EM Rundown: TRYing to Divine the CBRT's Next Move

The dog days of summer of winding down once again, though volatility in the forex market may not pick up until next week’s start of September data deluge. In the G10 FX space, most traders will be focused on US Durable Goods orders (Tuesday) and Eurozone CPI data (Friday), but there are three potentially market-moving announcements in the more widely-traded EM currencies as well.

USDZAR: Will Q2 GDP Recover?

After collapsing in the wake of widespread mining strikes in Q1, South Africa’s Q2 GDP report (Tue) is expected to show modest improvement. Analysts and economists are expecting that the report will show 0.9% quarter-over-quarter growth after Q1’s 0.6% contraction; Year-over-year growth, meanwhile, is expected to clock in at 1.2%. On a technical basis, USDZAR (not shown) has been trapped within a tight range from 10.55-10.80 since the start of June, and with rates currently near the middle of that range, only a big surprise in the GDP reading is likely to shake the pair out of its well-trodden consolidation zone.

USDHUF: Hawks to be Left Hungry?

Meanwhile in Hungary, the central bank is widely anticipated to leave interest rates unchanged at 2.10%, officially marking the end of its long easing cycle. For 24 consecutive meetings over the last 2+ years, the Magyar Nemzeti bank cut interest rates by between 0.10% and 0.20%, taking its main interest rate down from 7.0% to just 2.1% over that period. With both inflation and GDP figures improving markedly in July, the central bank is likely to leave interest rates unchanged. Despite the likely end of easing, the Hungarian forint continues to sell off against the US dollar, with the USDHUF (not shown) pressing against a 25-month high in the 2.3850 zone. A dovish statement could cause this pair to break that key barrier, potentially opening the door for further gains toward 2.45 as we head into September.

USDTRY: TRYing to Divine the CBRT’s Next Move

While traders are almost-unanimously expecting Hungary’s central bank to remain on hold, the market is split about what to expect from the Central Bank of the Republic of Turkey (CBRT) on Wednesday. About half of economists are expecting the CBRT to cut interest rates another 25bps after last month’s 50bps cut from 8.25% to 7.75%. On the other hand, a significant portion of traders believe the central bank will remain on hold, with the most recent data showing inflation ticked up to 9.3% and unemployment ticked down to 8.8% in July.

The CBRT’s position remains unenviable, but in our view, the current environment favors leaving interest rates unchanged at 7.50%. With some traders positioned for a cut, the USDTRY has the potential to pullback if the CBRT elects to sit on its hands. On a technical basis, the pair has been in a choppy uptrend since late July, and previous-resistance-turned-support at 2.1550 should provide support on any short-term pullbacks. Meanwhile, if the CBRT surprises traders by cutting rates further, a breakout to new 5-month highs above 2.1900 and a possible continuation toward 78.6% Fibonacci resistance at 2.2160 becomes more likely.

Source: FOREX.com