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US Dollar Index at 14-Month Highs on Emerging Market Risks

By OFX

The Turkish Lira continued its plunge against the US Dollar as the Lira remains the major headline for the week. At one stage a drop of more than 7% occurred and the USD/TRY breached 7 lira per dollar for the first time in its history of trading. Global emerging markets fell as the uncertainty of the fallout in Turkey caused these equity markets to mitigate risk.

European markets were also subdued seeing the Stoxx and Dax both falling 0.5%, contagion gripping the markets as some of the largest banks in Europe look at their exposures to Turkey, and the effects of a potential fallout to emerging markets globally. EUR/USD remained relatively square and sat just above the 1.14 mark on open this morning.

The US Dollar Index remained at 14-month highs, above the 96.00 handle to 96.37 and up 0.06% for the day despite the Dow shedding 0.5% yesterday. The Nikkei dropped 2% for the day yesterday but overnight recovered those losses by 2.28%. The USD/JPY was moved higher to 111.15 from 110.75 after seeing yesterday's initial Japanese yen strength in a move to safe-haven assets. The Calendar today is focused on import and export price indexes both missing expectations.

A quieter trading day yesterday for the Loonie changed overnight with the USD/CAD pair trading in a 70-point range. Recently subdued oil prices spiked from 65.71 yesterday to 68.37 overnight, the Canadian dollar a commodity-linked currency made gains on the greenback. After last week’s events out of emerging markets, traders remained cautious as risk sentiment maintained elevated levels; ultimately aiding the USD, JPY, and CHF.

Market participants saw US import/export price indexes out this morning both miss expectation; imports accelerated while export waned. The most significant risk event for the loonie this week will be this Friday's CPI print expectations are for 1.3% in line with previous.

Key technical levels leading to these risks events will be the 1.3200 resistance level, and on the downside, supports can be seen at 1.3029 and 1.2987 respectively.

The Euro traded sideways overnight with intraday lows at 1.1366 and session highs at 1.1433 as global risk sentiment stabilized overnight. We open this morning at 1.1380 against the greenback, a modest 0.1% depreciation. Developed market equities begin only slightly lower with the majority of the Eurostoxx 0.5% fall attributable to softness in the banking sector with investors concerned about the exposure of European banks to the fallout in turkey.

Comments from ECB banking supervisory board member Joachim Wuermeling overnight advised investors to remain calm and not ‘over dramatize’ the risks to the European banking sector. He reiterated that the ECB wields the authority to impose more additional capital requirements on at-risk banks should they feel the need.

From a technical perspective, notable EUR/USD supports are evident at 1.1310 and upside resistance can be seen at the 1.1450 level. Both the German CPI and GDP reads slightly missed expectations of 2.1%; both posted at 2.0%.

The Pound Sterling opens this morning at 1.2772 against the USD and 1.6716 against the CAD. In the absence of any domestic data, the Pound is still under pressure as we see Greenback strengthen on the back of Turkish sanctions imposed by the U.S.

With the imminent risk around Brexit negotiations as investors’ fear that Britain's departure from the European Union will be fractious. Brexit talks are set to resume this week after a summer break and could potentially be a catalyst for further downside moves.

The week ahead is set to bring robust economic data from the UK including strong July labor market report, with wages rising 2.6% and the unemployment rate stuck to a 4-decade low of 4.2%. The UK inflation is expected to accelerate slightly in July while retail sales are seen rising modestly in the same month.

The Australian Dollar is slightly weaker this morning when valued against its US counterpart. Overnight the AUD/USD pair fell to a fresh yearly low of 0.7259 on the back of falling equities market which fell to new multi-month low amid the unstoppable decline of the Turkish Lira. The lira is still under pressure this morning but is holding within yesterday’s range against the USD.

On the data front today, China will release Industrial Production and Retail Sales, both for July. Industrial Production is expected to have increased by 6.3%, while sales are seen up 9.0%, matching June's reading. While locally we will see the release of the July NAB's Business Confidence and Business Conditions indexes, seen unchanged at 6 and 15 respectively.

From a technical perspective, the AUD/USD pair is currently trading at 0.7253. We continue to expect support to hold on moves approaching 0.7250 while now any upward push will likely meet resistance around 0.7290.

The Australian Dollar is slightly weaker this morning when valued against its US counterpart. Overnight the AUD/USD pair fell to a fresh yearly low of 0.7259 on the back of falling equities market which fell to new multi-month low amid the unstoppable decline of the Turkish Lira. The lira is still under pressure this morning but is holding within yesterday’s range against the USD.

On the data front today, China will release Industrial Production and Retail Sales, both for July. Industrial Production is expected to have increased by 6.3%, while sales are seen up 9.0%, matching June's reading. While locally we will see the release of the July NAB's Business Confidence and Business Conditions indexes, seen unchanged at 6 and 15 respectively.

From a technical perspective, the AUD/USD pair is currently trading at 0.7253. We continue to expect support to hold on moves approaching 0.7250 while now any upward push will likely meet resistance around 0.7290.