Currency markets are off to a relatively slow start to the week, with the dollar generally inching lower vs. its major G10 counterparts. While not the focus of today’s report, it is worth noting that the trade-weighted dollar index is inching below its 50-day moving average at 97.00, suggesting that a deeper dip could be in the cards as we head into May. Speaking of May, many European banks will be closed on Friday for the May Day holiday, meaning that market liquidity could be more subdued than usual heading into the last trading day of the week.
Of course, “mayday” is also an international distress call used to signal a life-threatening emergency and while trading isn’t a life-and-death endeavor (though it does feel like it sometimes!), there are still ample opportunities for both bulls and bears alike to panic. Below, we zero in on two situations that could prompt some EM FX traders to call “mayday” this week:
1) USD/RUB Downside Momentum Stalling?
In last week’s EM Rundown, we highlighted the potential for USD/RUB to test the top of its channel and 20-day MA resistance near 54.00. As it turns out, the volatile currency pair was rejected from the barrier, fell back down to test 50.00, and is now edging back higher off that key level. From a technical perspective, the bias will remain lower as long as resistance at 54.00 holds, but bears will be hesitant to commit too strongly with buyers consistently defending resistance at the 50 level.
From a fundamental perspective, Russia’s central bank faces a difficult interest rate decision on Thursday, with consensus estimates calling for a 100bps cut amidst a dramatically strengthening ruble and still elevated inflation expectations; a larger-than-expected cut could reinvigorate the downtrend, while a decision to remain on hold could take USD/RUB through channel resistance near 53.00.
2) USD/TRY Rolling Over off 2.70?
While the ruble managed to strengthen over the last few months, Turkey’s lira has continued to depreciate against the world’s reserve currency. USD/TRY stalled out against its 161.8% Fibonacci extension at 2.7150 last week and after peeking above that level earlier today, the exchange rate has fallen all the way to a two-week low at 2.67 as of writing. At the same time, bearish pergences in both the MACD and RSI indicators are raising additional warning flags for bulls.
When it comes to the underlying economy, Turkey’s central bank will release its highly-anticipated Quarterly Inflation Report on Thursday. The lira has depreciated sharply since the last inflation report in January, so presumably the bank will be looking for inflation to exceed its previous forecast of 5.5%. That said, the line separating monetary policy and politics is a bit blurry in Turkey, so the central bank may opt to hold off on any interest rate hikes until after June’s big election.
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