EUR, GBP Offered As TRY Takes Advantage
| May 23, 2014 07:26AM ET
The EU Commission elections started yesterday and the early results confirm fears on rising Euro-skeptic poll in the heart of the European Union. EU currencies trade under pressure. Released in the morning, the strong German data didn’t gather any market reaction while the slightly weaker-than-expected German business confidence (IFO) pulled EUR/USD below the 200-dma support. EUR/GBP pulled out our 0.80850 target and extended weakness to fresh low of 0.80816. In Turkey, the unexpected rate cut boosted the Turkish equities, bonds and the lira. Was the timing good for such policy action?
EU Parliament elections weigh on EUR, GBP
EU Parliament elections have started yesterday and the early results show rising preference for UK’s Independence Party. Given the recent surge in anti-austerity / anti-European stand, the EU Parliament elections represent an event risk and will be an important input for FX traders for months ahead. At this stage, we do not believe that EU-skeptical bulk will be large enough to squeeze the balances, yet the heterogeneous shift in the heart of the EU Commission will undoubtedly play against the union, the cooperation with EU-skeptics will introduce important barriers in EU decision process. On the other hand, divergence in economic data in favor of Germany is no more exciting in peripheral eyes, as German needs in terms of monetary and fiscal policy doesn’t fit the rest of its European peers. On the wire: the permanent fiscal capacity, a mutual Euro-area insurance fund, carries hope for faster convergence. Yet a stronger EU-skeptical weight in the heart of the Commission can only complicate the implementation of this program, and the upcoming ones.
Released earlier, the IFO survey showed deterioration in business confidence and expectations in Germany and the Euro-zone in May. EUR/USD broke the 21-dma (1.3836) for the first time since September 2013, rallied on stops to 1.3625. Trend and momentum indicators suggest the extension of losses, decent option related offers at 1.3700/1.3675/1.3650 and 1.3600 will expire next week, and are likely to keep the upside capped. Traders look to sell the rallies walking towards June 5th ECB meeting. We do not expect immediate market reaction vis-à-vis EU elections on Monday, the new set-up in Parliament should see smooth pricing over the months ahead.
Turkish Central Bank links the economic destiny to external factors
Turkish Central Bank unexpectedly cut the benchmark repo rate from 10.0% to 9.5% in May 22nd meeting. The overnight borrowing and lending corridor was left unchanged at 8.0-12.0%. The decision has been welcomed with great enthusiasm in Turkish markets; BIST 100 index rallied to highest levels since October 2013. The 10-year government yields currently trade below 9.0%, the 2-year yields aggressively fell to 8.660%. The globally favorable liquidity conditions, the “improvement in risk premium gauges and drop in all interest rates in all maturities” gave flexibility to CBT. We find the statement somewhat worrisome given that Turkish idiosyncratic risks and the macro conditions have not changed since the emergency hike in January.
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Given the increasing upside pressures in inflation and the worsening expectations, we do not believe that the decision is appropriate for long-run stability for Turkish economy. Moreover, Turkish energy regulator removed cap on car fuel prices on May 21st and this removal can only further increase pressures on headline inflation. If the goal is to fight the current account deficit, the combination of above-stated actions may engender inefficient (or even reverse) results. The lira’s destiny is now at “foreign” hands. At this stage, we are afraid that Central Bank’s “improved risk premium” argument is mostly due to higher international risk appetite, thus fragile and highly dependent on external factors (Fed and Euro-zone decisions). Any reversal in global risk sentiment may result in leveraged sell-off in TRY and TRY holdings.
2014-05-23T12:30:00 CAD Apr CPI YoY, exp 2.00%, last 1.50%
2014-05-23T12:30:00 CAD Apr CPI Core MoM, exp 0.20%, last 0.30%
2014-05-23T12:30:00 CAD Apr CPI Core YoY, exp 1.40%, last 1.30%
2014-05-23T12:30:00 CAD Apr CPI SA MoM, exp 0.20%, last 0.20%
2014-05-23T12:30:00 CAD Apr CPI Core SA MoM, last 0.10%
2014-05-23T12:30:00 CAD Apr Consumer Price Index, exp 124.9, last 124.8
2014-05-23T14:00:00 USD Apr New Home Sales, exp 425K, last 384K
2014-05-23T14:00:00 USD Apr New Home Sales MoM, exp 10.70%, last -14.50%
EUR/USD
EUR/USD is challenging again the strong support at the 200 day moving average. A break of the resistance at 1.3734 (19/05/2014 high) is needed to confirm a short-term exhaustion of the current selling pressures. Another resistance can be found at 1.3775 (12/05/2014 high), whereas another support lies at 1.3562 (12/02/2014 low). In the longer term, EUR/USD has broken its long-term rising trendline (see also the support at 1.3673), indicating a clear deterioration of the underlying bullish momentum. A break of the key support at 1.3643 (27/02/2014 low) is needed to confirm a long-term bearish trend reversal (potential double-top).
GBP/USD
GBP/USD continues to move within its rising channel. However, in the shorter-term, prices are failing to decisively break the resistance at 1.6903. An hourly support can be found at 1.6802 (20/05/2014 low). Another support stands at 1.6732 (15/05/2014 low), whereas another resistance lies at 1.6996. In the longer term, prices continue to move in a rising channel. A bullish bias remains favoured as long as the support at 1.6661 (15/04/2014 low) holds. However, a major resistance stands at 1.7043 (05/08/2009 high).
USD/JPY
USD/JPY has successfully tested the strong support at 100.76 and has broken the hourly resistance at 101.67. A short-term rebound is likely. Short-term resistances are given by the declining trendline (around 102.20) and 102.36 (13/05/2014 high). An hourly support now lies at 101.35 (intraday low). A long-term bullish bias is favoured as long as the key support 99.57 (19/11/2013 low) holds. Monitor the support area provided by the 200 day moving average (around 101.26) and 100.76 (04/02/2014 low). A major resistance stands at 110.66 (15/08/2008 high).
USD/CHF
USD/CHF continues to challenge the strong resistance at 0.8953. A short-term bullish bias is favoured as long as the support at 0.8883 (15/05/2014 low) holds. Another resistance lies at 0.9038 (12/02/2014 high), whereas another hourly support can be found at 0.8841 (02/05/2014 high). From a longer term perspective, the structure present since 0.9972 (24/07/2012) is seen as a large corrective phase. A decisive break of the key resistance at 0.8953 is needed to validate a bullish reversal pattern (see potential double-bottom formation).
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