Asian Open Appetite for Risk is Back on The Menu

A calmer session overnight for markets as USDTRY fell from recent highs as did USDZAR and USDRUB. After trading above 7.20 to the U.S. dollar on Monday, USDTRY closed at about 6.37 to the U.S. dollar overnight, approximately 8% below Monday’s close. Apart from President Erdogan announcing a ban on the import of U.S. made electronic goods, little appears to have changed.

Turkey has economic structural issues that include being a large current account deficit country which means it relies on foreign funding. Throw into the mix, high inflation, rising U.S. interest rates and Presidential meddling in central back affairs and the Turkish Lira has spent the better part of 2018 falling, as investors head for the exit door. More recently an economic situation has been politized as the feud with the U.S. over the imprisonment of an American pastor intensified and remains unresolved.

As the 1997 Asian crisis which begun in Thailand illustrated, a currency crisis in a small country can spark the fires of contagion. However, thus far the effects of the economic events in Turkey have only had limited spill over into developed equity markets with banking stocks in Europe feeling the heat after reports that ECB officials are concerned about the exposure of European banks to Turkey. This has in turn seen key European stock indices come under pressure with the German Index, the Dax now testing some very important technical levels.

As can been viewed on the weekly chart below, after recent declines the Dax has held and is currently sitting just above 12250/12200, an area of support provided by the trendline which comes from the 8690.5 low of February 2016. For now, safe to say the uptrend is intact.

Turning to the daily charts and looking through the lens of Elliott Wave, a technical analysis technique, the Dax appears to be in the process of completing a Wave 4 correction in the form of contracting triangle. Contracting triangles are usually a continuation type pattern often viewed before the next impulse Wave begins. In this case it would be Wave 5 higher.

Also of interest, both Waves a and Wave c bounced from the trendline support highlighted above. It is possible the overnight low at 12286 becomes a Wave e low, the confirmation of which would be a move and close back above 12500.

Providing trendline support holds and the Dax posts a daily close above 12500, I favour taking a long position in the Dax with a stop loss below the trendline support 12250/12200, so let’s say 11999 in the initial instance with a view to trailing it higher. The initial upside objective is the trendline resistance viewed 13000 and then the year to date highs 13596, with the blue-sky target for the trade towards 14000. A trade that combines a nice set-up with an acceptable level of capital exposure in uncertain times.

Source Tradingview. The figures stated are as of the 8th of August 2018.  Past performance is not a reliable indicator of future performance.  This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation

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