EM currencies bounce back as USD weakens

Forex News and Events

Emerging markets stabilise (by Arnaud Masset)

After suffering a massive sell-off, which was triggered by a hawkish shift in the Fed rate path projections, emerging market currencies recovered somewhat on Friday as the US dollar weakened on a broad basis. Eastern Europe currencies took the most of the greenback’s weakness with the Russian ruble and polish zloty rising 0.28% and 0.30% respectively. The Turkish lira also got some relief after tumbling as much as 2% amid the terror bombing attack that hit Istanbul last week-end. South American currencies have had a mixed session on Thursday with the Colombian and Chilean pesos tumbling 1.30% and 1.55% respectively. The Mexican pesos was trading flat this morning while the Brazilian real closed in positive territory, up 0.20%, with USD/BRL easing to 3.3651.

The Brazilian real, just like most EM currencies, has been insensitive to local development as investors were focused exclusively on the US dollar and the last FOMC meeting that took place on December 13-14. Even the Brazilian Senate’s approval of a constitutional amendment aiming at limiting growth in public spending went unnoticed. The upper House has voted 65 to 14 for PEC 55 (previously PEC 241) in spite of massive street protests as it is widely seen as another hard blow on the poorer. The un-elected president that slid into office amid Dilma Rousseff removal last August is facing growing discontent as he keeps pushing reforms that would never been accepted under a Rousseff’s government. In spite of this new austerity measure that should help the country climbs out of recession, the uncertainty stemming from elevated political risk holds international investors on the back foot that weighs on the real and Brazilian assets in general.

Even though we believe that USD overshoot remains the main threat as we are sliding into 2017, the current political uncertainty may prevent a rapid recovery in the real. Moreover, the unpredictability of the upcoming US government is prompting investors to stay invested in USD.

Russia set to surprise markets (by Yann Quelenn)

This morning the Central Bank of Russia will release its key rate and markets expect it to remain unchanged at 10%. In our view, we expect the CBR to cut rates by 50 basis points to 9.5% due to several recent signs of improvement in Russia. The first of these is inflation, which has dropped to 5.7% from 6.1% since the end of September. The CBR still expects to reach 4% by the end of 2017, which means that Russian policymakers are likely to start a new easing cycle.

Russia is still suffering with an economic growth of -0.8% yield-to-date. Nonetheless, since oil prices recently largely appreciated, the economy may have expanded on an annualized basis which would also support a normalization path of the interest rates.

On top of that, currency conditions are ideal at the moment. Indeed, the ruble has strengthened strongly against the US dollar and is now trading at less than 62 ruble for a single dollar note - making it easier for the CBR to react. We therefore believe that today’s decision should weaken the ruble.

Silver - Monitoring Key Support At 15.82.

 

Today's Key Issues	Country/GMT
Dec 9 Money Supply Narrow Def, last 8.48t	RUB/08:00
3Q Labour Costs YoY, last -0,10%	EUR/08:00
Oct Trade Balance Total, last 3670m, rev 3665m	EUR/09:00
Oct Trade Balance EU, last 778m, rev 773m	EUR/09:00
ESV Budget Forecasts	SEK/09:00
ECB's Weidmann Speaks at Opening of Bundesbank's Money Museum	EUR/09:00
Oct Trade Balance SA, exp 24.5b, last 24.9b, rev 24.4b	EUR/10:00
Oct Trade Balance NSA, exp 29.0b, last 26.5b	EUR/10:00
Nov CPI MoM, exp -0,10%	EUR/10:00
Nov F CPI YoY, exp 0,60%, last 0,60%, rev 0,50%	EUR/10:00
Nov F CPI Core YoY, exp 0,80%, last 0,80%	EUR/10:00
Dec 15 FGV CPI IPC-S, exp 0,17%, last 0,15%	BRL/10:00
Dec 16 Key Rate, exp 10,00%, last 10,00%	RUB/10:30
Dec CBI Trends Total Orders, exp -5, last -3	GBP/11:00
Dec CBI Trends Selling Prices, exp 20, last 19	GBP/11:00
ECB Vice President Constancio Speaks in Madrid	EUR/12:15
Oct Int'l Securities Transactions, last 11.77b	CAD/13:30
Nov Housing Starts, exp 1230k, last 1323k	USD/13:30
Nov Housing Starts MoM, exp -7,00%, last 25,50%	USD/13:30
Nov Building Permits, exp 1240k, last 1229k, rev 1260k	USD/13:30
Nov Building Permits MoM, exp -1,60%, last 0,30%, rev 2,90%	USD/13:30
Fed's Lacker, Bank of America's Moynihan to Speak in Charlotte	USD/17:30
Nov Tax Collections, exp 100571m, last 148699m	BRL/23:00
SURVEY: Australia's MYEFO Budget Deficit 2016-17 A$37b	AUD/23:00

 

The Risk Today

Yann Quelenn

EUR/USD is stalling below 1.0500 amid the Fed meeting. Yet, hourly resistance is far away given at 1.0670 (14/12/2016 high). Hourly support can be found at 1.0367 (15/12/2016 low) has been broken. Expected to further consolidate. In the longer term, the death cross late October indicated a further bearish bias. The pair has broken key support given at 1.0458 (16/03/2015 low) is on target. Key resistance holds at 1.1714 (24/08/2015 high). Expected to head towards parity.

GBP/USD has exited uptrend channel. Hourly support is given at 1.2302 (18/11/2016 low). The technical structure suggests further weakness towards support at 1.2302. The long-term technical pattern is even more negative since the Brexit vote has paved the way for further decline. Long-term support given at 1.0520 (01/03/85) represents a decent target. Long-term resistance is given at 1.5018 (24/06/2015) and would indicate a long-term reversal in the negative trend. Yet, it is very unlikely at the moment.

USD/JPY's bullish pressures are still very strong. The pair has finally broken strong resistance area at 116.00. Hourly support can be found at 114.74(12/12/2016 low). Stronger support lies at 112.88 (05/12/2016 low). The technical structure suggests further strengthening towards 120.00. We favor a long-term bearish bias. Support is now given at 96.57 (10/08/2013 low). A gradual rise towards the major resistance at 135.15 (01/02/2002 high) seems absolutely unlikely. Expected to decline further support at 93.79 (13/06/2013 low).

USD/CHF has surged amid the Fed meeting. Key support is given at the parity. Hourly resistance at 1.0205 (30/11/2016 high) has been broken. Expected to consolidate. In the long-term, the pair is still trading in range since 2011 despite some turmoil when the SNB unpegged the CHF. Key support can be found 0.8986 (30/01/2015 low). The technical structure favours nonetheless a long term bullish bias since the unpeg in January 2015.

Resistance and Support:

EURUSD	GBPUSD	USDCHF	USDJPY
1.13	1.3481	1.1731	135.15
1.0954	1.3121	1.0652	125.86
1.0874	1.2775	1.0344	121.69
1.0464	1.2421	1.0278	118.04
1.0367	1.2302	1.0021	112.88
1.0000	1.2083	0.9632	111.36
0.9613	1.1841	0.9522	109.80