EUR/TRY Analysis Nov. 2nd 2016

Looking at the current monthly chart, we see EUR/TRY just about reaching its swing high from September 2015. That swing high occurred after the announcement by Erdogan that he rejected a coalition government with the opposition party and would pursue a second election in hopes of gaining majority support. Likewise this push back up to that level comes after several Fundamental hiccups for Turkey: (1) the failed coup in June this year and Erdogan’s increasingly authoritarian stance, (2) Erdogan’s influencing of the CBRT’s interest rate reductions throughout the year, (3) Traders’ anticipation of the transition to a single interest rate system and further rate reductions following that; (4) the degradation of Turkey’s bonds to “junk” status (i.e. non-investment grade) by major credit rating agencies, Moody’s and Standard&Poor; (5) A series of significant terrorist attacks in the first half of the year; and (6) Conflict on Turkey’s borders including with Turkish Kurds.

Overall it’s been a rough year for the Lira! So it is actually surprising to me that EUR/TRY hasn’t yet made a new high. If you compare EUR/TRY to USD/TRY, EUR/TRY is much more resilient than the latter. USD/TRY (below) has already made a new all-time high, whereas, EUR/TRY is still working up to it.

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This difference is of course for obvious Fundamental reasons. The US economy is looking stronger and there have been expectations of further Fed interest rate hikes, whereas the Euro Zone economy is still lagging behind, with its outlook damaged by the Brexit decision in July. The Euro will continue to be exposed in the future as the real consequences of Brexit unfold, and as anti-EU sentiment continues to grow from right-wing movements in Germany, France and Spain.

Technically, The EUR/TRY is reaching its swing high and there should be nothing to stop it from testing that level. However, without a Fundamental event, I don’t expect it to make a break higher. I believe a break higher is inevitable in these conditions, but I think there will be a pull-back prior to that, perhaps a bounce off off the high. After 12 month of upward motion, the pair is now over-bought and fatigued. If you compare the number of bars in the current swing with the number in the last swing high, this swing has taken considerably more time to cover the same distance, so momentum is clearly lower. I expect some profit taking to ensue when it reaches the upper limit. As built up market pressure is released, the resulting pull-back could be significant, maybe 40% of the current swing. But this analysis is meaningless if there is Fundamental change, in which case the pair will easily be pushed past the last high into new territory. I sense a break is a widely held expectation among market watchers, considering the strong monthly up-trend and break in the USD/TRY.

 

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