Equity Markets Stabilize

Forex News and Events:

“Normalization” should not trigger sell-off just yet

The tremors resulting from last week’s FOMC meeting seems to have faded. Asia’s regional indices are stable, while the European session feels like the start of a normal trading week. The European commission’s ruling that Portugal’s planned €4.9bn rescue of Banco Espirito Santo (BES) was in adherence with EU rules on aid also helped calm nerves. However, with the weekend to examine the situation, investors have released that with solid US data, a NFP number over 200k and unemployment rate unchanged at 6.1%, the Feds forward policy trajectory is unchanged. Not pulled in or pushed out. The marginal equity correction based on the recognition that the Fed is inching towards normalization should be viewed as a healthy pullback rather than a start of a full blow unwind. Despite the improving growth and signs of inflation real tightening in term of interest rate adjustment is still far off. Fundamentally or structurally nothing has changed. In the next few week, Yellen (and dominate dovish members) will increasingly stress that while asset purchases are coming to a halt, normalization is will be gradual. With little US data, other than ISM non-manufacturing (expected to hit a 11 month high), USD bullish momentum should pause as the focus moves across the Atlantic.

Turkey risk: strong inflation, presidential elections require cautious stand

Turkish inflation unexpectedly rebounded in July. The CPI accelerated at the pace of 0.45% in month to July, pulling the yearly inflation up to 9.32%. The core inflation picked up to 9.75%. The July inflation report is no good news for the Central Bank of Turkey, preparing for more rate cuts to boost the economic growth. First, because the inflation dynamics remain well above the central bank’s softer forecasts. Second, the international capital flows turn in disfavor of TRY given the supportive macroeconomic data out of the US. Although the US yields remain hesitant, with 10-year yields stuck around 2.50%, there is only one way possible walking towards the Fed normalization. The markets continue pricing in the first rate hike by mid-2015. Despite Friday’s disappointment, we note that the US printed the sixth consecutive month of NFP above 200K.

The lira is among the most USD-sensitive currencies (alongside with BRL and ZAR). The drop in carry appetite should certainly weigh on TRY, while lower lira should continue weighing on inflation dynamics. The faster inflationary cycle is clearly threatening for the financial stability and limit inflows from long-horizon investors. We do not rule out the possibility of further CBT easing due to heavy political pressures; however believe that the lower policy rates will certainly increase the downside TRY risks.

USD/TRY remains well supported by the 200-dma (1.1298), trend and momentum indicators turn positive. The option bets are skewed on the upside for the week ahead. Traders should remain cautious in TRY and TRY holdings this week as the first round of presidential elections are due on August 10th and the event risk is high.

Today's Key Issues (time in GMT):

2014-08-04T07:30:00 CHF Jul PMI Manufacturing, exp 53.1, last 54
2014-08-04T08:30:00 EUR Aug Sentix Investor Confidence, exp 9, last 10.1
2014-08-04T08:30:00 GBP Jul Markit/CIPS UK Construction PMI, exp 62, last 62.6
2014-08-04T09:00:00 EUR Jun PPI MoM, exp 0.00%, last -0.10%
2014-08-04T09:00:00 EUR Jun PPI YoY, exp -1.00%, last -1.00%
2014-08-04T13:45:00 USD Jul ISM New York, last 60.5
2014-08-04T14:00:00 DKK Jul Foreign Reserves, last 438.2
2014-08-04T14:00:00 DKK Jul Change in Currency Reserves, last 1.6B

The Risk Today:

EURUSD EUR/USD is bouncing within its underlying downtrend. Hourly resistances can be found at 1.3444 (28/07/2014 high) and 1.3485 (24/07/2014 high). An hourly support lies at 1.3367. In the longer term, EUR/USD is in a succession of lower highs and lower lows since May 2014. Downside risk is given by 1.3210 (second leg lower after the rebound from 1.3503 to 1.3700). A strong support stands at 1.3296 (07/11/2013 low). A key resistance lies at 1.3549 (21/07/2014 high).

GBPUSD GBP/USD continues its relentless decline since its mid-July peak. Despite, the overextended fall, the support implied by the rising channel (see also the 61.8% retracement) has been broken. Hourly resistances can be found at 1.6893 (01/08/2014 high) and 1.6928 (intraday high). An hourly support now lies at 1.6814 (01/08/2014 low). In the longer term, the break of the major resistance at 1.7043 (05/08/2009 high) calls for further strength. Resistances can be found at 1.7332 (see the 50% retracement of the 2008 decline) and 1.7447 (11/09/2008 low). A key support stands at 1.6693 (29/05/2014 low).

USDJPY USD/JPY has weakened near the key resistance at 103.02. Monitor the support at 102.36 (18/06/2014 high, see also the 38.2% retracement). Another support can be found at 102.04 (30/07/2014 low). A long-term bullish bias is favoured as long as the key support 99.57 (19/11/2013 low) holds. However, a break to the upside out of the current consolidation phase between 100.76 (04/02/2014 low) and 103.02 is needed to resume the underlying bullish trend. Another resistance can be found at 104.13 (04/04/2014 high), while a major resistance stands at 110.66 (15/08/2008 high).

USDCHF USD/CHF weakened on Friday. However, the short-term bullish momentum remains positive as long as the support at 0.9035 (28/07/2014 low) holds. Another support can be found at 0.9008. An hourly resistance now lies at 0.9107. From a longer term perspective, the recent technical improvements call for the end of the large corrective phase that started in July 2012. The long-term upside potential implied by the double-bottom formation is 0.9207. Furthermore, the break of the resistance at 0.9037 calls for a second leg higher (echoing the one started on 8 May) with an upside potential at 0.9191. As a result, a test of the strong resistance at 0.9156 (21/01/2014 high) is expected.

Resistance and Support: