Forex Traders Weekly Outlook – US Jobs Report and Hawkish Fed Boost Dollar

The US dollar rose sharply on September US Nonfarm Payrolls rising 263,000 and the unemployment rate fell to 3.5% from 3.7% as the labor force participation rate fell. Stocks collapsed and yields rose as the weight of all the hawkish Fed talk this week took their toll. Sterling fell nearly a full cent to 1.1063 from as high as 1.1225 before the jobs report. AUD, NZD also fell around 100 pips, EURUSD closed near the lows, even with oil soaring since the OPEC+ cuts USDCAD was able to hold highs. Eyes are on USDJPY as it presses the intervention levels around 145.40.

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.

Geopolitically the landscape is changing fast, a move to the right in Italy, the rapid referendums and Russia’s annexation in eastern Ukraine of territories, after taking Crimea in 2014 and a divisive election in Brazil. a new phase in the conflict.

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 October 7, 2022

  • For the week, the U.S. Dollar Index the U.S. Dollar Index added 0.6% to 112.80 (up 17.9% y-t-d).
  • For the week on the upside, the Brazilian real increased 4.1%, the Norwegian krone 1.7%, the South Korean won 1.3%, the Canadian dollar 0.7%, the Mexican peso 0.5%, the Singapore dollar 0.2%, the New Zealand dollar 0.2%. The Chinese (offshore) renminbi increased 0.10.% versus the dollar (down 10.89% y-t-d).
  • On the downside, the Swedish krona declined 1.1%, the British pound 0.8%, the Swiss franc 0.7%, the euro 0.6%, the Australian dollar 0.4%, the Japanese yen 0.4%, and the South African rand 0.1%.
Major and Minor FX Rates

Central Bank Rate Watch:

Another week for central bankers:

Fed Reserve’s speakers return as the FOMC comes out of blackout. Multiple regional Fed district bank Presidents will give their interpretations of the Fed’s recent actions.

Key Central Bank Decisions, Reports

The dollar has come back with a vengeance after falling the first few weeks of August to be hitting 37-year highs on the Pound, 24-year highs on the Yen and significant levels such as parity on the Euro and over 7 against the Yuan. In the emerging markets the moves have been even more dramatic.

What we focused on in the fundamental backdrop was the selloff in the euro and yen was linked to soaring natural gas prices and the threat that Russian supplies might be cut off altogether hitting big energy importers and machinery exporters, Japan and Germany hard. German gas giant Uniper SE saw the government come to the rescue with bailout package of over 9 billion euros and an eventual privatization.

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.

“The Federal Open Market Committee’s (FOMC) overarching focus right now is to bring inflation back down to our 2% goal. Price stability is the responsibility of the Federal Reserve and serves as the bedrock of our economy. Without price stability, the economy does not work for anyone.”

“Restoring price stability will take some time and requires using our tools forcefully to bring demand and supply into better balance. Reducing inflation is likely to require a sustained period of below-trend growth.”

“While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.” Jerome Powell’s Jackson Hole speech

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.”

US Yield Watch:

U.S. Treasuries ended a down week with losses across the curve as capital markets responded to a mostly better than expected Employment Situation report for September. The post-data selling was enough to briefly lift the 30-yr yield to a level not seen since early 2014 (3.877%) while yields on shorter tenors stopped below this year’s highs. We saw pressure on the 2s10s spread, which compressed by another two basis points to -42 bps. 

Yield Watch

  • 2-yr: +7 bps to 4.30% (+10 bps for the week)
  • 3-yr: +7 bps to 4.33% (+12 bps for the week)
  • 5-yr: +8 bps to 4.14% (+10 bps for the week)
  • 10-yr: +6 bps to 3.88% (+8 bps for the week)
  • 30-yr: +5 bps to 3.84% (+7 bps for the week)

Highlights – European Bonds last week

  • Greek 10-year yields slipped two bps to 4.81% (up 350bps).
  • Italian yields surged 19 bps to 4.71% (up 353bps).
  • Spain’s 10-year yields rose 12 bps to 3.41% (up 285bps).
  • German bund yields gained nine bps to 2.19% (up 237bps).
  • French yields increased eight bps to 2.80% (up 260bps).
  • The French to German 10-year bond spread narrowed about one to 61 bps.
  • U.K. 10-year gilt yields jumped 15 bps to 4.24% (up 327bps).

Highlights – Asian Bonds last week

  • Japanese 10-year “JGB” yields added a basis point to 0.25% (up 18bps y-t-d).

Europe

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.

This week we watch for the effect of the Italian elections. Keep an eye on the yield spread between the benchmark Italian 10-year government bond (BTP Italia) 4.353% and the German equivalent (Bund) 2.024% the most closely followed gauge of how investor’s view Italy’s prospects. That will flow through to confidence, or not in the Euro.

Paolo Pizzoli, senior economist at ING “When Italian politics start to appear on the market’s radar, downside risks to the euro often start to emerge … [but] markets may welcome a result that yields a stable majority and barring some unwelcome surprises … Italian political risk might have a rather muted impact on the euro into the new year.”

“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.

France Preparing for Hard Winter as Energy Crisis Escalates

“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)

Euro – EURUSD

EURUSD recovered back to the initial median line before the throwover to the 20-year low set in off $0.9535 but stalled around the 61.8% retracement objective of the move since September 20 ~$0.9890 where it spat the Tenkan. A break of $0.9650 would signal a return to the lows (under initial Chunnel). Parity is a key cap now.

EURUSD has been submerged since June 2021 from a high of 1.2280. Support comes from a cluster of old lows around the 0.9600, then -1/8. Euro continues to cascade in what seems like eternal flags in the channel as it spits the Tenkan. We watch if Kijun (pink) reflecting Tenkan (orange) creates any impulse as EURUSD develops 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.

British Pound – GBPUSD

The pound against the dollar GBPUSD traded in a wide range last week. It 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 a short-covering rally in sterling that lifted to a high at the end of the week of about $1.1235. The move met a technical retracement objective ~61.8% of the leg lower that began on September 13 from almost $1.1740. Sterling needs to overcome resistance in the $1.1275-$1.1300 area to signal a deeper recovery, a loss of $1.09 could see $1.0750-$1.0800.

It seems our jibe of cable parity is now doing the rounds becomes closer to fact from fiction. To stop the rout of sterling there is active talk of the Bank of England doing an emergency interest rate rise to defend the currency. This would come just days after the Bank of England MPC at its September meeting Thursday raised the key bank rate by 50 bps from 1.75% to 2.25%, as expected. of note from the MPC statement; “Since August, wholesale gas prices have been highly volatile, and there have been large moves in financial markets, including a sharp increase in government bond yields globally. Sterling has depreciated materially over the period.”

Money market wagers imply that the UK’s key rate will peak at over 5.5% in the second half of 2023. Three BOE officials who pushed for a bigger, 75 basis-point hike, argued that incoming fiscal support would stoke further price pressures on Thursday Bloomberg reported.

Cable’s Chikou incredibly closed balanced at week’s end. 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

British pound continues to have difficulty since it’s vicious move down in July that reversed to unchanged by the end of the month. Cable lost all of the steam from its biggest weekly gain since December 2020 against the dollar to above $1.26 to be smashed to the bottom channel under -1/8 and 1.1500 after retesting the channel and Tenkan.

Euro Pound – EURGBP

EURGBP after being in the doldrums saw a massive reversal after exploding higher off 8/8. The energy from when it back tested 50wma and cloud which broke and advanced significantly through the top of the channel and immediate level of resistance over 0.8900 to 93.00 and back. EURGBP support under Kijun with Tenkan.

Asia

The yen has been the worst performing major currency in 2022, sliding against the US dollar though it has corrected some in recent weeks. Relative to a basket of trading partner currencies and adjusted for inflation, the yen fell to levels last seen before the 1985 Plaza Accord.

Asian currencies have had a dismal year. The Japanese Yen and South Korean won have been falling sharply lower in 2022. The won has 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

Japan’s ministry of finance intervention helped steady the dollar-yen exchange rate with JPY145.00 the test point. The sideways movement was aided by the pullback in US rates. After briefly pushing above 4% in the middle of the week the 10-year US Treasury traded below 3.70% before the weekend. The two-year US yield reached almost 4.35% at the start of last week and finished below 4.18%. The currency extended losses to fresh 24-year lows last week at 145.89, as the spread between monetary policy in Japan and the United States widened further.

“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)

The yen on track for 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.

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.

A former top Japanese currency official said that the yen could weaken to 150 per dollar due to a deepening divergence in monetary policy. Veteran economist Jim O’Neill said “The yen’s slide may spark turmoil on the scale of the 1997 Asian Financial Crisis if it declines as far as 150 per dollar”

The USDJPY power move has been 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. This move 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 is the 1998 peak at 147.65. Key support is the Tenkan and 8/8.

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.

Use your USDJPY Murrey grid for now. EURJPY AUDJPY will determine risk on/off. The Tenkan is the natural balance of support ahead.

An impulsive leg 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.

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.’”

Japan Intervened to Support Yen for First Time Since 1998 After BOJ Decision

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

For the week USDCNH closed up 0.26%

China’s Yuan, Japanese Yen, the British Pound and the Euro have seen significant moves given their geopolitical dynamics. China’s yuan is now at the edge of the allowed trading band since a shock currency devaluation in 2015.

The currency hasn’t been this close to the weak end of the fixing band, which limits the exchange rate’s moves by 2% on either side, since the People’s Bank of China devalued the yuan in 2015. We are in a sixth month of losses with its real estate crisis overhanging.

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 has warned against criticism of its dynamic zero-COVID policy. The zero-tolerance approach, which depends on strictest lockdowns and mass testing, has weighed heavily on the already slowing economy and raised the need for further policy easing.

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?

We are heading into a weeklong holiday in China during the first week of October and reports suggest the CCP put banks on notice that they should be prepared for intervention.

“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 dollar fell from CNY 7.25 in the middle of last week to almost CNY 7.0835 before the weekend. The dollar settled near CNY7.1150, while against the offshore yuan, the dollar finished a little below CNH 7.1300.

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.

China Foreign Exchange Trading System August 2022

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 made a 2-year low this week near $0.6365 on September 28 and recovered to close a little bit above $0.6520. Risk assets struggle in the follow through of the Fed’s rate hikes. The AUDUSD has been dropping since it reversed off an eight-week high, trading over US71¢ with the revitalized hawkish Fed. We cautioned that The Reserve Bank of Australia has hammered on stagnant wage growth as a problem within the Australian economy. In June, the government raised the minimum wage by 5.2%. 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 under 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 would lift the tone.

The futures market leans (~60%) in favor a of 50 bp hike by the RBA on October 4, essentially unchanged last week. A half-point move would lift the target rate to 2.85%. The terminal rate is seen a little over 4% near mid-2023.

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 affect.

New Zealand Dollar – NZDUSD

For the week NZDUSD closed down 4.22%

The Kiwi hit a two year low this week after the Fed sent the dollar soaring. On the way down it has outrun the Aussie lower this week after it mirrored the AUD spitting the lower channel wing to recover through Tenkan after momentum failed and reversed from there. Once NZDUSD broke the yearly low (0.6061) after failing to test the June high (0.6576) the flood gates opened. The Kiwi is tracking the negative slope amid the string of failed attempts to push back to the Kijun resistance. Note the power dump at 1/8 and well under the old 61.8% break closing under .5600. The RBNZ meets on October 5. The market is more confident that it hikes 50 bp and again in November, its last meeting year. That would put the target rate at 4%. The terminal rate is seen closer to 5.25% in early Q3 23.

Canadian Dollar – USDCAD

For the week USDCAD closed up 2.48%

The USDCAD popped through 1.3800 on the hawkish Powell comments making a new two-and-a-half-year high near CAD1.3835. The psychological level at the 61.6 fib at 1.3659 at 4/8 confluence is now support. The Canadian dollar is no longer the best G10 performer this year against the US dollar. That now goes to the Swiss franc, which is almost 7% compared to the Loonie’s 8% decline.

Once the USDCAD recaptured the Tenkan led by the AUD and NZD as it spat the weekly flat-topped triangle it has been one way. Watch flat Kijun and Tenkan. Use Fibs for support and resistance. Eyes are on Canadian CPI, the recent decline in energy prices should help alleviate some of the broader pricing pressures. The BoC have been quiet since their 100bp hike in July after it was accompanied with the removal of language about acting in a “forceful” manner, but it did signal rate hikes are to continue with the path being decided by its ongoing assessment of the economy and inflation.

Emerging Market Currencies

Key EM currencies suffered additional losses this week.

Since the depths of July, we saw a dramatic squeeze. Emerging and developing nations’ foreign reserves have shrunk by $379 billion this year through June, according to data from the International Monetary Fund. Excluding the effects of exchange-rate fluctuations and the large foreign-exchange holdings of China and Gulf oil exporters, emerging markets are seeing the biggest drawdowns since 2008 according to JPMorgan Chase & Co.

The Run-on EM markets is unleashing a dangerous dynamic. 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.

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 Mexican Peso held its triple bottom to rally back to the Tenkan as rates rose in the US. It continues in the long sideways pattern and consolidates despite outside uncertainty from oil and high rates. The recent high near 19.5 per USD was the highest level since March of 2020 and tracked general strength in Latin American currencies which has since reversed. Use the Gann octave and the extension fibs to help measure the noise.

Turkish Lire USDTRY

The Turkish Lira slow decline picked up this week with another surprise 100 bps rate cut in Turkey. USDTRY rides the median in the corrective channel tier spitting 17 against the dollar. We broke the all-time Lira low of 18.4 hit in December. The Turkish Central Bank last cut its Weekly Repo Rate to 12.00% at its meeting. Turkey’s recent monetary policy decisions have not been based on economic fundamentals, with since late 2021 seeing a cumulative 700bps cut in rates in a matter of months to current levels.

Turkey Central Bank Shocks with Another 100bp Cut Accelerating Turkish Lira Free Fall

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.”

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.

Watch Central Banker and Geopolitics speeches, reports and rate moves. 

Sources: TC WSJ

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