The week can be summed up in forex by the ebbs and flows of Fridays market after the US December jobs report. There is a thought that the deluge of central bank rate hikes is nearing the end as the world topples into recession. The Treasury market had a flying start to the new year, highlighted by a 32 basis points decline in the 10-yr note yield to 3.56%. The 2s10s inversion widened to 71 basis points (from 54 basis points at the start of the year) while the 3mo10yr inversion widened to 105 basis points (from 53 basis points at the start of the year).
The U.S. Dollar Index, up 0.5% just before the employment report was released, was down 1.1% to 103.90 by the close, a long way from the DXY almost hitting 115 on September 28th.
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.
Eyes will be on big data points and Central Banks including U.S. CPI, global PMIs and commodity inventory levels. We had the US Jobs report and FOMC minutes out in the first week of 2023. Now we have the US and Japan CPI reports out this week. Powell seems determined in at least spinning interest rates will remain higher for a longer period of time. Friday’s soft data puts the timing all into question.
The shocking terrible ISM services report Friday pilled on to the softer wage’s aspect of December jobs report. The ISM forward-looking indicator and it gave the market confidence that the Fed is nearing the peak hike. Treasury yields collapsed and the euro jumped from 1.0510 to 1.0646. The USD/JPY range was 134.77 just before non-farm payrolls all the way down to a late-day session low of 132.07.
USD/CAD rallied early in the day to 1.3650 then tumbled to 1.3439 because of an extremely strong Canadian jobs report boosted the Loonie. Candian bonds are now pricing an additional 25 bps hike from the BOC later this month. AUD and NZD gained against the CAD as the thought is the RBA and RBNZ have a better handle of not overtightening.
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.
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 January 6, 2023
- For the week, the U.S. Dollar Index increased 0.4% to 103.88 despite Friday’s sharp fall. 2022 gains were 8.2%
- For the week on the upside, the Mexican peso increased 1.8%, the Brazilian real 1.1%, the Australian dollar 0.9%, the Canadian dollar 0.8%, and the British pound 0.1%. The Chinese (onshore) renminbi gained 1.03% versus the dollar.
- On the downside, the Norwegian krone declined 2.0%, the Swedish krona 0.9%, the Japanese yen 0.7%, the euro 0.6%, the South African rand 0.4%, the Swiss franc 0.4%, the South Korean won 0.3%, and the New Zealand dollar 0.1%.
Yield Watch:
Yields are one of the biggest influencings on currency prices. We saw that as late as Friday after the softer than expected earnings component of the US December jobs report. The bond market focus has shifted towards fundamental developments and away from monetary policy.
The Treasury market had a flying start to the new year, highlighted by a 32 basis points decline in the 10-yr note yield to 3.56%. The 2s10s inversion had widened to 71 basis points (from 54 basis points at the start of the year) while the 3mo10yr inversion widened to 105 basis points (from 53 basis points at the start of the year). Friday’s dollar index told us much of the story. The U.S. Dollar Index, up 0.5% just before the employment report was released, was down 1.1% to 103.90 by the close.
The soft wages data had some kindling thrown on from ISM services and factory orders. The December ISM Non-Manufacturing Index also registered its first contraction reading (49.6%) since May 2020, and November factory orders (-1.8% m/m) were much weaker than expected with declines both durable goods and nondurable goods orders.
US Yield Watch
- 2-yr: -18 bps to 4.27% (-15 bps for the week)
- 3-yr: -24 bps to 3.98% (-25 bps for the week)
- 5-yr: -20 bps to 3.71% (-30 bps for the week)
- 10-yr: -16 bps to 3.56% (-32 bps for the week)
- 30-yr: -11 bps to 3.69% (-28 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.”
Europe
Euro – EURUSD
EURUSD recovery stalled but remains still above the old channel and at the cloud. A breather is healthy after the 1-2 energy burst back over parity and the initial median line after holding the tenkan retest. 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 June break.
EURUSD has been submerged since June 2021 from a high of 1.2280. Support comes from 1/8 and parity. A cluster of old lows around the 0.9600, then -1/8. Euro had been cascading in what seems like eternal flags in the channel as it spat the Tenkan. The power was seen with Kijun (pink) reflecting Tenkan (orange) creating impulse as EURUSD developed in the channel. Watch 3 waves to see development for continuation. Again, governed by EURGBP and Bund volatility
Keep in mind 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 Euro’s attempts to rally have disappointed all year and have been impacted by surging inflation. Record-breaking natural gas prices have plunged Europe into a crisis with energy rationing this winter. In Germany, the cost of imports relative to exports has jumped to levels last seen in the 1980s. The weak euro in turn exacerbates a surge in energy costs. The EURUSD has depreciated over 12% since the start of the year and is currently trading below parity.
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.”
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.
Bloomberg reported Goldman Sachs Group Inc strategists see the euro falling to $0.95 in the event of a deeper and more prolonged cut to gas flows. A prolonged adjustment to the region’s terms-of-trade is not yet in the euro’s price, according to Karen Fishman, strategist at Goldman Sachs. The currency is trading at levels that are in line with the investment bank’s base case scenario of a mild euro-area recession later this year.
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.
In a nutshell the Euro have been undermined by crisis after crisis, the energy crisis is devastating Germany in particular. German reports like trade, GDP and the Ifo business climate underscore who difficult the situation is. The Ukraine war and Russia threats with Nord stream 1 pipeline continue to cruel growth prospects.
Another headwind is the higher energy prices and supply disruptions stemming from the war to depress growth in Europe. Any kind of weakening demand in China for European goods could also weigh heavily on the region.
“The European Central Bank is determined to nip ‘in the bud’ any fragmentation in borrowing costs between eurozone countries, its president Christine Lagarde said…, warning anyone doubting this was ‘making a big mistake’. Appearing before EU lawmakers in Brussels, Lagarde defended the ECB’s decision, made at an emergency meeting last week, to accelerate work on a new policy tool to counter a recent surge in the borrowing costs of more vulnerable countries. ‘You have to kill it in the bud,’ the ECB president said… ‘Fragmentation will be addressed if the risk of it arises; and it will be done so with the appropriate instruments, with the adequate flexibility; it will be effective; it will be proportionate; it will be within our mandate and anybody who doubts that determination will be making a big mistake.’”
June 20 – Financial Times (Martin Arnold)
British Pound – GBPUSD
British pound has responded to its vicious move down in July to blast out of the sphere of influence towards the median 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 ABS 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 .90 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 shown no momentum out of the support at the sphere of influence.
Asia
The yen had been the worst performing major currency in 2022, sliding against the US dollar but has corrected hard in recent months. 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 weakened more than 8% this year, following an 8.6% drop in 2021, which was the fastest annual fall since 2008. 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
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.
USDJPY spat 8/8 with a 151.95 high back to the Tenkan. Chikou rebalanced on the 600-pip move last Friday. Next support is recent highs and the tenkan below that the rectangle confluence. Use your USDJPY Murrey grid for now. EURJPY AUDJPY will determine risk on/off. The Tenkan is the natural balance of support ahead.
BOJ Intervention
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.’”
China
- 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
The USDCNH spat +2/8, to test the April Highs and recalculated. It caught the impulse power of USDJPY last Friday and followed through since to 3/8 and under the Kijun. Resistance is MM levels and the Tenkan and 8/8 for now. Support the previous high/low as marked and 2/8. 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
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 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. AUDUSD has held steadily since it bounced from its sphere of influence with some help from the rebound in iron ore prices. This week the Aussie retested and held the Kijun. 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 $0.6760 with 4/8 and 50% is now the pivotal resistance. This week we closed back over 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 area now 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 held on to 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 has rallied. Strength is also coming 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
The USDCAD bounced off the Kijun to above the tenkan and back to the 61.8%. The shift in the Canadian/US rate curve has impacted again after making a new two-and-a-half-year high a month ago. 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 fed the energy. Use Fibs for support and resistance. Eyes are on the recent decline in energy prices.
Emerging Market Currencies
This 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 was short lived as it couldn’t get out of the sphere of influence and rallied back above the tenkan. The big move on US rates down helped it penetrate the long sideways pattern and consolidation despite outside uncertainty from oil and high rates. The move had no momentum and failed. 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:
The most notable events are FOMC minutes. Fed speakers include St. Louis Federal Reserve Bank President James Bullard is scheduled to give a presentation on the U.S. Economy and Monetary Policy on Thursday. Richmond Federal Reserve Bank President Thomas Barkin and Atlanta Federal Reserve Bank President Raphael Bostic are scheduled to give speeches Friday.
For a Complete Central Bank Overview Visit TC Central Bank Watch:
For a Complete Macro and Micro Market Overview Visit TC Traders Market Weekly
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From The TradersCommunity Research Desk