The Turkish Central Bank surpassed expectations by more than doubling its key interest rate to 10% from 4.5% in a late-night meeting last night, as well as raising other benchmark rates. The move was particularly significant as PM Erdogan said yesterday that he was opposed to higher rates, but the central bank defied his wishes. The TRY immediately strengthened by 2.6%, but this just erased the last two weeks of weakening and still leaves the currency as the second-worst-performing currency in the world over the last month or two (after the ARS, which was devalued). Nonetheless the fact that it was willing to take these steps, coming after India’s surprise hike in rates yesterday, improved sentiment in markets and most Asian stock markets were up this morning. Risk-sensitive currencies such as the NOK, AUD and NZD were higher as well and the safe-haven JPY and CHF were lower.
In this context the weakness of CAD stands out as indicative of the negative sentiment surrounding the currency. (AUD and NZD may also have been boosted by a report that investors in a troubled high-yield trust will be bailed out, thus averting a possible credit crunch in the country.) Most EM currencies that we track were also higher, with INR, ZAR, MXN and IDR all gaining 1% or more. RUB and CZK were lower however, suggesting that their troubles are more idiosyncratic.
USD/TRY" title="USD/TRY" align="bottom" border="0" height="242" width="474">
However, if the recent bout of EM turmoil necessitates general tightening of monetary conditions in EM countries, then it is likely to slow down global growth. In this context, I wonder how long the high-beta G10 currencies can continue to gain. Moreover, are the EM countries willing to make the fundamental reforms necessary to renew investor confidence? The independent central banks may be willing, but the governments are a different story. I don’t think the EM turmoil is over.
As mentioned yesterday, EUR is positively correlated with TRY, yet EUR/USD moved slightly lower. This may be because of a story in a German newspaper that the decision by the German constitutional court on the legality of the Eurozone bail-out system has been delayed until April because of "intense differences of opinion" among the eight judges. A decision was initially expected last October, after the German elections. The longer the case drags on, the less likely it is that the court will agree to the German government’s request for a ruling that underpins the agreed bail-out machinery. The court can force German institutions to withdraw support for EU operations, which would cause the system to lose all market credibility and probably spark another Eurozone crisis. This is potentially a very serious problem that bears watching. It is potentially a big negative for the euro.
The focus of attention today will of course be on the FOMC meeting. The market expects a standard statement following the meeting. From what all the Fed speakers have said, I expect them to continue tapering off their bond purchases at the same pace. The economic data since the last meeting has been mixed but generally positive; although the December payrolls were disappointing, it’s likely that growth in the second half was faster than the Fed expected, so the low level of new jobs may be attributed to the weather. In any case the unemployment rate continues to decline. Inflation is below target but stable. Although unemployment is getting near to their 6.5% threshold, I wouldn’t expect any change in that threshold at the current meeting. The statement is unlikely to mention the recent turmoil in EM, since the Fed has consistently said that it sets monetary policy with regards to the US, not the world. As for the market reaction, at their last meeting in December they were not widely expected to begin tapering and the decision to do so sent EUR/USD lower by around 1 euro-cent. On the other hand, back in September when they were expected to begin tapering and didn’t, EUR/USD immediately jumped by about 2 euro-cents. Those two reactions give the possible extremes in case of a surprise. If they act as the market expects and continue tapering by USD 10bn, EUR/USD could decline slightly, given that there are probably some people who think it might not happen, but I wouldn’t expect a major impact. There is no press conference after the meeting.
As for the indicators, Eurozone’s M3 annual growth is estimated to accelerate in December, but the 3-month moving average is expected to slow. Italy’s business confidence for January is estimated to be higher than in December and Norway’s AKU unemployment rate for November is forecast to remain unchanged at 3.3%. There are no major US indicators out. As for the speakers, BoE Gov. Carney speaks at a lunch in Edinburgh. He will hold a press conference after the event. There is also a South Africa Reserve Bank policy board meeting that will probably be more closely watched than usual, given the recent moves by India and Turkey. No change is expected.
The Market
EUR/USD" title="EUR/USD" align="bottom" border="0" height="242" width="474">
• EUR/USD moved slightly lower, remaining between the support level of 1.3650 (S1) and the resistance barrier at 1.3700 (R1). In early European trading the pair is testing the support of 1.3650 (S1), where a downward violation may target the area between 1.3525 (S3) and 1.3570 (S2). On the other hand, a successful break above 1.3700 (R1) may open the way towards 1.3810 (R2). Both momentum studies continued moving lower, while the MACD, although in bullish territory, remains below its signal line, confirming the weakness of the longs to drive the price higher for now.
• Support: 1.3650 (S1), 1.3570 (S2), 1.3525 (S3).
• Resistance: 1.3700 (R1), 1.3810 (R2), 1.3893 (R3).
USD/JPY" title="USD/JPY" align="bottom" border="0" height="242" width="474">
• USD/JPY moved higher on Tuesday after Turkey’s central bank sharply raised its main interest rates at a late-night meeting, reducing demand for safe-haven currencies. Nonetheless, there is still the possibility for a lower high and that the correcting phase has not yet ended. The pair is once again above 103.00, finding resistance at the 50-period moving average. A lower high may push the price below 103.00 (S1) and challenge once more the 102.14 (S2) support, near the 38.2% Fibonacci retracement level of the 8th Oct. - 2nd Jan. advance. An upward violation of 105.00 (R2) is needed to signal a probable completion of the recent correcting phase.
• Support: 103.00 (S1), 102.14 (S2), 101.12 (S3)
• Resistance: 103.90 (R1), 105.00 (R2), 105.45 (R3).
EUR/GBP" title="EUR/GBP" align="bottom" border="0" height="242" width="474">
• EUR/GBP moved lower on Monday and yesterday moved in a consolidative mode near the support at 0.8230 (S1). The recent advance was limited at 0.8305, near the 200-period moving average. A clear dip below the 0.8230 (S1) hurdle may trigger further bearish extensions towards the next support barrier at 0.8167 (S2). Both momentum studies lie near their neutral levels, confirming the recent consolidation, but they are both pointing down, favoring a possible bearish momentum for the near future.
• Support: 0.8230 (S1), 0.8167 (S2), 0.8080 (S3).
• Resistance: 0.8305 (R1), 0.8345 (R2), 0.8390 (R3).
Gold
• Gold continued moving lower, riding the longer term trend line as a support. The metal is now trading near the 50-period moving average and the possibility for a higher low still exist. Both momentum studies continued declining. The MACD, already below its trigger line, seems ready to obtain a negative sign. Nonetheless, I would wait for a break below the low of 1235 (S2), before assuming that the violation of the trend line was a false break-out and that the recent correcting advance has ended. If the metal continues printing higher highs and higher lows I would expect it to overcome the 1268 (R1) barrier and target the next resistance at 1290 (R2).
• Support: 1250 (S1), 1235 (S2), 1224 (S3).
• Resistance: 1268 (R1), 1290 (R2), 1315 (R3).
Oil
• WTI rebounded from the blue trend line and the moving averages and moved significantly higher, violating the barrier of 96.50. Furthermore, the 50-period moving average crossed above the 200-period moving average, giving an additional bullish indication. The price is now heading towards the 97.85 (R1) resistance hurdle, the violation of which may open the way towards the next resistance at 98.90 (R2). The MACD, already in a bullish territory, crossed above its signal line, confirming the recent positive momentum.
• Support: 96.50 (S1), 95.00 (S2), 94.00 (S3).
• Resistance: 97.85 (R1), 98.90 (R2), 100.55 (R3).
BENCHMARK CURRENCY RATES - DAILY GAINERS AND LOSERS
MARKETS SUMMARY
Disclaimer: This information is not considered as investment advice or investment recommendation but instead a marketing communication. This material has not been prepared in accordance with legal requirements designed to promote the independence of investment research, and that it is not subject to any prohibition on dealing ahead of the dissemination of investment research. IronFX may act as principal (i.e. the counterparty) when executing clients’ orders. This material is just the personal opinion of the author(s) and client’s investment objective and risks tolerance have not been considered. IronFX is not responsible for any loss arising from any information herein contained. Past performance does not guarantee or predict any future performance. Redistribution of this material is strictly prohibited. Risk Warning: Forex and CFDs are leveraged products and involves a high level of risk. It is possible to lose all your capital. These products may not be suitable for everyone and you should ensure that you understand the risks involved. Seek independent advice if necessary. IronFx Financial Services Limited is authorised and regulated by CySEC (Licence no. 125/10). IronFX UK Limited is authorised and regulated by FCA (Registration no. 585561). IronFX (Australia) Pty Ltd is authorized and regulated by ASIC (AFSL no. 417482)