Central banks take center stage

Volatility in the G10 currencies remains subdued near multi-year lows in the first official week of summer (in the northern hemisphere at least).  At this point, traders seem content to turn their focus to the soccer pitch rather than their trading screens, and if volatility remains subdued, we could see a return of the halcyon days of carry trade supremacy. The market’s renewed focus on interest rates is also having a major effect on emerging market currencies, which tend to offer higher interest rates than their developed market counterparts.

Surprisingly, merging market currencies have generally shrugged off the ongoing violence in three regional hotspots: Ukraine, Syria and Iraq. We’ve discussed the clash between Russia and Ukraine extensively over the last few months, but as a quick update, Ukrainian President Poroshenko enacted a unilateral ceasefire over the weekend, and as we go to press, the latest headlines suggest that the pro-Russian separatists will also lay down their arms until Friday.

Unfortunately, the prospects for peace are more doubtful in Syria and Iraq. The recent Israeli airstrikes in Syria have set another potential geopolitical fuse aflame.

Meanwhile in Iraq, the ISIS militants continue to capture towns in Northern and Western Iraq, though this military action is not likely to interrupt oil exports, as we noted on twitter earlier today.

Though merging market currencies have whistled past this graveyard thus far, traders may feel compelled to sell down their emerging market exposure if the violence escalates further. More likely, the central bank carousel will draw the market’s attention this week.

 

Hungary: Another Cut on Tap?

The Hungarian National Bank (HNB) will meet tomorrow and is widely expected to extend its recent cycle of small interest rate cuts by reducing rates from 2.40% to 2.30%. The country is now experiencing outright deflation, miles away from the central bank’s official target of 3% inflation. The Hungarian forint is near the middle of its yearly range against both the euro and the U.S. Dollar, and as long as HNB delivers as expected, rates may remain relatively subdued. Support for both the EUR/HUF and USD/HUF is favored at the 200-day MAs: 303.00 and 222.00 respectively.

 

Poland: Political Crisis Driving Zloty Lower

There’s no central bank meeting this week in Poland, but a burgeoning political crisis is driving the zloty sharply lower. Last week, bugged conversations of backroom political dealings between top government officials and central bankers were released to the public, shaking the public’s confidence in the ruling Civic party. From a trading perspective, geopolitical uncertainty is almost always a negative for the currency in question, and the EUR/PLN spiked sharply last week as a result.

On a technical basis, the pair is now testing a resistance confluence from the 50-day moving average and 61.8% Fibonacci retracement at 4.1680. If rates are able to overcome this ceiling, a move up to the 200-day moving average (4.1770) or the 78.6% Fibonacci retracement (4.1900) may be seen next. On the other hand, if the worst of the political crisis is over, profit-taking could unwind some of last week’s gains and take the pair back down toward 4.1400 or 4.1200 later this week.

 

 

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