Trading Forex Exotic Pairs – USD/TRY USD/MXN Outlook
Today we will look at two emerging market currencies or exotics against the USD – The Turkish Lira and the Mexican Peso in terms of the big fundamentals, sentiment, and key technical levels to watch.
Turkish Lira Forecast
Despite the USD being Generally weak against a basket of currencies it’s up 24% on the Turkish Lira this year. The Lira did manage a rally last month of 5% after a reshuffle at the top of Turkey’s economic team which included replacing the head of the Central bank who last month hiked rates by 474 basis points to 15 percent. While the Lira rally was impressive and the carry interest is very attractive, we think USD and other major currencies could move higher in the coming months.
The economy has been hit hard by previous economic policies and of course COVID. For example, tourism a major source of income saw tourist numbers decrease by 80% this year, with a loss of income has been calculated at more than $11bn. The actual unemployment rate is probably higher than official numbers and many economists estimate it to be at 25 percent. With inflation high, more rate hikes will probably be needed going forward which will impact on economic growth. In terms of defending the currency going forward the central bank has run out of money and foreign exchange reserves are estimated at minus $50bn.
President Erdogan promised a new economic era in Turkey last month dropping his opposition to interest rate hikes and promising a new way forward for Turkey BUT: “Looking ahead, the key question is whether Turkey has officials and politicians able to devise and implement a new economic strategy and whether Erdogan is willing to embrace these changes despite their political cost,” (Wolfango Piccoli, co-president of London-based Teneo Intelligence.)
We doubt he will and even if he does, Turkey faces a long and painful road to recovery, and even more bad news for Turkey could be economic sanctions – There are rumours the United States is about to impose sanctions on Turkey over its acquisition of Russian S-400 air defence systems which would be another blow to an already weak economy.
In our view, we think long term the Lira will weaken against the USD and other major currencies such as the EUR and CHF.
Mexican Peso Forecast
The Mexican Peso has firmed in recent months on optimism about a global economic recovery, a Joe Biden election win in the US, strong stock markets, and finally an interest rate of 4.5% which gives it a significant advantage over the USD making it an attractive carry trade.
While longer-term it could strengthen further in the short term the good news now looks priced in. In terms of price action, we have found support and could see a substantial shorty covering rally. The market consensus is for the USD to fall further and of 20 Bank research reports we looked at, 17 remain out and out bearish the USD with only 3 looking for a USD rally in the coming months. The USD is starting to show some strength and if it can break out to the upside on the chart below, we could see a significant rally as the large number of traders who are short exit on stop.
Technical Analysis
USD/TRY DAILY CHART:
After a big fall in November, we saw the USD bounce from the 20-week MA as expected. After a period of low volatility sideways action, we have no broken out to the upside from the channel which could see another move back up to chart highs. Stop protection in our view should be below the bottom of the channel and if we break above the 9.00 level can be trailed up behind the Mid Bollinger Band / 20 Day MA.
USD/MXN DAILY CHART: The USD this week has found support and is now pushing higher. We are at the Mid Bollinger Band 20-day MA which has not been broken since the 4/11. If we move above it and break nearby resistance, we expect follow through buying on higher volatility as the large number of short carry trades exit on stop.
Research provided by LearnCurrencyTradingOnline.com
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