.

Conventional wisdom sees the negative yields in the US fed funds futures and concludes that investors are betting that the Fed cuts the target rate again. Some suggest that investors may be trying to push the Fed hand, deliver it a fait accompli, force it to cut, perhaps against its wishes. It is hard to argue against this. It seems to intuitively true.

Yet, the markets are not only about betting and taking on risk, but they are also for hedgers and people trying to layoff risk. The negative yields can be explained, even if no one thought the Fed would adopt negative rates. Imagine businesses that need to protect themselves against the chance.

They buy “insurance” from the seller, who then goes to the market to layoff the risk. Financial intermediaries may also choose to hedge the risk of sub-zero rates. Negative rates in the US appear to be more about swapping from floating to fixed rates and the related hedging then actually reflecting expectations of negative Fed policy rates.

Brazil is being punished. The currency and equity market are among the hardest hit, losing a third of their value. It is not simply a function of macroeconomics. Policy matters. The self-inflicted political crisis adds to the challenge posed by the crippling pandemic. President Bolsonaro has lost the confidence of investors who had been prepared to like him after several tumultuous years. The loss of the second health minister in a month during a pandemic that appears to give Brazil the fourth most cases in the world.

The US dollar is consolidating within the pre-weekend range against the Canadian dollar (~CAD1.4020-CAD1.4120). A six-week downtrend line is found today near CAD1.4160. With stronger risk appetites today, initial support near CAD1.4060 would be pressured in North America. The greenback is also consolidating against the Mexican peso with a heavier bias. Lows from the end of last week around found near MXN23.75. Below there, support is seen around MXN23.50, which also corresponds to the lower Bollinger Band. The dollar posted a key downside reversal on May 14 against the Brazilian real. Still, the follow-through dollar selling ahead of the weekend was reversed in late turnover, and the greenback finished on session highs (~BRL5.8560). The dollar’s record high was set near BRL5.9715.

This article was written by Marc Chandler, MarctoMarket.

The Dollar is Searching for its Price Ceiling

The dollar index tracks the USD against the six most popular world currencies, where the yen and the euro can be considered the main catalysts for a decline, having lost 3.0% and 2.6%, respectively.

Nevertheless, smaller and secondary currency pairs also deserve traders’ attention, the movement in which is a kind of manifestation of profound processes of financial markets. Judging by these movements, the longstanding carry-trade idea becoming obsolete, as the high-yielding currencies of emerging markets are no longer highly profitable and the central banks of these countries are softening their policies in the attempt to revive economic growth.

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Against the backdrop of the coronavirus epidemic and the Chinese authorities’ efforts to stimulate the economy, the Yuan is weakening. The Dollar is again worth more than 7 Yuan due to the easing of monetary policy of the authorities and fears of investors about a sharp cooling of China’s economic growth. The 7.0 mark was and remained an essential barometer of sentiment in China.

The price dynamic above this level reflects the continued uncertainty in markets about future growth prospects. In early 2017 and late 2018, the Yuan was heavily protected by PBC near this level. The signing of Phase One trade agreement also returned the renminbi underneath this waterline. However, the demand for the Dollar pushed the pair higher earlier this week.

The weakness of the Yuan and the Chinese economy also affected the Australian Dollar. AUDUSD is declining again this week, updating its 2009 lows below 0.67.  It was a kind of waterline at 0.70, and the pair failed its attempt to climb higher at the end of last year.

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A separate story is a Turkish Lira. This currency does not depend on problems in China so that it can be viewed as a different story. The USDTRY broke through 6.0 this week, following another cut of the rate by the Turkish Central Bank. TCMB has been more focused on reviving economic growth in recent months, rather than curbing inflation.

The steady downward trend of the lira against the Dollar has been observed for more than a month, and last week the pair crossed the 6.0 level, returning to last year’s highs. Above the current mark (6.08) the pair was only in May 2019 and from August to October 2018 during the period of extreme volatility in the pair. It seems that now the markets are trying to find the “ceiling” for the pair, the growth above which will be sensitive for the policymakers, forcing them to stand up for their currency.

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The same can be said about the South African Rand, which crossed the mark of 15.00 in USDZAR, which was repeatedly tested for strength in recent years but did not stay long. The weakening of the Rand against the Dollar looks more surprising as it is happening against the background of robust gold price growth, that previously determined the price direction of ZAR.

This article was written by FxPro

Waiting for FOMC. Nice Occasions on DAX, USDMXN and USDTRY

Yesterday, we talked about SP500, today, I will show You the situation on DAX. We will focus on the long-term as this is the best timeframe to trade shares. For the past two years, DAX was creating an inverse head and shoulder pattern, which bounced from the major up trendline. In the middle of October, the price broke the neckline of this formation, creating a buy signal. With this, the movement towards the highs from 2017 and 2018 seems very probable.

Now, two emerging markets currencies. First one will be a Mexican Peso with the USD. Here, we do have a positive sentiment towards the MXN, mostly thanks to the trade deal between Mexico, US and Canada, which is signed but not yet ratified. Typical market behavior – as for now, we are buying the rumors. Selling the facts can come afterwards. Technically, we are inside of the symmetric triangle pattern. The price is bouncing from its lower line, which can be a good buy signal. On the other hand, the bearish breakout here, will bring as a negative sentiment.

Last is Turkish Lira also in a pair with the USD. Few weeks ago, situation here wasn’t looking good for the TRY. Recent agreement helped a bit but it seems that we are coming back to the weakness of Lira. After the bullish breakout from the symmetric triangle pattern, the price is now breaking the upper line of the wedge. Wedge, in this case, can be considered as a trend continuation pattern and is promoting a further rise.

This article is written by Tomasz Wisniewski, Director of Research and Education at Axiory

Can Turkish Lira Regain Support?

If we start looking for profit opportunities elsewhere, the Turkish lira will come up soon. What’s happening with the TRY and is it fit for trading?

During September and the beginning of October, the lira was rather stable versus the USD. USD/TRY kept returning down to the support at 5.63, while the upside was limited by the 100-day MA. This week, however, the lira has experienced a selloff, the pair jumped above the mentioned moving average and got to the highest levels since the end of August in the 5.88 area.

Fight for the lira

For many months, Turkish state banks have been holding the advance of USD/TRY by selling dollars. According to Bloomberg, in March they sold between $10 billion and $15 billion ahead of the municipal elections.

On Monday, the lira took a blow after Turkey began a military offensive into northeastern Syria. The banks intervened when USD/TRY was around 5.84/5.85 and sold about $1-3.5 billion during the past few days. However, this wasn’t enough to negate political risks: American President Donald Trump said that the United States will “obliterate” Turkey’s economy if it did anything he considered “off-limits.” Although Trump later said that Turkey was a “big trade partner” of the US, USD/TRY stayed above 5.80.

It’s evident that the resources of any central bank aren’t endless and the Turkish central bank is no exception: it obviously won’t be able to support the lira by selling reserves during an extensive period. If tensions between the United States and Turkey keep escalating, the regulator might have to consider rate hikes to stop the fall of the TRY. This, however, is against what President Recep Tayyip Erdogan has in mind.

Economy and monetary policy

Turkish economy is going through hard times: it experienced the first recession in a decade. To restore growth, the Turkish central bank has slashed borrowing costs by 7.5 percentage points since July. The looser monetary policy is endorsed and promoted by President Erdogan.

The next meeting of the central bank will take place on Oct. 24. Although Governor Murat Uysal sounded cautious about further action, a rate cut this month is still likely given the decline in inflation. Notice that Turkey’s benchmark rate is currently at 16.5%. If we adjust this rate for inflation, it will still be higher than in most emerging markets. This, in turn, means that, despite the rate cuts, the TRY may still be attractive for those who hunt for yields and are willing to bear the immense country risk.

Notice that the International Monetary Fund has recently revised up its growth forecasts for Turkey. According to the IMF, fresh stimulus including an expansionary fiscal policy can make the GDP growth rebound by 0.25% instead of a previously projected 2.5% contraction by the end of 2019.

Despite this ray of sunshine, Turkey’s position remains very fragile. A continuation of the invasion to northern Syria can lead to the US sanctions – something the Turkish economy will have a really hard time dealing with. S&P Global Ratings has warned that the military deployment raised risks for the lira and Turkey’s balance of payments: all the progress made during the recent year may evaporate. If you monitor the TRY, keep your eyes open for the news: Erdogan will visit Washington on November 13 and the market may put some hopes in the TRY ahead of the meeting, though the future will, of course, depend on its outcome.

Conclusion

As you can see, the situation for the TRY looks nasty and difficult. Rate cuts and military action will continue keeping the currency under negative pressure. On the bright side, the relations between the United States and Turkey look better than they did a year ago (merely because back then they were outright terrible) and interest rates in the country are still high. As long as things don’t escalate from this point, the fall of the lira shouldn’t be extremely steep. As a result, the advance of USD/TRY may be limited by 5.90/95. The next key resistance lies at 6.00. Support, in turn, is located at 5.80 and 5.70.

The bigger picture will change in favor of the TRY only if Turkey conducts fundamental economic reforms or reaches a trade deal with the United States. With those things unlikely soon, USD/TRY will trend to the upside.

ECB Holds Rates But Flags Rate Cut in September

Although interest rates were left unchanged this month, markets are already pricing in an over 80.0% probability of a 10-basis point cut to interest rates in September.

At already a record low of minus 0.4%, investors will wonder whether lower interest rates will be enough to sustain the EU’s economic growth momentum. Mario Draghi has stated that “data point to somewhat weaker growth in Q3 and Q4”. “Significant monetary stimulus” may be required to ensure the EU’s economic conditions do not deteriorate further amid external risks.

The dovish language employed by Mario Draghi does little to hearten global investors over the EU’s economic prospects. Germany’s dismal manufacturing PMI and business confidence data in July also pointed to stuttering growth momentum in Europe’s growth engine, which makes an economic rebound for the EU in the second half of the year increasingly unlikely.

The EURUSD initially tumbled towards 1.110 against the Dollar, setting a new two year low before later rebounding sharply towards 1.1170. Prices have scope to test 1.1200 in the near term before bears re-enter the scene.

Turkish Central Bank joins global easing bandwagon

Less than three weeks following the news that attracted global headlines over the 6 July weekend that former Turkish Central Bank Governor, Murat Cetinkaya had been dismissed, President Erdogan has finally got what he has long called for – lower interest rates in Turkey.

In his first monetary policy meeting as Central Bank Governor, Murat Uysal has not wasted any time whatsoever in cutting interest rates. Interest rates in Turkey have been cut by 4.5% today and although the general consensus was that an interest rate cut would be the outcome of the policy meeting, a 425 basis point move lower is still higher than the 2-3% market expectations.

Although cooling inflation and soft economic fundamentals have provided a valid reason for the central bank to hop aboard the global easing bandwagon, the independence of the central bank will come into question following an interest rate cut that had occurred in just the first monetary policy meeting of the new Governor of the Central Bank of Turkey.

The USDTRY initially punched above 5.7700 before sinking back below 5.6600 as investors digested the rate decision.

With the new Central Bank Governor already stating last week that there is “room to manoeuvre” on monetary policy, this not only keeps the doors open to more interest rates cuts, but will also increase the probability of this being a matter of “when” and not “if” the Central Bank strikes again before the year concludes.


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Forex Daily Recap – Turkish Lira Fell as Edrogan Fired Central Bank Governor

USD/TRY

Turkey’s national currency Lira lost most of its value on Monday’s trading session. Conversely, the USD/TRY pair got elevated, marking the daily high near 5.7884 level. The negative sentiment aroused as President Recep Tayyip Erdogan fired the country’s Central Bank Governor. Reasons behind removal are still not evident. However, speculations suggest his reluctance to cut interest rates as the major cause behind ousting the Governor. Currently, the country economy is under pressure with rising inflation and rising GDP. Following such a detrimental act, investors cleared off a major chunk of their Turkish assets over fear. The Presidential decree for the same had come out on Saturday. As a result, the USD/TRY pair made a Gap-Up on the weekend, surging more than 2.78% since the last closing.

USDTRY 60 Min 08 July 2019
USDTRY 60 Min 08 July 2019

On the technical front, the Turkish Lira pair stood well above all the major SMA, supporting the positive price actions. Despite that, the pair gains remained capped beneath the robust 5.7686 resistance mark. The RSI indicated above 60 levels as buyers took over the sellers. 

EUR/USD

After facing a severe pullback on July 5, the EUR/USD pair had appeared to cling near 1.1228 mark. The pair quite smoothly managed to trace the same path in the Asian session on Monday. Positive German May MoM Industrial Production and Trade Balance data helped the pair to stay hold onto the consolidation range.  Somehow, there was some slight correction in the pair’s daily movements post-08:30 GMT.  The Eurozone July Sentix Investor Confidence reported data, disappointing the market participants. The consensus had hoped the Index to come out near 0.1 over previous -3.3. However, the actual figures got recorded near -5.8. Today, the US economic docket also remained light-weighted amid lack of significant events.

AUD/USD

A decisive rally that had initiated from 0.6957 level on July 5 rebounded on hitting a 3-day old slanted descending resistance line. Even if the AUD/USD pair displayed price actions taking the pair above the aforementioned barrier line, the pair would have met a strong SMA conflux. This conflux comprised of the near-term 50-day & 100-day SMA and the most significant long-term 200-day SMA.

AUDUSD 60 Min 08 July 2019
AUDUSD 60 Min 08 July 2019

In the morning session, the June ANZ Job Advertisements got published. The statistics had previously reported as -8.2%. However, this time, the reports surprised the street analysts recording a positive 4.6%. At around 18:11 GMT, the Relative Strength Indicator was pointing near 34 level, revealing strong disinterest among the buyers.

USD/JPY

The Japanese Yen pair opened up today near 108.48 level and showcased a slight downward drift in the early hours. Anyhow, the pair made a significant rebound motion over hitting the 108.30 support mark. From there, the Ninja pair maintained a healthy uptrend price action, breaching the 108.63 resistance handle. In the afternoon session, the USD/JPY pair was taking rounds near 108.72 daily high mark. The pair had attempted twice to make a break-through from this highest point but couldn’t make it a success. Earlier the day, BoJ Governor Haruhiko Kuroda mentioned that he had expected a moderate expansion in the economy, thereby allowing the inflation to meet the 2% mark. The Governor added that the Bank would make necessary adjustments in the monetary policy to attain its inflation target.

 

 

 

Erdogan’s Currency War. Markets Recede From the Recent Highs

As a result, this news caused demand for the dollar, which in turn put pressure on stocks, ignoring the recent growth based on the expectations of aggressive Fed policy easing.

Positive news on the latest round of US-China trade negotiations has so far failed to return the risky assets appetite to the markets this week. Now, the chances of Fed mitigation – to support the dollar and suppress demand for stocks – are fading.

Stocks

S&P500 futures retreated 0.8% down from the peak levels reached on Friday morning. Investors have taken profits from the previous rally, overestimating the chances of the interest rates lowering. In addition, market players have become noticeably more cautious in their actions, realising that an impressive pullback often follows historical highs.

EURUSD

The dollar purchases strengthening led to a EURUSD decline to 1.1220 on Friday. This confirmed the downward trend which has remained since the end of last month. As a result, the pair returned under MA(50): from the side of technical analysis, it could be considered as an additional signal to Sell. In the absence of other significant drivers up to Tuesday evening, EURUSD can be guided by technical indicators only.

GBPUSD

The British pound fell below 1.2500 on a wave of Friday’s dollar purchases. On Monday morning, GBPUSD has returned to the area slightly above this level. Behind last week’s decline was staying ahead of Bank of England Governor Mark Carney’s rhetoric easing and the overall demand for the dollar. Still, buyers’ interest in the British currency is noticeable on a decline below 1.25. Without an increase in the odds of Brexit ending erratically, the pound looks significantly oversold at current levels and is attractive for purchases during downtrends.

USDTRY

Turkish lira was hit in the morning, losing 2.3% at the opening of trading day. The Bank of Turkey’s independence has returned to the agenda as the President Recep Tayyip Erdogan suddenly removed the Head of the Central Bank from his post who after he refused to reduce the interest rate, despite repeated calls for it by the government. The influence of this event can go beyond the limits of the Turkish lira course. That could be an unpleasant precedent both in the context of pressure on the Central Bank’s heads and the relatively new wave of currency war fears.

This article was written by FxPro

Forex Daily Recap – Cable Dropped as Odds for a Hard Brexit Increased with Farage’s Win

US Dollar Index

The Greenback had touched the culmination mark of around 98.35 top levels on May 23. However, the USD Index failed to keep hold of the gains and had started the plunge rally on the second half of that day. The Index had continued the downtrend until today but appeared to initiate reversal from around 97.55 low levels. Today’s primary trend in the USD Index followed the drop of German 10-year Bond Yields, which hovered near its bottom levels. Euro being the biggest rival, the Greenback benefitted out of this and was more than 0.17% up for the day. The Index marked day’s high near 97.75 levels despite lack of economic events.

US Dollar Index 60 Min 27 May 2019
US Dollar Index 60 Min 27 May 2019

All US Banks remained closed today on account of Memorial Day. At around 05:00 GMT, the Japanese March Coincidence Index, and Leading Economic Index reported slightly lesser than the estimates. Though there remained lack of any fresh US-China trade dispute headlines, speculations revealed the US plans to blacklist another Chinese firm. This time after Huwaei, the Company is Hikvision Digital Technology, Giant Surveillance Equipment Manufacturers. Trump administration displayed deeps concerns about China’s “extensive surveillance industry”. During today’s session, such underlying trade tensions kept the Greenback restrained from growing further.

GBP/USD

Cable initiated trading on Monday morning near 1.2722 levels. The day started with a clear upshoot touching day’s high near 1.2748 levels amid the release of EU Election results. Nigel Farage’s Brexit Party won the majority UK seats followed by Lib. Democratic Party. The Conservatives and Labors remained down in the list as noted in the Election outcome. Farage commented that “Never before in British politics has a new party, launched six weeks ago, topped the polls in a national election”. However, the GBP/USD pair slipped 0.60% landing near 1.2670 levels following fears of a hard Brexit. After the announcement of the results, Farage had mentioned in his speech to the press that he needs a seat at Brexit talks. He alerted that the EU-UK Divorce should happen to the earliest and within the deadline October 31, 2019. If allowed to attend Brexit talks, Farage promised to ensure a Brexit happening irrespective of an underlying deal. Meantime, with May set to leave Downing Street on June 7, candidates line up to become May’s successor.

USD/TRY

The US Dollar, Turkish Lira pair, continued declining on Monday’s session as Lira stays under the verge of an economic crash again. The USD/TRY pair traveled along a straight line around 6.0842 levels in the early morning session. Recently, the Central Bank of the Republic of Turkey (TCMB) announced the depreciating value of Turkish Lira currency.

USDTRY 60 Min 27 May 2019
USDTRY 60 Min 27 May 2019

Over the years, Turkish people have tended to use foreign currencies over the local currency, limiting usage of Lira. Hence, the Central Bank addressed banks to elevate their Reserve Requirement Ratio with the Bank. Officials believe that this would lead citizens to increase the Lira liquidity in their national territory. However, the Bank’s revenues continue plunging, depreciating the local currency. Nevertheless, a lack of new headlines over US-Sino trade talks helped the USD/TRY pair to reduce intra-day losses. The pair had touched the day’s low near 6.0300 levels and recovered later reaching near 6.0614 levels.

USD/JPY

After closing the last day’s trading session on a negative note, the pair displayed some signs of recovery. The USD/JPY pair elevated from the 109.45 levels touching near the day’s high near 109.58 levels following weak Japanese March data. Leading Economic Index came out 0.42% lower than the consensus estimates of around 96.3 points. Also, the Coincidence Index reported 99.4 points over 99.6 forecasts. The Japanese Yen lost further ground after the BoJ’s Governor Kuroda alerted of high economic instability.

Forex Daily Recap – Turkish Lira Plunged Amid Political Turmoil Pushing the USD/TRY to 2019 Highs

AUD/USD

The Aussie pair rang the Tuesday morning bell near 0.6993 levels. The pair displayed a decent performance in the early hours after some positive AUD-specific events.  The March MoM AUD Retail Sales came around 0.1 percent higher than the estimates near 0.2 percent. Also, the March AUD Trade Balance reported a figure around 4949 million over expectation of 4300 million. The investors witnessed a whopping 0.76 percent in the Asian trading session post such positive results.

However, the AUD/USD pair slid back to 0.6999 levels in the next session after the RBA rate announcement. The market had expected the Central Bank to report a rate cut this time. Somehow, the RBA kept the interest rates unchanged at 1.5 percent shattering the investor hopes. At around 17:00 GMT, the pair was trading near 0.7006 levels.

AUDUSD 60 Min 07 May 2019
AUDUSD 60 Min 07 May 2019

EUR/USD

The Fiber managed to keep up near 1.1200 levels since last few sessions. However, the pair lost hold of high levels today. The EUR/USD had tested near the day’s high near 1.1219 levels. Laterwards, the pair fell amid poor German Factory Order figures. The March MoM German Factory Orders recorded near 0.6 percent over the estimates of 1.5 percent. Adding to this negative sentiment, France March Trade Balance reported a negative €5.3B over expectation of negative €4.5B.

Meanwhile, France March Current Account came as negative €1.3B, as to the consensus estimate of negative €0.97B. The primary rationale behind the Fiber plunge was the political turmoil prevailing in Turkey. During the day, the EUR/USD pair lost almost 0.46 percent of the gains accumulated since last few sessions.

USD/TRY

The Turkish Lira had extended its losses into today’s session amid Istanbul political chaos. During the day, the USD/TRY pair made a substantial 1.76 percent marking the year’s high near 6.2000 levels. The Lira investors went unnerved, calling for a massive sell-off after the Turkish government announced for re-election on June 23. The Opposition party had won in the local elections conducted on March 31.

USDTRY 60 Min 07 May 2019
USDTRY 60 Min 07 May 2019

Speculations suggested that the Turkish President Erdoğan is trying to misuse his powers to bring back control over Istanbul. The citizens protested against the government and its decision. The fall in the Turkish Lira had significantly benefitted the earlier-falling US Dollar Index. The USD/TRY pair had remained fragile to the last Central Bank Interest Rate meeting. The Bank had decided to keep the rates unchanged at 24.00 percent. This move was initiated to compete against the rising US interest rates and heavy debt pressures on the country.

US Dollar Index

The Greenback measured against the six major rival currencies weighed higher today after slumping yesterday. The Index was pretty down amid Trump threats to impose more tariffs on Chinese goods. However, the Index has successfully managed to rebound from its previous day losses. The Index jumped back near 97.70 levels from where it had fallen the last day. During the day, the Green Money made a swing high of around 0.32 percent. The primary rival (EUR/USD) which constitutes almost 50 percent of the Index dropped over Greenback rise. Quite notably, most of the competitors computed against the greenback remained lower today. The AUD/USD and USD/TRY remained among such tumbling currency pairs.

The Turkish Lira Decline May Spread to the Euro

Stocks

S&P 500 futures on Monday updated historic highs but shortly after fell under some pressure. One of the reasons is the disappointment in Alphabet report, whose stocks are losing more than 7% in premarket. But even worse, Chinese data showed a decline in production activity. The technical analysis demonstrates the weakening growth momentum in the markets and increases the chances of a quick corrective pullback. The markets may require an impressive positive factor to continue the rally, which may be a further sharp easing of the Fed position (Wednesday), and a strong labour market report (on Friday).

EURUSD

EURUSD has added about 40 pips on Monday to 1.1180. At the beginning of trading in Europe, the pair came close to the level of 1.1200. The former strong level of support now risks becoming important resistance, heightening the pressure on the euro. Among the news, quotes may be affected by estimates of GDP in the eurozone, as well as inflation in Germany.

GBPUSD

The British pound rose to 1.2950 dollars, adding about 50 points to Monday’s intraday lows. Behind the growth is the caution of players in front of a tense second half of the week. The combination of the demand for safe assets and reduced trading activity can make MA(200) a relatively strong resistance in the coming days.

USDTRY

Turkish lira continues to decline against the dollar. The financial markets of the country are experiencing serious outflows, and the national Central Bank (TCMB) burns foreign exchange reserves to curb the weakening of the national currency. The situation is aggravated by the economic downturn in the country, which limits the ability of the TCMB to raise the rate in order to stabilize the TRY. Potentially, the focus of anxiety can spread to the whole emerging markets sector and to the European markets, including EUR.

This article was written by FxPro

Russian Ruble Reattempts to Resume Bullish Trend

Most currencies are up against the dollar at the time of writing, but not all currencies have the same prospects of adding to its gains. The Russian ruble is looking most promising, while the USDZAR is looking to be carving out a significant inverse head and shoulders pattern. USDTRY is outright bullish, and it seems like the Turkish lira will add to its losses in the days ahead, while USDMXN is trading sideways.

The Russian ruble is looking most interesting after taking a break to its uptrend in the last few weeks. The USDRUB attempted in March to breakout from a multi-month descending triangle but fell short, after reaching a low of 63.68 and traded back into the pattern. However, in the last few days the price is once again trying to trade lower, and ATFX’s Chief Market Strategist, Alejandro Zambrano, suspects that USDRUB might reach its 2019 low of 63.62 as long as the price trades below this week’s high of 65.67.

The Turkish Lira is also highlighted in the video, as it looks to trade lower on technicals, but also as President Erdogan kept up pressure for a recount of local elections in Istanbul. The USDTRY left a relatively stable price range that latest from November 2018 to March 2019, and looks now to be heading to its rectangle pattern of 5.96. The price will need to trade below the April 2 low of 5.67 to turn neutral.

The Mexican Peso is trading sideways between 18.74 and 19.60, but the long-term prospects of a strong trend look good on a break to 18.74.

The South African rand is the short-term bullish, but if we take a longer-term view, it looks like the price is trying to carve out a significant inverse head and shoulders pattern.

Visit our site for more Forex Analysis.

Risk Disclaimer:

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 71% of retail investor accounts lose money when trading CFDs / Spread betting withATFX.

You should consider whether you understand how CFDs / Spread betting work and whether you can afford to take the high risk of losing your money.

This market update was provided with an educational purpose, and is the personal opinion of Alejandro Zambrano, and not to viewed as trading advice by ATFX or Red Castle Ideas LTD.

Forex Daily Recap – Risk Appetite Stabilising The Market

USD/JPY

Today, the USD/JPY pair skyrocketed breaking all the in-between resistance levels. After the heavy plunge of Friday, the pair had tried to rally upwards on Monday but failed to break the major resistance levels. The pair sustained range bound movement between 109.73 and 110.23 levels.

The USD/JPY pair began the day at 110.09 level. After that, it made a slight upward drift following the rebound of 10-year US T-bond yield. The pair again slipped lower to a new support level of 110.01. From that reversal point, the pair soared continuously moving up more than 0.58 percent.

During the morning session, the Bank of Japan (BoJ) reported its Summary of Opinions which mentioned that the bank would stay flexible on varying economic changes.

USD Index

The USD Index that computes the greenback against the six major currencies weighed more against its peers today. After consolidating in the early hours, the index changed gears at 04:00 GMT and took a steep upward jump reaching 96.092 level. After a small correction, the index uplifted further on lower 10-year Treasury Bond Yields. The escalation continued despite poor February Housing Starts and Building Permits reports released today. Both numbers were below the consensus estimate.

“There is a reluctance to buy dollars, while the bar for selling dollars has been relatively high because people have been burned before,” said Steven Englander, global head of G10 FX research at Standard Chartered Bank in New York.

EUR/USD

The EUR/USD tumbled reaching far below 1.1300 level. The greenback climbed new highs recovering previous losses. The USD Index had touched 96.7500 level during the day. The pair was unsuccessful in breaking the 200-week Simple Moving Average (SMA). The fall worsened later the day reaching weekly low under the vicinity of 1.1280.

EURUSD 5 Min 26 March 2019
EURUSD 5 Min 26 March 2019

The Brexit changed controls over to the Parliamentarians. Euro Investors are highly worried over concerns on a deal Brexit as Eurozone Elections are nearing.

USD/CAD

The Loonie pair seems to end the day at low levels. The pair had risen in the mid-day session after the rebounding of the US 10-year treasury bonds yields. Poor US housing data and other indexes released today, pushed the loonie pair down later the day.

With the OPEC cut in production and rising oil demands, the price of crude oil reached new highs. This elevation in the crude price helped the Canadian Dollar to uplift which lowered the pair further. The USD/CAD pair touched the day’s low of 1.3371 twice during the day.

USD/TRY

The pair remained under consolidation mode for quite some time before beginning with the downtrend. The USD/TRY pair showed violent movements ranging between 5.50/5.60 levels during the day. At 14:20 GMT, the pair started slumping heavily from 5.5616 level reaching 5.3829 level. Investors look for the Sunday Municipal elections.

USDTRY 5 Min 26 March 2019
USDTRY 5 Min 26 March 2019

The Simple Moving Average (SMA) for the major days lie above the last traded level of the pair. This symbolizes a bearish stance for the pair. The pair traded staying within the range of the Bollinger Band without breaking the boundaries. Mid-day contraction was followed by a later expansion. The bearish pressure increased multifold with the economic sluggishness amid US poor data revealing reports released during the day. A selling has taken place which brought the pair down to lower levels as the day approaches to end.

EM Currencies to Invest in 2019

We have come to the second month of 2019 and it’s time to take a deep breath after the crazy run of the year, evaluate what has already happened and made some precisions on the upcoming months.

Last year appeared to be struggling for the emerging market currencies. And there were several reasons for that. Firstly, it was the aggressive pace of rate hikes by the Fed. Secondly, the escalation of the US-China trade war and slowdown in the global economic growth. Thirdly, the global risk-off sentiment. Moreover, we all remember crises in Turkey and Argentina that made traders more cautious about the emerging markets.

2019 seems shinier for the EMs. Reasons are hidden in the relief of the Fed monetary policy and the possibility of the deal between the US and China. As a result, it seems like bears started easing their grip. Does it mean that the time to invest in developing economies has come?

Where to invest and why?

Brazilian Real

The Brazilian currency may become one of the most attractive ones in 2019.

Last year, the Brazilian market was under the pressure of the global market sentiment and the presidential elections. However, all these factors seem to start vanishing in 2019. There are no doubts the Federal Reserve will ease its monetary policy. Trade disputes between the US and China have started improving. There are no proves that they won’t escalate in the future again but the melting confrontation is already a good sign. Also, experts see a policy of Mr. Bolsonaro (elected in 2018) as a booster for the Brazilian economy. The pension reform is anticipated to become one of the main drivers. Experts believe that the policy of the pro-business president could contribute to the faster GDP growth and investment flows in Brazil.

Mexican Peso

Mexica has a similar situation to Brazil. Last year the country elected a new president. This year will show whether the new political force will encourage the economic growth or pull it down. Uncertainties around the policy of the new president will add pressure on the currency, but as soon as the new government confirms its reliability, investment flows will come to the country.

Turkish lira

2018 appeared to be the hard year for Turkey and its economy. Disputes with the US, problems with the monetary policy made the Turkish lira depreciate by around 30%.

Up to now, economic data are not encouraging. However, there is a chance. On its last meeting, the central bank decreased its 2019 inflation forecast by 0.6% to 14.6%. Moreover, the central bank promised to not cut the interest rate until there is an improvement in the inflation level.

It’s early to talk about the strong recovery of the Turkish currency, but it’s worth following the economic releases.

What investments to avoid?

Although most of the factors signal the recovery of the EMs, it doesn’t mean that all currencies will appreciate. Risks for some currencies still exist.

Possible stones for the South African Rand.

The first thing that may affect the currency is the continuation of the slowdown in the Chinese growth. China is the close partner of South Africa. As a result, the suffering Chinese economy may put downward pressure on the South African one.

The second factor is the possible credit downgrade. And this factor is highly connected with another one – May elections. Elections always create high volatility in the domestic market. Moreover, the results of the elections will affect the economy in general. The pace the elected government committed to will affect the future of the country.
Analysts say that it’s unlikely Moody’s will cut the ratings before the elections but the further slowdown of the South African economy and the risks of the further fiscal slippage may push the agency to do that to the end of the year.

Making a conclusion, we can say that there are good opportunities for emerging markets to recover. However, not all EM currencies have the same chances to appreciate. The further direction of them will depend on economic releases, political news, and the market sentiment.

Forex Annual Market Recap – 2018

Volatility returned to the currency markets in 2018. The prior year did not provide investors with fear and uncertainty the way 2018 did. The dollar was the main catalyst for changes in market sentiment. Exchange rates were relatively stable until the spring of 2018 and then it became clear that US yields would rise, sending the greenback higher. There were also some severe movements in emerging currencies. The Chinese Yuan weakened substantially along with the Turkish Lira. Moving forward, there are several factors investors should focus on. The ECB will play a key role in 2018, along with political events in both the UK and US.

The Strength in the Greenback

The dollar returned as the king of the currencies in the spring of 2018.  A new Federal Reserve chair began his tenure and quickly installed the belief that the Fed would continue to raise rates multiple times in 2018 and 2019. This led to a rise in US yields pushing the yield differential between major counterparts in favor of the greenback.

Fed Chair Powell’s continued to be hawkish throughout the year, and by October of 2018 the average Fed forecast confirmed the central banks’ intention to increase interest rates three more times in 2019, with another rate hike scheduled for December.  Fed chair Powell in the fall of 2018 said that monetary policy was still accommodative, and there was further to go before the Fed funds rate hit neutrality.  The hawkish tone of the Fed was repeated during the week before Christmas. The fed increased the Fed fund rates by 25-basis points and signaled some softening by forecasting an increase in interest rates by 50-basis points in 2019 instead of the 75-basis point forecast increase they had made during the fall. This was at odds with the market which forecast rates to fall in 2019.

The Dollar versus the Euro which is the most liquid global currency pair has a peak to trough move of nearly 10%. The increase in the value of the greenback might be curtailed by a less hawkish fed. The markets are signaling that rates have reached restrictive levels which might reduce dollar volatility moving forward.

EUR/USD 1y
EUR/USD 1y

 

One of the issues is the concept of neutrality. Coming out of the Great Financial Crisis, the Fed wanted to increase interest rates to the point where they had enough bullets to reduce rates should a recession occur. If the Fed left rates as very accommodative levels, then there would be no stimulus to help the economy if it began to falter.

The Fed also needed to unwind its asset purchases. The period of quantitative easing had ended, and the Fed began to wind down its portfolio. This strategy was put in place before President Trump was elected, and there has been continuity between recent Fed Chairs, during the last 10-years. The President has been ultra-critical of the Fed decision to increase rates during 2018. If this occurred in nearly any other country investors would have hammered the currency. Yields would soar as investors extract a steep price for criticism of the central bank.

Brexit Hampers Sterling

GBP/USD 1y
GBP/USD 1y

The pound was a big loser in 2018, as the issue related to Brexit started to heat up. The decline in the pound coincided with strength in the greenback which began in the spring of 2018. The GBP/USD had peaked to trough range of 13%.

During the fall of 2018 reports that the EU and the UK were having difficulty reaching an agreement started to generate headwinds for the GBP. Despite mixed data, some of which showed strength, the Bank of England was hamstrung by the Brexit issues. Ahead of the Christmas break, Prime Minister Terresa May reached an agreement with the EC but was told this would be the last agreement and there was no flexibility.  Unfortunately, PM May was unable to get the Brexit bill passed by the parliament. In fact, her own party the Tories held a no-confidence vote which May was able to survive. This will be revisited in early 2019, as the Brexit saga continues.

The Chinese Yuan Tumbles

The Chinese Yuan was one of the biggest movers during 2018. The peak to trough range was nearly 11.5%.  The currency began to weaken during the spring of 2018 as trade issue between the US and China began to heat up. There were multiple fits and starts and as of the year-end, the rhetoric between President Trump and President Xi continues. Initially, investors thought the weakening of the Chinese currency was a function of the People’s Bank of China’s efforts to offset softening exports with a weaker currency. This would make Chinese exports more attractive. During the latter half of 2018, Chinese economic data began to soften which was foreshadowed by the weakening currency. As of year, end Chinese PMI data moved into contraction territory which points to further contraction in the Chinese economy.

USD/CNY 1y
USD/CNY 1y

2019 Forecast

While 2018 was the year of the dollar, there are many issues that can change the narrative in 2019.  The Fed will likely change its tune and reduce the number of rate hikes to 1, instead of 2. US yields already reflect this scenario and should help reduce the value of the dollar. The global economy could continue to weaken which will weigh on the yuan and could further hurt the Chinese currency.

The markets have also failed to discount the volatility associated with political unrest in the United States. President Trump could be impeached which is likely, but nobody believes, the Senate will convict him. If this becomes the case, the markets could become very volatile and could generate significantly headwinds for the dollar. US yields, in this case, would decline instead of rising, making the dollar less attractive. At the same time, investors would be looking for a safe-haven currency which would likely be the yen and the Swiss Franc. Even if political unrest does not occur, a potential recession in the US would weigh on the greenback.

How to Trade the Trade War?

The developing trade war between the US and China has created turmoil in emerging markets, most noticeably in the form of a sell-off of the Chinese stock market and currency.

Trading the trade war is not very straightforward. Firstly, we really don’t know how it will end. It will probably be resolved eventually, but the timing will make a big difference.

The longer it lasts the more damage will be done, and that will have longer-term implications. A longer trade war may also trigger a domino effect through other parts of the global economy. If the trade war was to be resolved fairly soon, prices would normalize quite quickly.

One thing to remember is that it appears Trump is happy to keep the pressure on as long as the US stock indices continue making new highs. If volatility in the US stock market picks up, as it is now, he may be forced to soften his stance.

Several markets related to the trade war are currently very oversold, and should the impasse be resolved, sharp reversals are possible in some of these markets.

Traders should be careful of using the same approach across all emerging markets. Some markets have been caught up in the trade war, while others have deep-seated underlying problems of their own.

China

Tensions over trade began to grow between the US and China between January and May this year. In May the US began to effectively impose tariffs on certain imports from China by terminating tariff exemptions. More products were added in June and more gain in September.

The Chinese Renminbi has fallen 10% since March as the trade war has escalated. The Shanghai composite has meanwhile lost as much as 25% since the beginning of 2018.

USD/CNH Weekly Chart
USD/CNH Weekly Chart

The slide in the renminbi has to a certain extent offset the added tariffs – the weaker currency means US importers are paying slightly less before tariffs are added.

It’s worth noting that the slide in the value of the Renminbi has slowed significantly since July despite the additional tariffs with a double top potentially forming. It is possible that the Chinese Central Bank is supporting the currency to prevent capital flight, as they experienced in 2015/2016.

Not many forex brokers offer to trade in the Renminbi, but a few do. If you are looking to trade the Chinese currency you will be trading the Offshore Renminbi or CNH. The CNY is the Onshore Renminbi which us restricted and managed by the Central Bank.

Turkey

Turkey has several problems. Firstly, a series of populist policy decisions by the president eroded investor confidence, triggering a selloff of the already structurally weak Lira. This turned into a vicious cycle as much of the country’s government and corporate debt is USD denominated, and effectively rises as the Lira weakens. On top of this precarious situation, the US then imposed new import tariffs on Turkish goods.

USD/TRY Weekly Chart
USD/TRY Weekly Chart

The Turkish Lira had lost almost 46% of its value by the middle of August and is now consolidating in what could turn out to be either a continuation or reversal pattern. The benchmark equity index, the BIST100, fell as much as 30%, though it has recovered some of those losses.

The Turkish economy is one of the most vulnerable in the world, and further emerging market volatility could very easily lead to further losses for both the currency and stock market. Investors will probably want to see policy changes before a sustained recovery begins.

Argentina

Argentina had to turn to the IMF to help prop up its balance sheet in May, and this loan was recently increased to $57 billion. The Peso reached an all-time high of 41.47 against the USD, having traded at 18 in January. Last week, the Central Bank raised interest rates to 65%, indicating how serious the crisis is.

The benchmark stock index recently tested the all-time high recorded in January – though this has more to do with the inflationary effect of a weak currency than with earnings.

Argentina is one of the weakest markets and will be vulnerable to further fallout from the trade war. Traders watching the stock index should focus on the technical picture rather than trying to weigh up valuations and a fluctuating currency.

South Africa

South Africa’s economy has been under pressure for several years as a result of a scandal-ridden government. In the second quarter, the country officially dipped into a recession.

USD/ZAR Weekly Chart
USD/ZAR Weekly Chart

South Africa’s currency, the Rand, is structurally weak and was also rated by Bloomberg as one of the most vulnerable in the world. The Top40 stock index has made little ground since 2014 as political uncertainty led to an investor exodus.

A certain degree of political stability has been restored and South Africa is beginning to look more like a potential turn around play. South Africa is also a major commodity exporter and highly correlated with China’s economy. If the trade relationship between China and the US is resolved, SA may be a market to watch on the upside.

Commodities

Commodities, especially base metals like copper and iron ore are another potential play based on how things develop. If the standoff is prolonged its likely to have an ongoing impact on China’s domestic economy, which includes massive infrastructure projects. Besides metals prices, traders can also look to Australia’s large commodity exporters.

Global Tech Stocks

The original FAANG stocks (Facebook, Apple, Amazon, Netflix, and Google) have a few problems of their own. Not only are they priced for strong growth going forward, but the likes of Facebook and Google are facing growing scrutiny over issues related to users’ personal data.

The trade war has now brought a new dynamic to the sector. Chinese tech giants Alibaba and TenCent are both under pressure due to the trade war. China is also very important in Apple’s life, both as a supplier and as a customer. Ongoing pressure on China’s economy will eventually begin to impact Apple.

Summary

As you can see there are quite a few instruments that traders can use to play the trade war, either in the case of an escalation, or continuation or in the case that it is resolved. When choosing a forex broker it’s a good idea to look at the range of instruments offered so that you have the option of expressing trades through several instruments.

As was mentioned at the beginning, it’s impossible to predict how all of this will play out. Traders should, therefore, trade opportunistically and keep an open mind.

What to Expect From the Fed Meeting Today?

The US Federal Reserve will be announcing their decision on interest rates and releasing the minutes of the FOMC meeting today at 18h00 GMT tomorrow. A 25-basis point hike is expected by economists and investors, with another hike in December also widely expected.

Given that the rate decision is taken as a given, all eyes will be on the wording that accompanies the decision and, on the Fed’s updated Summary of Economic Projections which will also be released. In particular, the market will be looking at whether the term accommodative will be removed or softened within the statement.

Jerome Powell is widely expected to say that risks to the economic environment are balanced, but investors will also be interested to see whether he highlights trade policy (i.e. tariffs) as a major risk to the US economy.

In the absence of any unexpected concerns regarding risks, GDP growth or inflation, the market will be looking at the Fed’s projections for the economy and rates out to 2021. This will be the first time the Fed will extend its projected rate charts to 2021, where many believe rates will stop rising and level off.

Overall, the rate announcement is likely to be a non-event and investors will look to other economic data releases, the escalating trade war, and emerging markets for direction.

The US Dollar

US Dollar has weakened since the previous meeting and sentiment remains weak around the greenback, despite 10-year treasury yields hitting their highest levels since 2011. With the market already discounting a 25-basis point hike, the Dollar is only likely to strengthen if the outlook is more hawkish than expected.

There is a very small chance (2%) of a 50bps hike but considering that another hike in December is also expected by most market watchers, even this may not be enough to boost the Dollar.

The US Dollar index (below) has breached support going back to May, and it will take a very hawkish statement for it to regain this support level at 94.75. While all of this appears to point to further weakness, this too may be contained by technical levels against other major currencies.

US Dollar Index Daily Chart
US Dollar Index Daily Chart

The EUR/USD has bullish momentum but will encounter resistance between 1.181 and 1.19 – in fact it is already struggling below 1.18. If this area of resistance is convincingly breached, we may see further USD weakness.

Most of the emerging market currencies that have been under pressure in 2018 have consolidated over the past month. In general, risk assets are back in favor, and emerging currencies have benefited from this. However, they do remain vulnerable, and any volatility that follows the Fed decision would probably lead to further weakness.

In all, the rate decision is most likely to turn out to be a non-event. The market is more likely to focus on the longer-term fallout from the trade war with China, something that will impact emerging markets and China, more than the USD itself.

Exotic vs Major & Minor Currencies

While the currency pairs we hear about most often are the major and minor pairs, there are actually far more exotic currency pairs to trade. In this introduction, we will define the types of currency pairs and cover some of the basics you’ll need to know before you begin trading the ‘exotics’.

Major and Minor Currency Pairs

Firstly, we should define major and minor currency pairs. The following are regarded as major currencies:

  • US Dollar (USD)
  • Euro (EUR)
  • Japanese Yen (JPY)
  • British Pound (GBP)
  • Swiss Franc (CHF)
  • Canadian Dollar (CAD)
  • Australian Dollar (AUD)
  • New Zealand Dollar (NZD)

Major currency pairs refer to any pair containing one of these currencies and the US Dollar, so while there are eight major currencies, there are only seven major currency

An important issue in the currency market is liquidity – i.e. the amount of any currency being bought or sold at any time. The most liquid currency pairs tend to have natural supply and demand from exporters and importers in addition to the supply and demand generated by speculators and investors. Since all the countries listed above have substantial trading relationships with the US, constant liquidity is provided by exporters and importers.

Minor currency pairs include any two of the major currencies apart from the USD. Some of these pairs, including GBP/EUR and AUD/JPY represent pairs of countries with active

trade relationships, providing significant liquidity. Others, like CHF/JPY and EUR/JPY, have less active natural supply and demand.

Currency Liquidity

Before we move on to exotic currencies it’s important to understand that there are two major forces driving the exchange rate between two currencies; natural supply and demand, and the relationship between those two currencies and other currencies – most notably the USD. If you exchange GBP for EUR, importers, and exporters in both the UK and Europe will be buying and selling both currencies, providing an active market. On the other hand, if you exchange GBP for NZD, there will be fewer importers, and exporters active in the market – the quotes will more likely be a combination of the GBPUSD rate and the USDNZD rate. With currencies that are even less liquid, exchanging one currency for another will inevitably involve exchanging the first currency for USD and then exchanging USD for the second currency.

Most forex brokers offer clients forex trading either in the direct currency market or via CFDs (contracts for difference). Either way, the spreads they offer depend on the liquidity of the underlying currency market. Even though you may see a pair quoted as just two currencies, for the trades to take place in the underlying market, at some point an extra leg may have to be executed by a market maker.

What are exotic currencies?

Exotic currencies are any currencies not mentioned already. Some like the Hong Kong Dollar (HKD) and Norwegian Krone (NOK) are actually very liquid, some like the Mexican Peso (MXN) and Thai Baht (THB) are fairly liquid, and others like the Malawian Kwacha (MWK) and Laos Kip (LAK) have very little liquidity.

Exotic pairs are those that include one major currency and one exotic currency. While there are over 150 countries that could be classified as developing nations, trading in exotic currencies is focussed on 18 currencies. Admiral Markets UK Ltd, a prominent forex and CFD broker, for instance, lists 19 exotic FX currency pairs including 10 exotic currencies. There are plenty of other exotic currencies, but in most cases, brokers will only offer those that their clients demand.

The following are the most widely traded exotic currencies:

  • Norwegian Krone
  • Polish Zloty
  • Czech Koruna
  • Hungarian Forint
  • Russian Ruble
  • Turkish Lira
  • Chinese Yuan Renminbi
  • Singaporean Dollar
  • Hong Kong Dollar
  • South Korean Won
  • Thai Baht
  • Malay Ringgit
  • Indonesian Rupiah
  • Indian Rupee
  • Mexican Peso
  • Brazilian Real
  • South African Rand

With any broker, the spreads being offered for a currency pair will reflect the underlying liquidity for that pair. Admiral Markets, for instance, offers spreads as low as 0.1 pip for the EURUSD pair (the most liquid pair in the world) to 5 pips for CADCHF and 10 pips for the USDCNH. For even less liquid currencies, the spreads can be much wider, in some cases reaching 800 pips.

Which Currencies Should You Trade Exotic Currencies Against?

An exotic currency will usually have better liquidity if it is traded against the currency of a major trading partner. The Turkish Lira is therefore usually traded against the Euro, the HKD against the USD or Chinese Renminbi and Mexican Peso against the US Dollar. You would struggle to find a broker offering a Malawian Kwacha/Swiss Franc pair, but even if you did, the spreads would be very wide. In most cases, exotic currencies from countries in or close to Europe are traded against the Euro, and others are traded against the USD.

Pros and Cons of trading Exotic Currencies

The currencies of developing nations are often volatile and prone to trend strongly. Some countries with large current account deficits have structurally weak currencies that have weekend consistently for decades, while others have steadily strengthened over time.

This means there are certainly opportunities for forex traders to profit. The downside is that trading costs can be high and are some currencies are prone to large, unexpected moves when government policies are changed without warning.

For the most part, traders need to have a longer-term view when trading exotic currencies than they would with major currencies. The less liquid a currency is, the longer the time horizon should be. Some, like the Norwegian Krone and Singapore Dollar, are very liquid and can be treated like major currencies. However, others, like the South African Rand and Turkish Lira are not suitable for intraday trading and are only suitable for medium-term trading under unique circumstances. In most cases, exotic currencies require time horizons of weeks to months, unless a very unique opportunity presents itself.

Secondly, traders must familiarise themselves with the typical patterns for a particular currency before trading it. Each currency has its own unique personality and there are usually good and bad times of the day and week to trade them.

Conclusion

While trading exotic currencies are less straightforward than trading major and minor pairs, they do offer very profitable opportunities. Every few years there is usually an emerging market currency crisis which results in some currencies moving as much as 20 to 30%.

These situations offer forex traders opportunities they will seldom see in major pairs. It is therefore worth learning more about these currencies and adding another tool to your trading arsenal.

Risk disclosure: Forex and CFD trading carries a high level of risk that is not suitable for all investors. Presented information is not an offer, recommendation or solicitation to buy or sell. Before making any investment decisions, you should seek advice from an independent financial advisor to ensure you understand the risks involved. Read more at admiralmarkets.com.