Rebound in Risk FX Tepid at Best

Market Drivers August 14, 2018
EM recovers fuels risk rally
UK Labor data in line
Nikkei 2.28% Dax 0.68%
Oil $67/bbl
Gold $1194/oz.
Bitcoin $5900

Europe and Asia:
EUR GE GDP 2.0% vs. 2.1%
GBP UK Labor 4.0% vs. 4.2%
EUR GDP 0.4% vs. 0.3%
EUR ZEW -13 vs. -20

North America:
No Data

With Turkish lira off its worst level of the week, rallying about 5% in overnight trade, risk trades in FX saw small rally at the start of European open, but the move quickly fizzled after Erdogan started speaking.

President Erdogan remained defiant, decrying the economic “war” foisted on the country and vowing to not give in to the markets. Mr. Erdogan’s nationalistic rhetoric shows no signs of trying to address Turkey’s current account problems and almost assures that the currency crisis will morph into a credit crisis once USDTRY clears the 7.0 level for good and sends the country’s banking sector towards insolvency.

As we’ve noted earlier, the EM crisis could become a much more serious economic event if oil prices continue to rise causing balance of payment issues in energy-dependent EM economies such as India where the rupee hit an all-time low of 70.00 against the dollar.

Meanwhile, on the economic front, the data from UK was mildly positive with the Unemployment rate hitting 4.0 and average wages in line at 2.7%. Cable rose ahead of the news buoyed by risk on flows, but could not hold the 1.2800 figure in post news reaction dropping to 1.2765 before finding some support. The pair is grossly oversold, but can’t find any traction in the market unless risk on flows return and for now remains in a tight 1.2700 -1.2800 range as markets assess risks in the near term.

The euro also saw its rally flame out as the pair could not hold the 1.1400 level in morning London dealing despite slightly better ZEW and flash GDP readings. For now it has managed to hold above the 1.1350 level but if risk-off flows return later in the day the shorts will no doubt try to test those multi-month lows.

With no material economic data in US session, the risk on/risk off battle should continue. After several days of pounding, all the risk FX pairs are now heavily oversold, and if they can hold the current support level some rebound is due with EURUSD popping to 1.1450 GBPUSD to 1.2900 and USDJPY to 111.50 as the week proceeds.