EM Rundown: Liquidity Flood Continues

 | Nov 24, 2014 03:14PM ET

Two month ago, we speculated that the end of the Fed’s Quantitative Easing program could hurt emerging market economies and currencies. In our view, the so-called “Fragile Five” economies (Brazil, Turkey, South Africa, India, and Indonesia) looked particularly vulnerable, but a number of developments over the past week have partially alleviated those concerns.

Though the Fed has completely tapered QE and is now considering raising interest rates sometime next year, other central banks have ratcheted up their liquidity at the same time. Just in the past two weeks, the Bank of Japan dramatically increased its QQE program and pushed back a sales tax hike, the People’s Bank of China surprised traders by cutting both its one-year lending and savings rates, and ECB President Draghi has heavily hinted at a sovereign QE program in the Eurozone in the near future. Undoubtedly, this next wave of global liquidity will have a massive impact on the domestic currencies in question, but it could also spill over to help support the previously vulnerable Fragile Five currencies as well.

USD/TRY: Consolidation Set to Continue This Week

Based on the recent price action, the Turkish lira is already holding its own against the broad-based US dollar rally. For the past three months, USD/TRY has been consolidating in a symmetriacl triangle pattern between 2.15 and 2.30. With little economic data on the calendar for the eastern European country this week (Friday’s foreign trade data is the only noteworthy release), more consolidation within the triangle is favored this week. That said, if the US dollar uptrend sputters later this year, USD/TRY could drop below support at the bottom of its symmetrical triangle and the 100-day MA near 2.20 to expose longer-term Fibonacci retracement support at 2.1550 next.