China's currency may be back on a firm path to appreciation, now that the country's leadership issue has been settled, according to latest thoughts on FX markets from JP Morgan Private Bank.
TRY: macro backdrop continues to surprise positively
The rebalancing of the Turkish economy continues to surprise positively with October trade data showing a deficit of only $5.5bn compared to expectations of $8.0bn.
The central bank’s soft landing has contributed to a decline in import demand with imports down 5.6%yoy and exports up 11.6%. Turkish export resilience remains a story about diversification away from a slow growing Europe toward faster growing Middle East countries. As a result of improving trade date, the current account is expected to narrow to $53.5bn (6.8% of GDP) from USD55.8bn in (7.2% of GDP) in September.
An improving current account trend would generally be positive for the currency, but upside in TRY is limited given a rising risk of intervention. CBRT governor Basci has warned that the lira is approaching the overvalued territory. Based on the CBRT’s focus on a currency basket this implies that intervention is likely near the 1.75 level in USD-TRY. Intervention in Turkey is unlikely to be as disruptive as in other emerging market countries with the CBRT likely to lower its funding rate to temper currency strength. The CBRT does not want to engineer currency weakness so much as prevent a stronger lira from boosting import demand and reversing the trade deficit improvement.
Gold: Hasn’t lost its luster yet
Gold’s hard sell off captured investor attention after falling over $40/oz to finish lower by 1.5%. The initial break lower is presumed to have been triggered by a large sale on the NY open on Wednesday 28th Nov which broke the $1,735/oz support level, triggering stop limit orders down to the $1,710/oz level.
Gold volatility responded in kind, with 1 month implied vol rallying nearly 1%. We don’t think anything has materially changed for gold. It is our view that this selloff was technical in nature and the longer-term fundamentals remain supportive of being long gold.
Gold ETF holdings increased 0.40moz, its largest weekly inflow since early-October, to a fresh high of 88.42moz. In addition, the global trend towards stimulus remains in place with continued MBS asset purchases and widening balance sheet. These types of longer-term drivers of gold should trump the shorter-term technical price action. We view this pullback as an opportunity to establish long positioning.
BRL: weakening amid absence of central bank
USD-BRL has floated above 2.10 and on Friday was trading toward 2.14 absent central bank (BCB) intervention. The BCB had $1.8bn in a long USD futures positions maturing on 30 November 2012, so in allowing it to fix implicitly sold USD to the market.
However, the lack of a new USD sales auction led market participants to test the BCB’s resolve in illiquid Friday afternoon markets. Future price action is dependent on when and if BCB decides to intervene and sell USD, particularly following disappointing growth data.
The 3Q12 GDP report was a huge disappointment, printing just 2.4% quarter-on-quarter versus consensus and JPM projections of 4.8%, and up from 0.8% in 2Q12. This result was also likely a surprise for government officials with the central bank’s GDP proxy suggesting a 4.7% expansion and may have implications for policymaking ahead.
Following the GDP report, most sell-side economists revised down their 2013 GDP forecasts by 50-100bp. Prior to the report, consensus expectations for 2013 GDP were growth of 3.9%. As USD-BRL trades above the 2.00-2.10 that the market had come to expect, it remains unclear where the government see fair value for the currency.