FX Update: USD slips lower again. TRY focus for EM.
Head of FX Strategy
Summary: Yesterday saw record highs for gold and tech stocks and a record low for US treasury yields for 2-year and out to 10-year benchmarks, with a weaker US dollar clearly helping things along. In EM, the focus is squarely on the Turkish lira as USDTRY poked above the 7.00 level that Turkey has been trying to defend of late.
The USD is sharply weaker again and helping to drive everything else higher saver for the Japanese yen, which is reverting to its oft-played role of tracking USD direction in the crosses. Asset prices from gold to stocks are all higher on the day, with the swift gold move above 2,000 per ounce in gold particularly impressive. It remains striking to see strong risk appetite, and new cycle highs in oil prices as this is being written, and new record low yields for US treasuries on the same day.
Later today we get a look at ADP July payrolls ahead of the Friday Nonfarm payrolls change data, which is expected to show a slowdown in job growth from the prior months due to actions to counter the virus resurgence in the US. We are also watching the ISM Non-manufacturing survey today, particularly the employment subcomponent, which was at 43.1 in June, suggesting the labour market in services was actually contracting despite nonfarm payrolls printing a 4.8 million growth in June.
In the background, a good deal of EM volatility has cropped up of late, for everything from the South African rand to especially the Russian ruble but mostly focused now on the Turkish lira as I discuss below. This doesn’t square well with the strong risk sentiment and USD weakness elsewhere, offering an interesting “wrong note” in the background.
As I noted in Monday’s update, interest in the Turkish lira picked up at the beginning of the week, perhaps due to prominent pieces in the WSJ and FT detailing Turkey’s precarious financial situation after USDTRY bumped up close to 7.00 last week, the level Turkish authorities are clearly defending. In fact, Turkey is now deploying private domestic USD holdings to intervene in the FX market to keep USDTRY from running higher because central bank reserves ran dry earlier this year. This means the country is intervening from a position now of “net negative reserves.”.
Yesterday, market dysfunction showed up in the form of overnight implied rates on TRY rising over 1,000% at one point, making short TRY positions extremely expensive to roll and briefly pushing the spot exchange rate back toward 6.90 in late trading yesterday. Today, overnight rates “normalized” somewhat, pushing back toward a more “orderly” 20% as of this writing, while the USDTRY rate has spiked above 7.00 in the European morning. EM contagion risks don’t look notable here, with credit spreads generally looking complacent across EM ex-Turkey. But it is a situation that bears close watching for any chaotic TRY decline and risks into large European banks that are heavy creditors for Turkish corporates (to the tune of $140 billion as recently as 2018.) An article on Wolfstreet.com offers a thorough rundown of the woes plaguing Turkey here.
Outside of USD weakness within G10, we note that CAD has achieved another leg up in breaking higher against the USD (see below), AUDNZD Is poised closed to a big level around 1.0865 as iron ore prices are on a moonshot, and GBP has gone from threatening higher versus CHF and the Euro to being tamed back into the range.
USDCAD broke down through a major pivot area around 1.3300-50 today, moving as low as 1.3250 as oil prices have notched a major advance to fresh highs since the March meltdown. It’s the first G10 USD pair to make a new local high today, though AUDUSD is close on the commodity inflation theme. If USD weakness persists, the next focus for this pair shapes up around the huge 1.3000 level, while bulls only have a case on a smart reversal back higher to reverse of the past two sessions of downside price action.