Cautious Stand In TRY Despite Carry-Appetite

Forex News and Events:

The volatilities in G10 activity remains low, the absence of important data/event keep the trading ranged. We shortly lean on EUR/GBP strength countered by residual gamma positions and concentrate on the rate cut decision by the Turkish Central Bank. Walking into New York open, the focus will shift to US 1Q GDP, consumption and price index (third release), the expectations are soft given the weather-related economic slowdown in the first quarter and weak business inventories. May durable goods data has potential to surprise on the upside. USD trades mixed today.

EUR/GBP on its way for deeper correction

The sharp sell-off in pound leaves the residual gamma bias in favor of GBP, thus capping the rallies in EUR/GBP. However, the short-term technicals turn positive suggesting deeper upside correction if 0.80000-support holds. Option related offers are strong below 0.80000 while barriers are eyed at 0.80500 for today expiry.

Turkey cuts rate as Basci aims for flat yield curve

The Central Bank of Turkey cut the weekly repo rate (policy rate) by 75 basis points to 8.75% in June 24^th meeting following persistent pressures from the government. The overnight corridor remained unchanged at 8.00-12.00% as well as the reserve option coefficients and required reserve ratios. In the policy statement, the CBT mentioned its goal to keep a flat yield curve until there is sizeable progress in the inflation outlook. The Turkey’s headline inflation advanced to 9.66% in May with improvement foreseen from June. However, given the tensions in Iraq and higher oil prices, we do not rule out a surprise deterioration through the coming months.

Fortunately, the unchanged overnight corridor, most precisely the higher band, is a good safety measure in case of emergency. Currently, the cheap liquidity conditions and the carry-driven EM appetite keep the lira well supported thus should curb the overheating prices to some extent. According to Basci, the depreciation in lira has stood for 3 ppts in inflation figures. Now that the lira recovers (alongside with other high yielding currencies) the funding behind the TRY strength remains fragile and is contingent on Fed-related/carry-driven risk appetite. In case of reversal in international capital flows and the anticipated rush back into US dollars, the low Turkish rates will certainly discredit the lira. The asymmetric corridor should then provide the flexibility that CBT may need to control the lira volatility and sharp changes in the global trading environment.

Moving forward, we are ready for further cuts through the year-end, ceteris paribus. If the improvement in inflation dynamics materializes, the 10-year government yields should head further down. We do not expect to reach the pre-Gezi levels (6 – 7%) seen through May 2013, yet consider the extension of weakness towards 8.00-8.25% zone. If this is the case, the CBT should be tempted by additional 50-75 bp cut this year. We however see the o/n lower band intact.

The potential positive behind this whole Turkey story is the bullish boost in market sentiment. Should the country manage to take benefit of lower rates to reduce the current account deficit, we can talk about a new era for Turkey. For the moment, we keep our cautious stand vis-à-vis TRY and TRY holdings.

The Risk Today:

EUR/USD is grinding higher within the horizontal range between 1.3503 and 1.3677. An hourly support lies at 1.3565 (20/06/2014 low, see also the 61.8% retracement). An hourly resistance can be found at 1.3644 (19/06/2014 high). In the longer term, the break of the long-term rising wedge (see also the support at 1.3673) indicates a clear deterioration of the technical structure. The long-term downside risk implied by the double-top formation is 1.3379. Key supports can be found at 1.3477 (03/02/2014 low) and 1.3296 (07/11/2013 low).

GBP/USD is weakening after having failed to break the major resistance at 1.7043. A break of the hourly support at 1.6923 (18/06/2014 low, see also the 38.2% retracement) would negate the current positive technical configuration. Another support can be found at 1.6882 (27/05/2014 high, see also the 50% retracement). In the longer term, an eventual break of the major resistance at 1.7043 (05/08/2009 high) is favoured as long as the support at 1.6693 (29/05/2014 low) holds. Other resistances can be found at 1.7332 (see the 50% retracement of the 2008 decline) and 1.7447 (11/09/2008 low).

USD/JPY is moving sideways despite the proximity of the support implied by the 200 day moving average (around 101.69). The hourly resistance at 102.20 (20/06/2014 high, see also the declining trendline) has held thus far, confirming a lack of sustained buying interest. Another hourly resistance lies at 102.36, whereas another support stands at 101.43. 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 and 100.76 (04/02/2014 low). A break of the key resistance at 103.02 is needed to suggest the end of the current consolidation phase. A major resistance stands at 110.66 (15/08/2008 high).

USD/CHF has successfully tested the support at 0.8908 (05/06/2014 low, see also the 38.2% retracement). However, the bounce has thus far failed to break the resistance implied by the 61.8% retracement at 0.8974. Furthermore, the short-term succession of lower highs remains intact. Another support stands at 0.8883. A strong resistance area lies between 0.9012 and 0.9037. From a longer term perspective, the bullish breakout of the key resistance at 0.8953 suggests the end of the large corrective phase that started in July 2012. The long-term upside potential implied by the double-bottom formation is 0.9207. A key resistance stands at 0.9156 (21/01/2014 high).