The currency market was subject an incredibly intense squeeze engulfed the Treasury market with major global de-risking and deleveraging. Forced risk off flows from the US banking crisis contagion continues. We saw the SNB backstopping Credit Suisse and safe haven buying in the yen force more short covering as yield curve bets blew up. Yen shorts and levered “carry trades” were suddenly at risk. The ECB held firm Thursday with its 50 bps rate increase following Wednesday’s abrupt Euro 2% dive with fragile European banks impacting, before cutting losses to 1.5% by the end of the session. The USD was retreating against all major crosses by week’s end with the cost of carry shift and hopes the banking mess is stabilizing.
One of the biggest shorts in 2022 were different currencies against the US dollar, most aggressively shorting the yen. We have seen these reverse abruptly and significantly, poorly positioned funds have experienced quick losses to bring in 2023. These popular macro trades tend to be risk on or risk off and feed each other, the forex moves accordingly flow into other big shorts such as bonds, U.S. tech stocks, commodities such as lumber and European equities.
Forex Weekly Analysis and Outlook – US Dollar, Euro, Japanese Yen, British Pound, Swiss Franc, Canadian Dollar, Australian Dollar, New Zealand Dollar, Turkish Lira, Mexican Peso. Currency dynamics are complex. There are myriad facets to analyze and contemplate.
Speculation the Federal Reserve is approaching terminal rate and will slow the pace of its interest-rate hikes while other Central Banks are unabashedly raising undermines the US dollar. Many of the more astute players are and have been short the dollar as the KnovaWave matrix pronounced peak dollar in November and December.
Geopolitically the landscape is constantly evolving since the Russian invasion of Ukraine, China’s Xi’s power grab and Covid lockdown protests, a move to the right in Italy and Russia’s annexation in eastern Ukraine of territories, after taking Crimea in 2014 and a divisive election in Brazil and the US deepening partisan divide.
Hints there are large shorts out there still and we are a long way from the DXY almost hitting 115 on September 28th. There is a thought that the deluge of central bank rate hikes is nearing the end as the world topples into recession.
We continue keep eyes on the bond market, as we have said the US 10-year Treasury peaked around 4.33% on the same day as the US dollar peaked against the yen USDJPY 151.95 on October 21.
We have seen the USD pull back significantly from highs but the strong dollar negatively affected multinational earnings and the US economic outlook and could alter the Federal Reserve terminal interest rate, economists surveyed by Bloomberg said last month. Just 28% saw the currency strength as unlikely to have any impact.
To say central bankers, have issues is an understatement. Already grappling with the quickest inflation in decades they now have these decisions to make, forcefully raise borrowing costs to defend currencies and risk hurting growth, spend reserves that took years to build to intervene in foreign exchange markets, or simply stand aside and let the market play out.
Weekly Recap and Outlook
How Foreign Exchange Prices Finished March 17, 2023
- For the week, the U.S. Dollar Index declined 0.8% to 103.71 (up 0.2% y-t-d). 2022 gains were 8.2%%
- For the week on the upside, the Japanese yen increased 2.4%, the New Zealand dollar 2.3%, the Swedish krona 2.1%, the Australian dollar 1.8%, the South Korean won 1.7%, the British pound 1.2%, the Canadian dollar 0.7%, the Singapore dollar 0.6%, and the euro 0.3%. The Chinese (onshore) renminbi increased 0.44% versus the dollar (up 0.17%).
- On the downside, the Mexican peso declined 2.1%, the Brazilian real 1.2%, the South African rand 0.9%, the Swiss franc 0.6% and the Norwegian krone 0.5%.
Yields are one of the biggest influencings on currency prices. The bond market focus has shifted towards fundamental developments and away from monetary policy.
U.S. Treasuries continued in the same vein as the previous week with safe haven flows from the continued fallout from the banking crisis. An intense squeeze engulfed the Treasury market. U.S. Treasuries ended the week toward their highest levels of the week. European and U.S. equities faced pressure from banks. First Republic Bank announced a suspension of its dividend and confirmed that it borrowed funds from the Fed’s discount window over the past week. This week’s action expanded the 2s10s spread by 47 bps to -42 bps and the MOVE index sailed past its pandemic high to a level not seen since 2008.
The 2-yr note yield plunged 77 basis points this week to 3.82% and the 10-yr note yield fell 30 basis points to 3.40%. The CME FedWatch Tool shows a 64.2% probability that the Fed will raise rates by 25 basis points at the March 21-22 FOMC meeting. That is up from 59.8% a week ago.
US Yield Watch
- 2-yr: -32 bps to 3.82% (-77 bps for the week)
- 3-yr: -28 bps to 3.68% (-60 bps for the week)
- 5-yr: -28 bps to 3.47% (-48 bps for the week)
- 10-yr: -19 bps to 3.40% (-30 bps for the week)
- 30-yr: -12 bps to 3.60% (-10 bps for the week)
The Strong US Dollar Effect on US Economy and Rates
The strong dollar is likely to negatively affect the US economic outlook and could alter the Federal Reserve terminal interest rate, economists surveyed by Bloomberg said. Just 28% saw the currency strength as unlikely to have any impact.
The survey of 40 economists was conducted Oct. 21-26.
- 44% said they believed the Fed could fully complete its aggressive rate tightening despite possible stresses.
- 38% said the policy makers would be forced to cut rates earlier than expected and
- 18% said the Fed would not be able to raise rates as much as planned.
- Survey respondents expect rates to peak at 5% early next year and a majority of the economists now expect a US and global recession.
The Fed as expected raised another 75 basis-points last meeting. Their last forecast showed rates reaching 4.4% by year end from a current target range of 3% to 3.25% and to 4.6% in 2023. The value of the dollar is an important component to lowering inflation. A stronger dollar tends to dampen inflation by reducing the costs of imports and lowering domestic production as it raises export prices.
“Usually the trade deficit would balloon when the dollar appreciated as much as we had seen since last year. But that effect has been curiously absent so far, even as we are already about five quarters into the appreciation process. One possible explanation is that US is increasing its exports in energy products. The fact that this tightening channel of dollar is absent means that the dollar appreciation is less contractionary to the economy than historically.”Anna Wong (Bloomberg chief US economist)
The surge in interest rates and the de-risking of the world is one factor but there are other particular influences. With regards to volatility in currency markets, these huge moves act like rubber bands when its crowded. The more stretched an exchange rate is, the bigger, faster and more painful the eventual correction. What is the catalyst? There is the obvious, a peace deal in Ukraine or a dovish Fed, which after Chairman Powell’s speech at Jakson Hole that appears to need a dramatic change.
However, it is usually something not expected that creates major shifts. The reality is the recovery from the pandemic is not yet complete and we have the specter of a US recession darkening the scene. The strong dollar adds to the pressure to tighten as weak currencies exacerbate imported inflation.
John Maynard Keynes, 1920: “There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction and does it in a manner which not one man in a million is able to diagnose.”
Euro – EURUSD
EURUSD reversal from the 50%, cloud spit mirrored the energy last April and the sell was held at the 38% this week. Below there we have the Kijun and cloud base. recovery stalled but remains still above the old channel and at the cloud. Completive following the throwover to the 20-year low at $0.9535. The 61.8% retracement objective of the move since September 20 ~$0.9890 where it spat the Tenkan energized the move to power through the Kijun. Resistance the cloud and circle of influence.
On the way down Euro had been cascading in what seems like eternal flags in the channel as it spat the Tenkan. This pattern is one to watch moving forward should it remerge. Watch 3 waves to see development for continuation. Again, governed by EURGBP and Bund volatility.
Keep in mind prior recoveries have all lead to failure, the July attempt at a bullish breakout above previous resistance at 1.0270 failed and from there the Euro tumbled. EUR/USD bulls were unable to push the pair meaningfully above the long-term previous-support-turned-resistance level at 1.0350. That comes in from the low set at the start of 2017 and overlaps the 50-day EMA which has defined the downtrend over the last six months within the downtrend channel.
The Effects of Euro Depreciation and Response
“We can be gradual, but we should not be slow and delay normalization until higher inflation expectations force us into aggressive interest-rate hikes,” ECB’s Villeroy said Saturday. “What remains essential, however, is to be orderly, in order to avoid undue market volatility and ultimately economic volatility.”
Analyzing that move through Parity
The Euro did finally breach parity in July, if you recall the first attempt recovered off lows earlier this year after Dutch central bank chief Klaas Knot said if inflation continues to climb then rates may need to be raised 50bp, this was the first time such an aggressive shift has been suggested. However, it gave all those gains back. The low just over 1.5% away from reaching parity with the dollar. It was all the way back in 2002 that the euro and dollar last reached parity. The Euro reversed off the lowest closing rate since 2017 at the outer channel extended gains to above $1.07 before settling back lower again. The short covering rally enabling a reloading of US dollars. From there we got the sharp lows below parity which we are now correcting.
The European Central Bank continues to lag behind the Fed in tightening monetary policy, ECB President Christine Lagarde said earlier this month, noting that the euro area’s economy is likely to absorb a greater blow from the war in Ukraine.
British Pound – GBPUSD
We saw again this week the resilience in the British pound since it responded to its vicious move down in July to blast out of the sphere of influence to the cloud base and has since retraced to the median after hitting the 50% (as shown) and reversing. Cable’s Chikou balanced at week’s end with that power move off the tenkan. Last year GBPUSD reversed after 1985 lows & spat fib extension 1.618 level 1.1432 with previous low & -1/8. Above channel Tenkan confluence & sliding Kijun. Use Fibs and MM
The Pound Crisis
The pound against the dollar fell to its lowest level since the end of Bretton Woods, reaching $1.0350. The BOE’s measures to address the threat to systemic stability helped spur the initial short-covering rally in sterling that lifted to a high at the end of the week of about $1.1835. The move met and broke a technical retracement objective ~61.8% of the leg lower that began on September 13 from almost $1.1740. Sterling overcame resistance in the $1.1275-$1.1300 area to signal a deeper recovery.
Euro Pound – EURGBP
EURGBP screams false breaks. After exploding higher to 8/8 at .93 it reversed to back test the 50wma and cloud break to the outer median line where it advanced significantly through the top of the channel back through 86. EURGBP has dribbled higher out of the support at the sphere of influence.
The yen remains key for the overall currency matrix. We have a new BoJ coming in and YCC future tinkering will effects on the dollar, Aussie and yuan. The currency had been the worst performing major currency in 2022, sliding against the US dollar but then corrected hard. Relative to a basket of trading partner currencies and adjusted for inflation, the yen fell to levels last seen before the 1985 Plaza Accord.
Overall Asian currencies had a dismal year, though by years end they had recovered some for the most part. The Japanese Yen and South Korean won had been falling sharply lower in 2022. The Won fell below the much talked about psychological threshold of 1,300 per U.S. dollar for the first time in 13 years.
Also factor in that Asia is the epicenter of technology manufacturing – with the global “tech” Bubble in grave jeopardy. The confluence of China’s bursting Bubble, Japan’s foolhardy monetary policy gambit, and highly levered systems puts Asia today on a Collision Course with rapidly deteriorating macro and micro fundamentals. I’ll assume mounting hedge fund and derivative issues.
Japanese Yen – USDJPY
Focus on forex here remains on the yen since reports the next BoJ is Kazuo Ueda. The Japanese currency traded above 135 to the dollar intraday Friday for the first time since Kuroda loosened YCC on December 20th finishing down 2.1% for the week. We are watching for more significant moves should yen weakness develop and lead to contagion effects on the euro and EM currencies. In other words, is the USD correction completing or is this just a 1-2? Global bond markets will be informative along with geopolitical risk. Rising yields to pressure Japanese bonds. T
Eyes on the new BOJ Governor:
“For Prime Minister Fumio Kishida, Japan’s next central bank chief had to symbolise a departure from the unconventional policies of his predecessor Shinzo Abe – but without angering pro-growth lawmakers of Abe’s powerful political faction. The tricky task of steering the Bank of Japan (BOJ) out of years of ultra-low interest rates without upending markets required the skill to read markets and clearly communicate policy intentions, both domestically and internationally. Kazuo Ueda, a 71-year-old university professor who has kept a low profile despite strong credentials as a monetary policy expert, ticked some important boxes. He was branded neither an explicit dove nor hawk. While he was not even on the list of dark horse candidates floated by the media, Ueda was well known in global central bank circles.”February 16 – Reuters (Leika Kihara and Tetsushi Kajimoto)
The dramatic final moves last year on the yen stemmed from The Bank of Japan adjusting the central bank’s yield curve control program with saw yields rise sharply and a similar move in the yen. Dollar Yen went from 137.20 to 133.20 on the announcement. 10-year JGB yields surged to 0.455%, the highest since 2015 leading to a limit down halt on the Osaka Exchange.
The move followed the yen recovery picked after the softening of the November CPI prompted heavy selling in the US dollar and buying of bonds and a surge in US stocks. That led to a multi decade single day move lower of -3.5% in the USDJPY on the Thursday and another -2% Friday, losing 5.7% on the week”
Let’s be clear here, USDJPY was one of the most overcrowded trades with heavy BOJ intervention over the past few months. Intervention doesn’t always work, it’s a matter of timing and teamwork. Japan spent a record $42.8 billion on currency intervention in October to prop up the yen, the finance ministry said. Following the FOMC meeting the Yen was also the strongest currency in the rebound.
The USDJPY power move was clinical, it pushed to a new high at levels last seen in 1998. Prices confirmed a breakout above 139.391, the previous 2022 peak from July. The move higher was fueled after it corrected to the weekly Tenkan at 125.88 which held and fueled a swift return higher and has rallied dramatically. USDJPY traded to 145.89 above the 78.6% Fibonacci extension at 140.636 and 100% level at 143.425. Above here was the 1998 peak at 147.65. Eventually the USDJPY topped out at 151.95.
Key support now is the 50wma and cloud. The move closing above the Tenkan this week. USDJPY spat 8/8 with a 151.95 high back to the Tenkan. Chikou rebalanced on the up-move Friday. Use your USDJPY Murrey grid for now. EURJPY AUDJPY will determine risk on/off. The Tenkan is the natural balance of support ahead.
The impulsive leg higher earlier in the year came from The Bank of Japan reinforcing its commitment to low interest rates despite the rising inflation. The BoJ said it would purchase 10-year Japanese government bonds at a yield of 0.25% every business day to ensure that the yield doesn’t exceed that level. That sent the yen weakening to more than 130 to the dollar for the first time since April 2002.
“Japan’s currency interventions have been stealth operations in order to maximise the effects of its forays into the market, Finance Minister Shunichi Suzuki said…, after the government spent a record $43 billion supporting the yen last month. Bank of Japan Governor Haruhiko Kuroda, however, reiterated the central bank’s resolve to keep interest rates ultra-low, indicating that the yen’s broad downtrend could continue… ‘There are times when we announce intervention right after we do it and there are times when we don’t,’ Suzuki told a news conference… ‘We are doing this to maximise effects to smooth sharp currency fluctuations.’ The finance minister repeated his warning that authorities are closely watching market moves and will not tolerate ‘excessive currency moves driven by speculative trading’.”November 1 – Reuters (Tetsushi Kajimoto and Leika Kihara):
“Japanese foreign exchange reserves fell by a record amount in September and China’s dipped closer to $3tn as the surging dollar hit two of the world’s most significant pools of central bank assets. Japan’s foreign reserves dropped by a record $54bn to $1.24tn after authorities spent nearly $20bn last month to intervene in currency markets to stem the yen’s fall… Japan’s foreign reserves are at their lowest level since 2017, as markets resumed testing the yen’s ¥145 level against the US dollar. The foreign reserves of emerging markets in Asia have declined by more than $600bn in the past year, the biggest decline on record… FX reserves cover in months of imports has deteriorated ‘to the lowest level since the global financial crisis for [emerging markets] Asia-ex China,’ said Standard Chartered. ‘Against this backdrop, central banks may choose a more judicious use of FX reserves going forward.’”October 7 – Financial Times (Thomas Hale and Leo Lewis and Kana Inagaki)
It was a grim year for the yen, its worst year on record falling to 144.99 per dollar, a 24 year low, fueled by the selloff in Treasuries widening the yield gap between the US and Japan. It went another 5 yen from there.
Where it all started for the Yen
The BoJ has said Japan’s cyclical position with low core inflation and a more limited rebound in economic output warrants an easier monetary policy stance compared with its G10 peers. A strengthening dollar also tends to weigh heavily on emerging markets currencies, a rising dollar makes dollar-denominated debt more expensive for emerging nations to repay. The Bank of Japan chief Kuroda speaking at the G7 said BOJ will patiently continue with powerful easing announcing no change to monetary policy.
On the way up the price accelerated after the close above the Tenkan over 114 hence the pull for it to correct to the Tenkan which it did to ignite this rally a month ago. The Murrey Math level should remain massive support for dollar-yen. Any change will come from the weekly Kijun as it breaks through the old channel.
Yen weakness places Chinese manufactures at a competitive disadvantage, which has emboldened Beijing to play the currency devaluation card in an attempt to mitigate mounting economic woes and dumping of Chinese assets. Higher-yielding Chinese debt securities are losing their relative appeal (in a rising yield world), and now even the perceived stability of the Chinese currency is in question.
A slump of that to 150 may convince China to intervene in the currency market to protect its own flagging economy and it would be perfectly rational for it to do so, former Chief currency economist at Goldman Sachs Jim O’Neill said:
‘If the yen keeps weakening, China will see this as unfair competitive advantage so the parallels to the Asian Financial Crisis are perfectly obviously,’ ‘China would not want this devaluing of currencies to threaten their economy.’”
- USD/CNY is the onshore yuan and is permitted to trade plus or minus 2% from the daily reference rate.
- CNH is the offshore yuan. USD/CNH has no restrictions on its trading range.
- A significantly stronger or weaker rate than expected is typically considered a signal from the PBOC.
- The IMF lifted the yuan’s weighting in its Special Drawing Rights currency basket in May
Last year USDCNH spat +2/8, to test the April Highs and recalculated. China’s renminbi had hit its weakest level against the dollar since 2007 as concerns over President Xi Jinping’s appointment of a harder line leadership team and a struggling economy spread from equities to currency markets.
It caught the impulse power of USDJPY and followed through since on the correction. Resistance is MM levels and the Kijun and 4/8 for now. Support the previous high/low as marked and 0/8.
China’s Yuan, Japanese Yen, the British Pound and the Euro have seen significant moves given their geopolitical dynamics.
“China’s yuan finished the domestic session at a two-week high against the dollar on Friday, but still looked set for the worst annual performance in 28 years. The onshore yuan finished the domestic trading session at 6.9514 per dollar, the strongest such close since Dec. 14. If it finishes the late night session at the domestic closing level, it would have lose 8.6% against the dollar for the year…”December 30 – Reuters (Winni Zhou and Brenda Goh)
During July the PBOC cut the 5-year loan prime rate to 4.45% from 4.6% to boost the economy and cut short term rates further this past week. Beijing warned against criticism of its dynamic zero-COVID policy. The zero-tolerance approach, which depends on strictest lockdowns and mass testing, weighed heavily on the already slowing economy and raised the need for further policy easing. Protests and further implosion of the Chinese economy led to the Chinese reversing the zero Covid policy. A monumental failure to Xi.
Looking Back at the Yuan Fall and PBoC Response
On Aug. 19, the central bank also signaled its preference for a weaker yuan by setting its daily midpoint fix for onshore trading at more than 6.80 against the dollar. This was the first time it had crossed that level in 23 months. The PBOC allows the currency to trade within a daily range of 2% up or down against the dollar from its target level. The market is asking where the upper band is now?
“China’s central bank stepped up its defense of the falling yuan with a strongly-worded statement to warn against speculation, after the currency dropped to its lowest versus the dollar since 2008. ‘Do not bet on one-way appreciation or depreciation of the yuan, as losses will definitely be incurred in the long term,’ the People’s Bank of China said… Key market participants need to ‘voluntarily safeguard the stability of the market and be firm when they need to iron out big rallies or declines in the exchange rate.’ The central bank added that it has ‘plenty of experience’ to fend off external shocks and effectively guide market expectations.” September 28 – Bloomberg
The forward margin between the Yuan and the USD has widened as the PBoC’s rate cuts have been made it less attractive to hold the yuan against the dollar because the U.S. Federal Reserve has gone in the opposite direction.
April 28 – Bloomberg (Sofia Horta e Costa and Tania Chen): “When China’s tightly managed currency depreciates dramatically against the dollar, it can be hard to stop. More than six years after China’s shock 2015 devaluation roiled global markets and spurred an estimated $1 trillion in capital flight, the yuan is weakening at a similar pace. Onshore it’s lost nearly 4% in eight days, while the offshore rate is heading for its worst month relative to the greenback in history. Selling momentum is the strongest since the height of Donald Trump’s trade war in 2018.”
China Foreign Exchange Trading System
While the yuan has tumbled about 8% versus the USD this year, it has strengthened against the currencies of major China’s export rivals such as Japan and South Korea. The yuan’s trade-weighted basket is just about where it was at the end of December.
The Fed’s tightening cycle has triggered a widespread selloff in Asian currencies this year, including more than 10% declines for the Japanese yen and the Korean won. China’s central bank last let the yuan depreciate past 7 to the dollar in August 2019, during the trade war between Beijing and Washington.
The yuan however has held up better against other currencies this year. China Foreign Exchange Trading System, an arm of the central bank, measures the performance of the currency against a basket of 24 currencies, including the dollar, yen and euro and lesser-traded currencies such as Polish zloty and Russian ruble the WSJ reported. That yuan index was roughly at the same level it was at the start of 2022, according to the most recent data published on Aug. 19.
Australian Dollar – AUDUSD
The Aussie dollar has been rallying with optimism about China’s economy reopening & the prospect of a higher RBA cash rate. The Aussie has been getting support from commodities. Iron ore has been recovering sharply and it has been benefiting from a flip by China on Zero Covid policy. With pullbacks in commodities and a rise in US rates we have seen the AUD reverse off the July and cloud top confluence at Northern sphere of influence.
AUDUSD has risen steadily since it bounced from its sphere of influence with some help from that rebound in iron ore prices. This week the Aussie retested and held the tenkan. The Aussie had reversed after sliding off an eight-week high, trading over US71¢ with the revitalized hawkish Fed. Keep an eye on the effect on bonds and the dollar here. In essence at this time, it is all about the USD.
To reflect potential upside, we look at the way down AUDUSD with cloud, Kijun and channel confluence over $0.7200 with 5/8 and previous 38% now the pivotal resistance. Note the reversal at the top of the channel. Since completing a 5 at the psychological 80 level it had fallen & corrected under the weekly cloud in emotive fashion. Overcoming the $0.6575-$0.6600 then 68/69 areas lifted the tone.
China lockdown fears overhang and AUDUSD forwards support with bonds and RBA raising. Support is the Murrey Math Levels. Resistance the Cloud and Kijun like many commodities. It was the strongest major currency against the USD in July after the Yen correction so keep an eye on the basket should a bounce come into effect.
New Zealand Dollar – NZDUSD
The Kiwi reversed off the 61.8% level after it bounced off its sphere of influence at -1/8, a two year low with the dollar soaring. With the dollar weakening, the kiwi rallied. Strength is also came from the NZD/JPY testing highs, with 2015 levels at 94.00 in sight on a break (it closed 87.67). The point is yields, China reopening and a weak yen. On the way down it outran the Aussie lower after it mirrored the AUD spitting the lower channel wing to recover through Tenkan after momentum failed and reversed from there.
The NZDUSD broke the yearly low (0.6061) after failing to test the June high (0.6576) the flood gates opened. The Kiwi has recovered beyond those levels quickly testing the negative slope breaking the string of failed attempts to push through Kijun resistance.
Canadian Dollar – USDCAD
USDCAD bounced off the Kijun to above the tenkan off the 50%. The shift in the Canadian/US rate curve impacts the shifts. The psychological level at the 61.6 fib at 1.3659 at 4/8 confluence is like a magnet. Loonie weakness amplified by the weakness in crude oil prices. The CAD has weakened against the AUD and NZD. Watch flat Kijun and Tenkan feed the energy. Use Fibs for support and resistance. Eyes are on the recent decline in energy prices.
Emerging Market Currencies
Last year we saw seen a run-on EM market which unleashed a dangerous dynamic. We have seen EM systems facing global de-risking/deleveraging without a clear Fed and central banking community “put.” Nomura has warned 22 of the 32 countries covered by its in-house “Damocles” warning system have seen their risk rise since its last update since May to the most vulnerable since July 1999 and near the peak at “the height of the Asian crisis”. Seven countries, Egypt, Romania, Sri Lanka, Turkey, Czech Republic, Pakistan and Hungary are now at a high risk of currency crises.
When global liquidity flows abundantly, financial flows originating from U.S. trade deficits and leveraged speculation often find their way into higher-yielding EM securities. These flows end up at EM central banks, where they are conveniently “recycled” back into U.S. markets through (chiefly) purchases of Treasuries, agencies and other debt securities.
“Some of the world’s poorest economies embraced borrowing in their own currencies as a shield from painful swings in the U.S. dollar. Now that strategy may be coming back to bite. Debt issued by emerging-market governments and companies in their local currency reached $12.5 trillion in 2021, according to… Bank of America that excludes China’s enormous borrowings in the yuan. That compares with $4 trillion in foreign-currency debt. The fate of local-currency debt has become a key stumbling block in debt-restructuring negotiations in Ghana, Sri Lanka and Zambia. And it is forcing investors, policy makers and economists to rethink what an emerging-market debt crisis looks like.”December 4 – Wall Street Journal (Chelsey Dulaney)
EM tightening cycle fragility (aka “taper tantrum”) is not a new phenomenon. This is, however, the first episode of highly levered (securities markets and real economies) EM systems facing global de-risking/deleveraging without a clear Fed and central banking community “put.” With the global liquidity backstop now nebulous, there is every reason for the leveraged speculators to move more aggressively in exiting levered EM “carry trades.” And resulting outflows lead to only weaker currencies, more EM central bank Treasury (and sovereign debt) sales, and greater stress on global financial stability.
Mexican Peso USDMXN
The USDMXN break of its triple bottom saw Peso gains accelerate after breaking from the sphere of influence and spitting the tenkan. The big move on US rates down and the Mexican central Bank raising more than expected helped it penetrate the long sideways pattern and consolidation despite outside uncertainty from oil and high rates. Use the Gann octave and the extension fibs to help measure the noise.
Turkish Lire USDTRY
Nothing new here, the Turkish Lira slow decline continued after the recent with another surprise 150 bps rate cut in Turkey. USDTRY rides the median in the corrective channel tier spitting 17 against the dollar. USDTRY barely took strength from other emerging markets big reversals. Since we broke the all-time Lira low of 18.4 hit in December it has stepped headed towards +4/8 near 18.80. Turkey’s recent monetary policy decisions have not been based on economic fundamentals, since late 2021 seeing a cumulative 850bps cut in rates in a matter of months to current levels.
To recap the wild 18-10 USDTRY swing last year reversed after falling in 3 waves to explode over the Tenkan, weekly cloud Kijun and 50wma below. The Murrey Math and Fib targets with last year’s Lire all-time lows in a hyper inflating collapse. So far this year the lira is the worst performer in emerging markets, raising concerns that the country could be heading for a repeat of the FX crisis seen at the end of last year.
The background is the same with President Recep Tayyip Erdoğan vowing to cut interest rates despite spiraling inflation. In December last year, the Turkish Central Bank introduced a “Lira deposit scheme” to stem the decline in the currency. The Turkish president said that the country had ‘wasted years’ with the misguided view that prices should be controlled by using higher borrowing costs to suppress consumption. Such policies, he said, benefited only ‘those living a charmed existence and filling their pockets with [the proceeds of] high interest’, including foreign investors.”
Central Bank Rate Watch:
Central bankers continued their hawkish tilt for the most part all week. Though Fed’s Bostic gave the stock and bond markets relief when he said he’s firmly in the 25bps camp for rate hike pace (as opposed to 50bps). There were no major Central Bank decisions. The Pakistan Central Bank (SBP) hiked 300bps to 20% saying the IMF required the rate hike to get funding released. Emerging markets are caught in a never-ending loop brought to you by their bankers.
The week ahead is a busy week for Central Bank decisions, we get key monetary policy meeting, from Australia’s RBA, Canada’s BoC and Japan’s BoJ all with Interest Rate Decisions. For the US we get Federal Reserve Chair Jerome Powell delivering his semiannual monetary policy testimony before the Senate Banking, Housing and Urban Affairs Committee, then the next day he is before the House Financial Services Committee,
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From The TradersCommunity Research Desk