Market ignoring risks
Interestingly markets seem to be ignoring the political risk building in Italy. Peripheral European yield spreads failed to react to Northern League and 5-Star have reached a tentative coalition agreement. Despite the dramatic cost this coalition might have on Italy government spending Euro continues to firms against the USD. Industrial metals such as copper and iron ore are threating to break higher conveying a renewed risk appetite.
President Trump’s decision to withdraw from the JCPOA should be considered a major geopolitical shift. The unexpected announcement has pushed oil prices above $77 / bbl for the first time since 2014. Tighter supplies are forcing analysts to raise price forecasts for 2018. Rising prices, in addition to cost cuts is allowing oil companies once again turn a profit. Valuations have lagged oil price due to skepticism over diminishing supply glut but the removal of Iranian oil will likely have investors allowing for higher forward outlook. On the FX front we anticipate commodity currencies CAD, NOK and AUD to improve.
NZD keeps falling despite broad USD pullback
The New Zealand dollar was one of the few G10 currencies to lose ground against the greenback as speculators scaled down bullish bets. Indeed, according to data released by the CFTC last Friday, speculators trimmed long Kiwi positions significantly last week with net long positions falling to 12,546 contracts from 16,573 a week earlier – this correspond to a decrease from 44% of total open interest to around 25%.
The last four weeks were rough for the New Zealand dollar has it gave up more 6.5% against the buck to reach a multi-month low at $0.6903 on May 10th amid widening interest differential and a cautious RBNZ. . However, the debasement has stopped for now with NZD/USD climbing back to $0.6950. On the downside, the currency pair is approaching a key technical support area at between $0.6869 (50% Fibonacci on March 2009- September 2011 rally) and $0.6781 (low from November 2017). Despite the solid debasement of the last few weeks, we think that sellers are not exhausted yet as speculators are still net long Kiwie and may continue to unwind long positions.
Turkey current account deficit deepens
After announcing its withdrawal from Iran deal last Tuesday, United States decision caused further uncertainty in the Middle East region. The diplomatic confrontation between Israel and Iran keeps on tightening following Israel’s Prime Minister Benjamin Netanjahu declaration with regard to Iran’s engagement towards its nuclear program freeze. The Iran deal is in danger though European effort to maintain it could worsen its relationship with the US, who temporarily put aside trade tariffs against the Old Continent.
Recent Turkey current account balance deficit of USD -4.81 billion (prior: -4.52 billion) continues to expand, strongly impeded by a continued decline in goods trade (USD -4.6 billion) and employee compensation (USD -1.31 billion, at 3-years low). On the other side, positive numbers in services (USD +1.12 billion), though estimated below its 5-year average at USD 1.85 billion continue to support the current account balance.
Accordingly, the downtrend with regard to EM currencies continues, strongly impacted by continued risk-off effect. We expect the USD/TRY to maintain its strength, as long as no intermediation with regard to Iran deal are found, adding up with Central Bank of Turkey relative inaction with regard to its required monetary policy tightening.
Currently trading at 4.32, USD/TRY regains strength following recent decline at 4.22 (10/05/2018 low), heading along the 4.35 range in the short-term.
