EM Rundown: Two Key Central Bank Meetings on Tap

As we roll into a new trading week, the biggest story remains the uninterrupted rally in the world’s reserve currency. For the first time since President Nixon officially severed the US dollar’s fixed link to gold back in 1973, the US dollar index has risen for ten consecutive weeks. Of course, the dollar index only measures the greenback’s performance against G10 currencies, but the buck has also rallied against almost all the major emerging markets we cover. Heading into this week, key central bank meetings in Hungary and Turkey will determine whether that trend can be “bucked” (pun intended).

USDHUF: Hungary’s Central Bank Likely to Remain on Hold

Tomorrow, Hungary’s monetary council will announce its decision on interest rates and release latest monetary policy statement. While central bank meetings are always worth noting for traders, this one may be a nonevent for USDHUF and EURHUF traders; the central bank is likely to keep interest rates on hold at 2.1% after completing its massive easing cycle in July of this year. The central bank projects inflation of just 0.0% this year, but expects prices to rise by 2.5% in 2015, removing the primary impetus for cutting interest rates. Indeed, if these projections turn out to be correct, the central bank will likely remain on hold until at least the second half of next year before embarking on tightening cycle.

As long as the central bank sticks to the script, the USDHUF is likely to continue its recent uptrend. Rates pulled back slightly over the last two weeks, but this controlled dip took the RSI out of oversold territory and led to a bounce from two-week bullish trend line support near 240. To the topside, swing traders may start to target previous resistance around 250-2, which represents the 12-year high in the pair. Meanwhile, a break of bullish trend line support could expose the 50-day MA at 236 next.

Source: FOREX.com

USDTRY: Turkey’s Convoluted Interest Rates

Unlike most central banks, which conduct monetary policy through one primary interest rate, Turkey’s central bank (the CBRT) tweaks a number of different interest rates to try to achieve its monetary policy goals. As such, it can be difficult for traders to immediately parse the short- and long-term impacts of any CBRT monetary policy decision. For Thursday’s meeting, the primary rates to watch will be the one-week repo rate (currently 8.25%) and the short-term interest rate corridor (7.50%-11.25%). A reduction in any/all of these rates would likely be a negative for the lira, while a hike (unlikely, in our view) would be bullish.

Thankfully, the technical picture for USDTRY is much clearer. The pair just hit the measured move target of the inverted Head-and-Shoulder pattern that we highlighted two weeks ago (see {"USDTRY Rocketing to 5-Month Highs, but Further Gains Still Favored" for more). If this week’s meeting can push the pair above 2.2450 resistance, further gains will be favored in the medium-term. On the other hand, with the bullish technical pattern played out, the pair may be due for a pullback toward 2.20 if the CBRT is relatively hawkish.

Source: FOREX.com