FX Update: Today’s close important for cementing recent developments

Odds and ends

TRY maintains calm after Turkish Central Bank meeting. Initially on the rate decision announcement yesterday, the removal of the prior statement’s mention of continued rate hikes saw the lira weaker, but the currency stabilized quickly and returned to thetop of the recent range just ahead of the 8.00 level in USDTRY. While there is no doubt that the new central bank chief will take every opportunity to cut rates if conditions allow, the statement is perhaps also reassuring enough to encourage the idea that the new leadership isn’t set to immediately cut rates as it wants to keep the policy rate above the rate of inflation (hear that, Federal Reserve?). Given a recent calming in Turkish credit spreads and a massively supportive backdrop (recently weaker USD, another drop in US long treasury yields yesterday). I would be surprised if the lira can wring much upside in the medium term beyond what it has already achieved in recent weeks as international investors will continue to discount the currency, knowing that easing will always be the default option as soon as the window opens. Still, relative macro stability could mean it slightly outperforms on carry if Turkey’s new exploding Covid wave is reversed and the export and tourism markets can respond.

Poland CPI, a reminder of negative real rates that hurt? The zloty (PLN) has enjoyed a period of strength in sympathy with the recovery in euro sentiment as is often the case as Poland’s economy is profoundly reliant on Europe. This after EURPLN recently teased the highs for the cycle. But note the very significantly negative real rates investors suffer in country where the core CPI had rebounded to 3.7% already last month and posted a 3.9% reading for March today, while the Bank of Poland maintains a 0.10% policy rate. In coming months, we are looking at worse than -400bps of negative real yields. The PLN can only fly so high.

Next week’s calendar highlights – next week offers a few event risks worth highlighting as the US calendar goes much quieter (and this week proved the point anyway that even significant upside beats on nearly everything are being aggressively looked through). Among these are a PBOC meeting on Tuesday, Bank of Canada meeting on Wednesday, ECB meeting Thursday and Russian central bank meeting Friday (another rate hike expected – with a smart rally in RUB today an impressive show of strength given US sanctions). On the geopolitical front, note that US President Biden is meeting Japanese prime minister Suga today – the first meeting with a head of state since he became president. Watch out for statement on the Taiwan strait and China and any response.

Table: FX Board of G-10+CNH trend evolution and strength
The recent strength in the G10 smalls (slight exception for CAD) is the most noteworthy new development as growth hopes pick up for the rest of DMs as well and key cyclical commodity prices have heated up again this week after a period of fairly shallow consolidation. Spot gold is at pivotal levels as well that are likely more linked with real yields (the lower the better for precious metals) than the direction in commodities.

Table: The individual FX Board trend readings
Little to note today relative to yesterday, save for the fact that the support at the margin for the JPY from lower nominal and real yields is seeing the oldest surviving trend – CADJPY – about to roll over, although other JPY crosses remain in an uptrend – mostly Europe-linked ones.

Upcoming Economic Calendar Highlights (all times GMT)

• 1215 – Canada Mar. Housing Starts
• 1230 – US Mar. Housing Starts and Building Permits
• 1400 – US Apr. Preliminary University of Michigan Sentiment