EM Rundown: Could USDTRY bulls quit cold turkey?
Matt Weller, CFA, CMT January 25, 2016 2:00 PM
<p>Central banks will be traders’ central focus in the G10 this week, with monetary policy “decisions” out of the Federal Reserve, Reserve Bank of New Zealand and Bank of Japan, but there will also be some potentially important central bank meetings in the emerging world as well. While not too many readers are trading the currencies of Hungary, Nigeria, Ukraine or Israel (each of which features a central bank meeting this week), there will be central bank updates from more widely-followed nations like Russia, South Africa, and Turkey.</p>
Central banks will be traders’ central focus in the G10 this week, with monetary policy "decisions" out of the Federal Reserve, Reserve Bank of New Zealand and Bank of Japan, but there will also be some potentially important central bank meetings in the emerging world as well. While not too many readers are trading the currencies of Hungary, Nigeria, Ukraine or Israel (each of which features a central bank meeting this week), there will be central bank updates from more widely-followed nations like Russia, South Africa, and Turkey.
USD/RUB: CBR on hold despite ruble turmoil?
It’s been a rough start to the year for Russia’s economy, with weak inflation figures combined with a "flash crash" in the ruble to an all-time low against the US dollar reminding Russian citizens of the ongoing economic struggles. The CBR had previously suggested it would cut interest rates in one of its next three meetings, but may have to walk balk that dovish view at its meeting this Friday, given the recent weakness in the ruble.
While it’s possible that the central bank could even raise interest rates at its meeting, such a move could provoke political consequences with the economy struggling. After the potential blowoff top two weeks ago, USD/RUB is edging back up toward the 80.00 level and sellers may try to defend that area if the CBR comes out more hawkish than expected.
USD/ZAR: How high could the SARB hike?
Speaking of political issues, the South African Reserve Bank (SARB) will meet on Thursday for the first time since the government dismissed the country’s finance minister in December. The political turnover, along with a similarly struggling currency should force the SARB to hike interest rates at its meeting on Thursday; the real question is whether we’ll see a larger-than-usual 50bps hike (to 6.5%) or merely a run-of-the-mill 25bps increase (to 25bps).
In addition to the close decision on interest rates, the central bank will also release its latest economic forecasts, with most analysts expecting a downgrade to near-term GDP and CPI expectations. On balance, USD/ZAR may edge lower toward 16.00 if the SARB hikes 50bps, whereas a more conservative 25bps hike could reinvigorate the recent uptrend.
USD/TRY: Struggling at 3.0650 resistance ahead of QIR
Finally, though the Central Bank of the Republic of Turkey (CBRT) won’t be making any decisions on interest rates this week, it will be releasing its latest economic forecasts in the Quarterly Inflation Report. This widely-watched release will give CBRT Governor Basci an opportunity to outline the central bank’s views on Turkey’s economy, including the latest impact of the drop in oil prices and possible comments about how the central bank plans to overhaul its process for making monetary policy decisions.
This release will be less "binary" than some of this week’s other EM central bank decisions, but could be particularly impactful for Turkey’s lira. As the chart below shows, USD/TRY rolled over off previous resistance at the 3.0650 last week, and a perceived-hawkish report from the CBRT could cause USD/TRY to break support at its 3-month bullish trend line and 50-day MA in the 2.97 zone. If seen, USD/TRY could then retreat back toward the 2.80 level. Of course, if the CBRT fails to deliver and comes off as more dovish, the lira rout could resume; if USD/TRY breaks conclusively above 3.0650 resistance, a continuation toward 3.10 or higher seems likely.
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