Oil gives commodity currencies a boost
(Peter Rosenstreich, head of market strategy)
Commodity currencies, led by NOK and CAD dominated gains against the USD in the Asian session. The catalyst was OPEC and non-OPEC oil producers reaching their first deal since 2001 to reduce the global oil glut. Crude oil prices initially surged 5% on news of the completed deal and since last Thursday have rallied 9.74% to $54.51. However, after an initial spike Asian regional equity market indices declined (exceptions: ASX tracking commodity, specifically coppers surged, higher). Given the general euphoria around the first deal in 15 years and Saudi Arabia signalling its wiliness to cut more, we could see Brent oil heading to $58 (WTI $56). Given the overstretched USD positioning (five Fed hikes by end of 2018) and room for further oil upside we believe that the Trump reflation theme is running hot and therefore would play long commodity FX trades in the near-term. In equites, higher oil has already been priced in so traders should steer clear of US energy sector plays (US valuations look rich, making discounted Europe a smart relatively valueable trade).
Long GBP
(Peter Rosenstreich, head of market strategy)
We remain constructive on GBP in the near-term. The UK CPI inflation rate looks to have accelerated in November to 1.1% (2-year-high) aided by an increase in food and fuel prices. With housing and labor markets still tight the BoE will likely keep policy unchanged this week. Also, the UK Supreme Court will continue to hear the appeal around the High Court ruling that the government must get parliamentary permission before triggering Article 50 and beginning the withdrawal process form the EU. While Brexit will remain the primary generator of short-term volatility, mid-term improvement in the UK domestic economy coupled with a side-lined BoE will allow the GBP to strengthen. We view sell-offs in GBPUSD as an opportunity to reload long positions.
TRY under fire after twin bombings in Istanbul
(Arnaud Masset, market analyst)
The Turkish lira had another rough start into the week, losing almost 2% against the greenback after the explosion of two bombs in Istanbul on Saturday. The lira, which has been increasingly sensitive to local political risk and the risk development on a broad basis, is heading into a complicated year as the improved US yield outlook is dragging investors out of emerging markets. On the political side, President Erdogan’s AK party has submitted a bill aimed at extending the powers of the president at the expense of the prime minister. The proposed constitutional changes would shift Turkey toward an executive presidential system from a parliamentary one. If passed, this bill will most likely not be viewed positively by international investors as it will put the continuity of stability in jeopardy and will increase political tensions within the country.
The Turkish economy is already struggling to finance a massive trade deficit of roughly $15 billion, while GDP growth showed further signs of weakness recently. GDP growth slid into negative territory in the third quarter as it contracted 1.8%y/y versus 0.3% median forecast and 3.1% in the June quarter. Unfortunately, the outlook is not so pretty as the central bank continues to struggle with strong inflationary pressure, which is enhanced by the weak lira, and finds itself forced to tighten monetary policy. Indeed, in late November the CBRT increased two of its benchmark rates, lifting the repurchase rate by 50bps to 8% and the lending rate by 25bps to 8.50%. The TRY’s reaction was muted as the market continued to focus on the US enhanced yield outlook, hoping for Donald Trump to give a boost to the world’s largest economy.