Originally published by AxiTrader
QUICK SUMMARY
The Turkish lira fell around 20% last week as the argument with the US over the release of a Pastor intensified. As the ECB becomes increasingly worried about EU exposures to Turkey, the lira opened up in early Asia down another 10%, but it caught a bid and is currently down 5.38%.
It’s only early Asia and it is a Monday. So this could be a head fake and could get washed away in the next 6, let alone 24 hours.
But, the trouble in Turkey and the risk of sentiment helped the US dollar break out and close above significant resistance in US Dollar Index terms and below the head and shoulders neckline in EUR/USD terms Friday. Structurally that's more important than this morning's funk.
Anyway, this morning the DXY is at 96.19 while the euro was down again – Turkish Lira impact – in early Asia trade at 1.1371. It's since recovered to 1.1400 now.
That US July CPI Friday printed 2.4% in core terms and 2.9% in headline terms (post financial crisis high) also helps the US dollar as it reinforces the Fed’s tightening cycle and the relative strength of the US economy.
Elsewhere on forex markets the yen is a little stronger with all the market funkiness and is trading at 110.60 this morning. Naturally, that also means the Aussie dollar is lower but it's regained most of its losses and is at 0.7290, down 0.15%. Sterling is now flat at 1.2770 while the kiwi is now in the black at 0.6588 up 0.15% while USD/CAD is flat at 1.3138.
BIGGER PICTURE
The market is getting longer of US dollar's according to CFTC data released Friday. Or at least the big spec accounts I watch are getting longer as at last Tuesday. My guess would be that as at the close of business in New York Friday the market is even longer of Dollars and maybe even this very stocky euro long might have reduced.
The context of this table and the fact that the US dollar is still gaining even when the market is long is the old adage rewritten. That is, I’d rewrite “the market can stay irrational longer than you can stay solvent” to “the market can get push further with longs [or shorts] than you think until it gets to an extreme and runs out of position limits”. I know the first one is more elegant. But the key here is position limits. We aren’t there yet – as you can see in the chart below.
The key here is that the US dollar move might be short term overdone by some technical measures. This whole Turkey mess may not lead to contagion in other markets and a big market funk. But the EUR/USD move, the US dollar move more broadly. looks like the start of a very big break. One that aligns with both the technical and the fundamentals. The US economy, the Fed, and inflation are aligned in such a way as to drive the US dollar higher. Just look at this head and shoulders pattern in the euro.
DATA:
Looking ahead it is very quiet on the data calendar front. Chinese loan and money supply data is about it. All eyes are gong to be on Turkey and worries of contagion. For the moment that’s not happened to the extent we’ve seen in the past.
Have a great day's trading.