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Talking Points:
- Political crisis in Brazil sends emerging markets lower, DM stabilizing
- Dollar ends six-day losing streak, still below 3-year Trendline
- Sentiment highlight: EUR longs bail, upside may continue in EUR-crosses
The top story in Thursday comes from one of the world’s most important emerging markets, Brazil. The Brazilian equity index, the Ibovespa fell 10% on reports that Brazilian President, Michel Temer has been pulled back into a corruption scandal. From a global markets perspective, there are state-owned companies with large blocks of Brazilian state-backed debt that are coming into question as to whether or not we could see default. Emerging markets were a darling asset class that many flocked to in thesearch for yield and hopes that commodities would extend their gains from Q1. However, there could be a deadly cocktail of a worsening commodity backdrop overlaid on top of a reversal of optimism the Brazilian government reforms will be passed. The Brazilian Real (BRL) sank 7% vs. the USD, and other emerging market currencies were caught in the ripples of EM selling with many EM currencies down over 1%.
Recommended Reading: DXY Breaks Below 3-yr Trendline, Bucks Seasonal Trend
Some of this anti-Emerging Market flow seemed to support the USD. The dollar saw gains throughout the trading day. The dollar was able to bounce against many of the currencies that it was sold against on Wednesday including the EUR, GBP, & JPY. In addition to signs of stabilization for USD, WTI Crude continued to trade closer to $50/bbl. Next week on May 25, OPEC will meet in Vienna, and they will look to validate what the market has priced in, which a 9-month production cut extension that is aimed at putting global oil supply in a deficit compared to absolute demand. A breakout above $52/bbl could bring back some of the excitement in commodities that has been sorely missing in Q2.
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Closing Bell’s Top Chart: May 18, 2017, DXY hit downside targets. Next action is important
Tomorrow's Main Event: CAD Consumer Price Index (MoM) (APR)
IG Client Sentiment Highlight: EUR-crosses showing retail buyers losing desire to hold, bullish contrarian signal
The sentiment highlight section is designed to help you see how DailyFX utilizes the insights derived from IG Client Sentiment, and how client positioning can lead to trade ideas. If you have any questions on this indicator, you are welcome to reach out to the author of this article with questions at tyell@dailyfx.com.
Across the board, you can see Euro long exposure being reduced on a daily and week-over-week basis on the recent gains. While we do not blame traders for taking profits, the contrarian view could mean we are about to see larger gains ahead in the EUR crosses that traders are exiting. The signal would be strengthened by a rise in shortpositions, which have not appeared aggressive as of yet.
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Written by Tyler Yell, CMT, Currency Analyst & Trading Instructor for DailyFX.com
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