The Dollar Smashes its Way Ahead, EUR/USD Break of 1.15 is Key Technical Event

- EUR/USD below 1.15 opens the door to further losses

- Lira currency crisis explodes

The US Dollar - and of course the Turkish Lira - are the two stories dominating discourse on global foreign exchange markets ahead of the weekend.

"Trouble in Turkey spurred a stampede into the U.S. currency which powered to fresh highs. The dollar broke through key levels and surged to mid-2017 highs against the Euro and Sterling," says Joe Manimbo, a foreign exchange strategist with Western Union.

However, if we look at the below performance charts, we can see Sterling is doing OK, considering the overwhelming dominance of the US unit:

Above: The Dollar's performance against the G10

Above: The Dollar's performance against the next ten biggest freely-traded currencies

"The greenback also rallied against the Canadian and Australian dollars and posted its biggest gains against emerging markets," adds Manimbo.

Of interest to us is the break lower in the EUR/USD, something that many market commentators did not expect to occur; the script went something along the lines of the Dollar's days of strengthening are nearing an end and the way forward for the Euro is higher.

But, EUR/USD's break below 1.15 is something of a game-changer, particularly from a technical point-of-view.

"Spot trading below 1.15 – the range base over the past few months and major support on the longer run charts – casts a bearish light over the immediate prospects for the EUR. EURUSD was looking soft anyway but we had expected the 1.15 area to hold," says Shaun Osborne at Scotiabank.

Osborne argues persistent weakness below this level could suggest a more negative outlook for the currency over the medium to longer-term.

"The impulsive nature of today’s decline allows for some tolerance for temporary weakness. Sustained softness – and, more especially – a clear break of 1.1448 (50% retracement of the 1.03/1.25 rise) spells more weakness for EUR this year," adds Osborne.

The Euro exchange rate complex was a major under-performer on the day after news reports suggested the ECB was studying how exposed Eurozone banks are to Turkish assets.

"The EUR should be trading with a neutral bias vs the USD in an environment like the current one. Instead, the EUR has been a G10 under-performer today.  Why the discrepancy?" asks Stephen Gallo at BMO Capital Markets.

Gallo explains the Eurozone is not intact the unified and steady single market many assume, and "in the context of low bank profitability and the Eurozone’s minimal resilience to shocks, the direct financial exposures of Eurozone banks to Turkey matter more, especially for the EUR."

The Eurostoxx index is down more than 1.5% on the day, led by banks which are down around 2.9% confirming the risks markets perceive the banking sector to be exposed to on the crisis.

According to BIS data, the European banking sector is the most exposed to Turkish counterparty risk.

Although Japanese and the US investors also have investments in Turkey, the size of the investments compared to the size of the economy is much higher in Eurozone countries, especially in Spain.

The Turkish Lira's woes graduated into a full-blown crisis Friday, as TRY went down close on 20% to record fresh record lows.

"The market has increasingly soured on Turkey as it loses confidence in the president’s economic policies," says Manimbo. Manimbo adds that the Lira's  precipitous fall of more than 60% this year has made it harder for the government to repay its stockpile of dollar-denominated debt.

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