Conducive environment for EM FX – ING

Analyst(s) at ING provided their brief view on the USD dynamics against its emerging market counterparts, namely – Turkish Lira (TRY) and Czech Koruna (CZK).

Key quotes:

USD: Soft USD trading to continue this week Friday’s disappointing US January labour market report (mainly the lower than expected Jan wage growth and the downward revision to the Dec reading) translated both into soft USD and a carry conducive environment as odds of Fed’s March rate hike suffered. Given the lack of catalysts for a trend reversal this week (ie, calm data week in the US), the soft dollar/EM FX supportive trading should spill over into this week. Elsewhere, all eyes are on PM Abe’s visit in Washington (Fri). The undervalued JPY may get into the focus, suggesting some downside risks to USD/JPY throughout the week.”

TRY: Benefiting (for now) from external and domestic drivers We expect the recent TRY rebound to continue this week, a function of three factors: (a) carry conducive environment following the disappointing US January
wage growth; (b) the non-negligible increase in CBT average funding costs (200bps since late Jan) and the series of CBT liquidity measures, in part targeting the deteriorating inflation outlook and rising the costs of shorting TRY; (c) one-way short TRY positioning. Needless to say, TRY looks cheap on medium term basis – undervalued against USD by around 20% based on our BEER model. USD/TRY to test the 3.6000 level this week.”

“CZK: Below consensus Dec Retail Sales to have a limited market impact Our economists look for a below consensus Czech Dec Retail Sales due to some one-off factors that might have influenced the December figure (eg, online sales registration in restaurants, new law closing shopping malls during selected holidays). Yet, this is unlikely to change much market’s perception about the CNB FX floor exit and have a fairly limited effect on CZK spot and the derivative market. Expect EUR/CZK 12-month forward points to continue trading within the -300/-400 range.”

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