USD is fighting back against CEEMEAs – Rabobank

Piotr Matys, EM FX Strategist at Rabobank, note that the US dollar is fighting back against the CEEMEA currencies trimming its year-to-date losses and the high yielders – the Turkish lira and the South African rand – are struggling to hold to their recent gains as US 10-year yields rose to the highest level since March 2017 providing the USD with much needed support.

Key Quotes

“We are watching closely the DXY Index for fresh clues on USD/CEEMEAs. Price action in the DXY Index implies that the corrective wave II (formed by three smaller waves ABC) has run its course, bottoming recently around the 76.4% Fibonacci retracement.”

“A close above the November 27 low at 92.496 would imply that the short-term bias is shifting to the upside. Further gains beyond the 93.28~ pivot would increase our conviction that wave III is in the making towards the June high at 97.871. A sharp retracement below recent lows around the 91.75 level would invalidate the bullish wave count based on the Elliott wave principle.”

“Should the DXY Index gain a much better upside traction, it should reignite the bullish momentum in USD/TRY. It is worth pointing out that a sharp pullback from the all-time high at 3.9826 to the recent low formed the falling wedge technical pattern, which is a bullish signal.” 

“With the momentum indicator signalling that USD/TRY may have bottomed, the odds are skewed in favour of a rebound in the US dollar against the lira in the coming weeks.”

“Following the sharp retracement - caused by market friendly Cyril Ramaphosa becoming the governing ANC party new leader - USD/ZAR has been trading sideways so far this year. That said, the MACD provided a bullish signal crossing the signal line. The 12.52~ pivot is key to watch. If cleared, it may force at least some market participants to cover their short positions in USD/ZAR.”

“The outcome of the ANC’s National Executive Committee’s meeting on Wednesday may set the tone for the rand. Reportedly the NEC will discuss a motion to order President Zuma to resign before his term ends in 2019. In fact, USD/ZAR briefly fell sharply earlier today after dubious report that President Zuma resigned – a story that has not been confirmed by respectable news media.” 

“The NEC’s meeting will be a major test of support not only for ANC’s leader Ramaphosa, but perhaps more importantly how much influence President Zuma retained over the NEC. The market could be too optimistic about Ramaphosa’s ability to implement much required structural reforms, which could be stalled by ANC officials who are still loyal to Zuma.” 

“Rebound in USD/PLN from the lowest level since 2014 has almost reached an important resistance area formed by the September and the November lows at 3.5136 and 3.5157 respectively. This area needs to be cleared to improve the short-term outlook for USD/PLN. It’s worth watching the RSI given that a break above the trendline resistance would indicate a shift in the momentum. Profit taking also lifted EUR/PLN, but a close above the 4.20~ pivot is still required to adopt a more constructive short-term view.”

“Last, but not least, USD/HUF is testing the 259.30~ pivot. A close above this important level would be a constructive short-term signal for USD/HUF. To confirm the January 5 low at 307.18 as an important bottom EUR/HUF must clear at least the 309.90 threshold.”