USDTRY

Recep Tayyip Erdogan won the second round of the Turkish presidential elections this weekend, securing a decent lead over opposition candidate Kemal Kilicdaroglu (52~% vs 48~%). There were expectations that the run-off will be a close call with some even projecting Kilicdaroglu winning. Nevertheless, Erdogan managed to secure another term in power. Market  participants have warned a number of times that continuation of Erdogan's rule may put Turkey on the brink of bankruptcy. Turkish President asked domestic banks shortly before the elections to buy Turkish USD-denominated bonds in order to improve solvency ratings and pricing.

Spread for 5-year credit default swaps has even dropped recently and currently sits significantly below record levels (around 900 points). Currently, 5-year CDS spread is 665 points and implies around 11% default risk with 40% recovery rate.

CDS do not point to any increased default risk following Erdogan's win in second round of presidential elections. Nevertheless, Turkish CDS spread remains significantly higher than for other countries. Source: Bloomberg

Erdogan's win would likely mean continuation of capital flight from Turkey, although this has been made much harder following the central bank's actions. According to Morgan Stanley, lira may  drop around 30% in value, what would suggest USDTRY jumping to around 26.00 by the end of this year. Central Bank of the Republic of Turkey may have around $25 billion left to defend TRY. This is a very limited amount of funds given that CBRT is said to have spent around $177 billion to defend the currency over the past 16 months. Having said that, it looks like chance for a trend reversal on the TRY market is very slim.

Turkish lira is weakening against USD and EUR this morning. Some financial institution expect around 30% drop in TRY value by the end of the year.

EURUSD

Final services PMI readings for May from European countries were released this morning. Revised data from France and Germany, as well as whole euro area, showed lower PMI readings than flash releases. Releases from Spain and Italy also missed expectations and came in lower compared to a month ago. Nevertheless, services sector in all major European economies is still in expansion with PMI readings above 50 pts threshold.

EUR moved slightly lower on those releases with EURUSD looking back towards daily lows in the 1.0682 area. Equity indices did not saw any major reaction to PMIs today.

JAP225

Japan's Nikkei stock index closed yesterday's session at 33-year highs last seen in 1989, above 33,000 points, and today contracts on the index (JAP225) extend gains, ahead of the Fed decision. The index is being driven by a weakening yen and rallies in the stocks of Japan's largest companies, - yesterday Toyota (TM.US) shares in particular added to the gains. The rally of Japan's Nikkei was fueled by the US S&P 500 and Nasdaq indices, which yesterday recorded their highest closes in 14 months.

After the release of US inflation data Wall Street is more sure that the Fed will not raise interest rates in June. Tachibana Securities pointed out, a significant improvement by global investors regarding the Japanese market - primarily large inflows into the stocks of Japan's largest companies and the automotive sector like Toyora, Honda Motor (HMC.US), Mazda. Toyota informed that it had overcome a technical hurldes (solid-state batteries) and will start produce more efficient, faster-charging versions of current batteries to improve EV driving range and cost;

Among all Tokyo sub-indexes, it was the automaker segment that gained the most strongly (over 4.2% growth). It is worth noting, however, that shares of this sub-index have behaved quite poorly in recent months and still have a considerable loss to the benchmark average - it seems that they are striving to close the gap;

The stocks of other companies related to the auto market (including manufacturers of EV batteries), industrial conglomerates like Kobe Steel, and shares of technology investment fund SoftBank also performed well. Slightly weaker on the Japanese trading floor were chipmakers linked to the still-weakening Chinese market like Advantest and Screen Holdings.

Contracts on the Nikkei (JAP225) rose euphorically and are trading near 33,600 points. In case of a correction, the main support could be set by the previous peaks of February and September 2020, at 30,500 points.

Oil

Brent (OIL) launched new week's trading with a bearish price gap as new on rising Iranian exports as well as cuts to Chinese growth forecasts created downward pressure on prices. OIL tested 200-period moving average at H4 interval this morning (purple line) but bulls managed to defend the area.

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Economic Calendar: Survey Data from Germany and US, central bankers speeches

European indices set for flat opening
Survey data from Germany and the United States
Speeches from ECB and SNB members

Markets remain calm after a short-lived Russian coup that took place over the weekend. PMC Wagner rebelled against the Russian Ministry of Defense, took control of few Russian cities and launched an armored column towards Moscow. However, agreement between Wagner and the Kremlin was brokered by Belarusian leader Lukashenko and rebellion ended before any hostilities took place.

European index futures point to flat opening of today's cash session on the Old Continent. Energy commodities and precious metals are trading slightly higher while the US dollar is pulling back. Economic calendar for today is light. Traders will be offered German IFO indices for June in the morning as well as Dallas Fed index for June in the afternoon. Apart from that, EUR and CHF may see some moves today as we have a number of SNB and ECB officials scheduled to speak.

Economic release schedule gets more interesting later into the week with CPI inflation from Europe and PCE data from the UNited States.

9:00 am BST - Germany, IFO Business Climate index for June. Expected 90.8. Previous: 91.7
9:00 am BST - Poland, unemployment rate for May. Expected: 5.1%. Previous: 5.2%
3:30 pm BST - US, Dallas Fed manufacturing index for June. Expected: -20.0. Previous: -29.1

Central bankers' speeches

8:15 am BST - ECB Villeroy
9:40 am BST - SNB Jordan
3:00 pm BST - ECB McCaul
3:25 pm BST - SNB Maechler
6:30 pm BST - ECB President Lagarde
6:30 pm BST - ECB De Cos

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AUDUSD

> Lower CPI data weakens the Australian dollar
> Goldman Sachs predicts a lower target rate for the RBA
> AUDUSD react to the key level at 0.679

Australian inflation slowed more than expected in the second quarter due to a decline in domestic holiday and gasoline costs, suggesting less pressure for another rate hike and causing a sharp weakening of the Australian dollar.

Annual headline inflation fell to 6.0% in June from 7.0% in March, which was weaker than the 6.2% consensus and the RBA's own 6.3% forecast. Importantly, the RBA's preferred measure - core inflation - the trimmed mean - slowed to 5.9% from 6.6%, which was slightly less than the market and RBA's expectation of 6.0%.

On a quarterly basis, the Australian consumer price index rose 0.8% in Q2, which is the weakest quarterly pace since September 2021. Economists believe this signals a peak in the interest rate cycle, despite a shift in inflation from goods to services. This shift might push the Reserve Bank of Australia (RBA) to raise rates by 0.25 percentage points in August and September. As a result, Goldman Sachs lowered its peak cash rate prediction to 4.6% from 4.85%, and National Australia Bank expects the RBA to leave rates unchanged in August. Current OCR rate is 4.10%.

Chart of the Day - Gold

Fitch downgrading US credit rating from AAA to AA+ is the big news in the markets today. However, the market's reaction has been fairly muted given how significant this news can be. It should be noted that Fitch is the second major ratings agency to downgrade US credit from top-tier rating - S&P did so back in 2011 and has not upgraded it back since. Should the third major ratings agency - Moody's - follow suit and also downgrade US credit from AAA grade, this could have serious implications on US bonds. Some funds are obliged to hold only AAA grade bonds and once neither of three major agencies has such a rating on US credit, those funds may be obliged to sell their Treasury holdings, potentially triggering a slump in the TNOTE market.

However, the rationale behind Fitch downgrade is disputed. Fitch said that repeating debt ceiling disagreements over the past 20 years, last-minute solutions to debt ceiling problems, rising general government deficit as well as issues with US governance are the reasons behind the move. US officials rejected the rationale behind the decision saying that downgrade from Fitch is baseless and bizarre.

Announcement from Fitch yesterday after close of the Wall Street session triggered some volatile market moves. US equity futures launched overnight trading with an around 0.4% bearish price gap. There were also some notable safe haven flows into USD, JPY and gold. However, a bulk of those moves have been reversed already.

Taking a look at GOLD chart at D1 interval, we can see that a potential major reversal pattern is building up. GOLD pulled back to the $1,940-1,950 price zone, where previous price reactions as well as the 50-session moving average (green line) can be found, but bearish momentum began to slow. Should we see a rebound off this area, the right should of a potential inverse head and shoulder pattern would surface. In such a scenario, neckline of the pattern at $1,980 will be on watch as a break above could trigger an almost $90 jump, which would push GOLD close to all-time highs.

Chart of the Day - EURUSD

The dollar continues to appreciate after yesterday's strong labor market data and the latest dovish comments from the ECB president, Lagarde. Yesterday's ADP report showed employment growth of 324,000, compared to significantly lower expectations of 190,000. If the good ADP data are confirmed by Friday's NFP reading, it may encourage the Fed to continue raising interest rates at the September FOMC meeting. The discrepancy between NFP and ADP was quite large last month, but growth above 200,000 NFP would still give a very high chance of a Fed hike in September. Analysts' estimates assume a publication at the level of 200,000. Currently, the market is pricing an 82% chance of no hike at the next September meeting of the Fed. However, these estimates could still change significantly if subsequent data continue to show a strong labor market and rebounding inflation.

This last, more hawkish sentiment favors the appreciation of the dollar, which, after reaching a medium-term peak at the level of 1.12640, continues to correct downward. Historically, the announcement of the end of the interest rate hike cycle almost always coincided with a weakening of the dollar, regardless of the macroeconomic situation. Recent comments from Jerome Powell indicate that the Fed would like to see sustained low inflation and a weakening labor market. For this reason, recent strong NFP publications raise questions about a pause or end to the hikes. A continuation of the strengthening of the dollar could cause the EURUSD pair to retest the level of 1.0855.