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Lira eases into referendum, USD recovers
The Turkish lira pares the weekly gains as investors take profit and flatten their position before Sunday’s constitutional referendum.

Turkey may be giving the most important decision of its modern history. On Sunday April 16th, Turkish citizens will say ‘yes’ or ‘no’ to the constitutional change aiming to consolidate President Erdogan’s power at the heart of the government. We are prepared for two-sided volatility in TRY and TRY-denominated assets at Monday’s open.

Turkey to say ‘Yes’ or ‘No’

Although the accuracy of the market polls are questioned, Reuters has reported that the yes camp may have slightly taken the lead. While a ‘no’ vote could trigger a relief-rally across the Turkish lira and lira denominated assets, the market reaction to an eventual ‘yes’ vote is unpredictable.

A ‘yes’ victory could bring along a sharp sell-off on Monday, followed by a sharp rebound similar to the US presidential election. In fact, Turkish companies were brought to comply with Erdogan’s rule over more than ten years. Specific sectors, including the construction sector, boomed under Erdogan’s government. Therefore, a ‘yes’ victory could mean a favourable playground for some of the Borsa Istanbul (BIST) companies, although the fundamentals of the Turkish economy could be questioned in the medium to long-term.

A ‘no’ vote could boost the appetite in the Turkish stock and currency markets. Nevertheless, there are rising speculations that a failure to pass the constitutional referendum could mean another referendum for Turkey, hence the extension of political uncertainties through a progressively tenser political and social environment.

 On the run up to the referendum, the USDTRY eased to its 100-day moving average for the first time since September 2016. A two-sided volatility could hit the lira crosses on Monday. In the aftermath of the election, we will be monitoring the key technical levels. As the market absorbs the referendum results, the only fact of having the vote behind could encourage further gains in the Turkish lira. The lira could challenge the 3.55/3.50 support on the downside. On the topside, the key resistance is eyed at 3.80 and a significant break above this level should suggest a renewed anxiety regarding the Turkish lira, increase the selling pressure and push the USDTRY toward the 4.00 mark.

Japanese stocks extended losses on stronger yen

Risk appetite in Asia remained limited on Friday.

Nikkei (-0.49%) and Topix (-0.63%) extended losses on stronger yen. The USDJPY hit 108.72 yesterday and remained capped below 109.23 in Tokyo. More offers are eyed pre-200-day moving average (109.66). Light option barriers stand 109.35 and 110.00 for today’s expiry.

UK and European markets closed the week on a negative note

The FTSE 100 erased 0.29% on Thursday, as energy stocks (-0.92%) lead losses on softer oil prices. The WTI retreated to $53 per barrel, after the EIA stated that the oil inventories rose in the first quarter, despite OPEC’s efforts to reduce the global supply glut. The positive momentum in oil markets eased. The price of a barrel could pull back to $52.40 and $51.40 (minor 23.6% and major 38.2% retracement on March 21st to April 11th rise). Solid offers are eyed pre-$55.00.

Across the channel, the stronger euro weighed on investor sentiment, which was already weakened due to French political uncertainties and geopolitical tensions in North Korea and Syria. The DAX closed the week softer for the second consecutive week (-1.11%), the CAC wrote off 1.10% over the week, breaking the series of six consecutive weeks of gains.

The EURUSD remained sold into 1.0700 (major 38.2% retracement on March-April slide) and consolidated below the 100-day moving average (1.0624) in Asia.

USD pares losses before March inflation data

Earnings season kicked off well in the US, as JPMorgan and Citi posted solid trading gains in the first quarter. The reflation environment and improved yields benefited to the US banks. Moving forward, softening US yields could dent the enthusiasm in bank shares. Nevertheless, the Federal Reserve (Fed) is expected to proceed with two additional interest rate hikes in 2017 and start shrinking the size of its balance sheet by the end of the year. Although Donald Trump voiced concerns about the strengthening US dollar and has the option to slow down the USD appreciation by an expansive fiscal policy, the US interest rates are set to increase as the US monetary conditions will be tightened either way.

The US 10-year yields stabilized at 2.22% - 2.23%, the lowest levels since November. Still, they trade with more than 20% premium compared to the pre-Trump levels. As a quick reminder, the US 10-year yields stood below 1.80% before Donald Trump was elected President of the United States.

Although the US dollar’s mid-term term direction is contingent on the combination of fiscal and monetary policies, the short-term trend is driven by the information available to investors today. Hence, in the dirt of further details regarding the US fiscal policy, we expect the USD sell-off to cool down. The US Congress will be closed for the next two weeks. As such, the economic data should be in focus of short-term traders.

The US will release the March inflation figures before the weekly closing bell. The inflation excluding food and energy could have advanced to 2.3% year-on-year from 2.2% printed a month earlier. Solid read should revive the Fed hawks and help the US dollar paring losses across the board.

The Dow Jones is called 16 points firmer at $20’469 the US open.