EM FX Weekly: TRYing times EM FX Weekly: TRYing times EM FX Weekly: TRYing times

EM FX Weekly: TRYing times

Forex
John J. Hardy

Chief Macro Strategist

We are writing this in the wake of the huge devaluation of the Turkish lira and an speech from Turkish president Erdogan indicating he will maintain his defiant stance and refuse to take the traditional measures of hiking rates or appealing to the International Monetary Fund for a bailout. The situation is very fluid and next week looks like a critical timeframe for the situation to move towards a resolution of one kind or another.

Helmets on

We leave this week with markets in a fragile state linked to the accelerating risk of a Turkish default, both by its banks and possibly even the sovereign eventually after Erdogan’s defiant speech. We’ll provide the normal full update next week. Until then we focus on two things – foremost, of course, the direction of the Turkish lira and whether any further weakness continues to feed additional contagion risk across EM and even into DM currencies.

The euro, for example, was weak on the risk to EU banks from exposure to Turkish banks. The other factor on the loose is the stronger US dollar, in part due to the Turkey-inspired sell-off, but also in the wake of the EURUSD sell-off through 1.1500. Further USD strength is generally associated with pressure on emerging markets, but extra attention on the USDCNY rate is also required as the Chinese currency’s level versus the dollar garners intense scrutiny and likely anxiety if the USDCNY is allowed to rise above 7.00 after China’s recent efforts to short-circuit further weakness.

The danger for Turkey is that at a certain level for TRY, the Turkish banks run out of excess capital to service debt denominated in foreign currency, debt estimated at 30-40% of Turkey’s GDP even before the most recent TRY devaluation. At a sovereign level, the default probability has moved beyond 25% according to CDS prices on Turkey’s sovereign debt – see in chart below.

President Trump added insult to injury on Friday with a tweet calling out bad relations with Turkey and a doubling of tariffs on steel and aluminum for Turkey relative to other exporters.

Chart: USDTRY and Turkey CDS price

There is no real technical analysis on a currency that is in freefall, but once the speed of the move turns parabolic as it has this week, the timeframe is likely rather short until some sort of at least near-term climax is reached. Next week looks like the time frame for the situation to reach some sort of temporary “resolution”.

USDTRY
Source: Bloomberg

Chart: Global Risk Index

A brief stay in positive territory indeed...

The recent thaw in risk conditions we noted last week has suddenly receded with the contagion risk emanating from Turkey, and conditions are worse than the chart is showing because not all indicators used to create the indicator provide intraday pricing, so the up-to-the-minute situation is worse than shown before.

Global risk
Source: Bloomberg, Saxo Bank

EM currency performance: recent and longer-term, carry-adjusted

Chart: the weekly spot and one-month carry-adjusted EM FX returns versus USD: The Turkish lira’s weakness stands out as the chief mover and shaker in our universe of EM. The performance among EM currencies was rather varied recently until the last couple of days of the past week, where the acceleration of lira weakness began to feed contagion fears across EM. Somewhat adding to the broader contagion are flows out of the Russian ruble, where the sanctions threat from the US has picked up on the circulation of the leaked text of a proposed Congressional bill targeting Russia for its purported interference in the US election. A drop in oil prices could feed further RUB downside from here.

EM FX performance
Source: Bloomberg, Saxo Bank

Chart: Three- and 12-month carry-adjusted EM FX returns versus USD: On the longer term performance chart, only MXN has managed a positive performance over the last three months as the market repriced the currency after a peak in pessimism on the prospects of an Obrador presidency back in June. Meanwhile, the damage done to Turkey via its currency will mean ugly real economic pain as the costs of imports have risen precipitously and as credit is cinched off as banks lick their wounds. Any boost to exports from a cheaper currency will not offset this pain significantly.

EM FX performance
Source: Bloomberg, Saxo Bank

Quarterly Outlook 2024 Q3

Sandcastle economics

01 / 05

  • Macro: Sandcastle economics

    Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.

    Read article
  • Bonds: What to do until inflation stabilises

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain inflation and evolving monetary policies.

    Read article
  • Equities: Are we blowing bubbles again

    Explore key trends and opportunities in European equities and electrification theme as market dynamics echo 2021's rally.

    Read article
  • FX: Risk-on currencies to surge against havens

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperform in Q3 2024.

    Read article
  • Commodities: Energy and grains in focus as metals pause

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities in Q3 2024.

    Read article

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)

Saxo
40 Bank Street, 26th floor
E14 5DA
London
United Kingdom

Contact Saxo

Select region

United Kingdom
United Kingdom

Trade Responsibly
All trading carries risk. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more
Additional Key Information Documents are available in our trading platform.

Saxo is a registered Trading Name of Saxo Capital Markets UK Ltd (‘Saxo’). Saxo is authorised and regulated by the Financial Conduct Authority, Firm Reference Number 551422. Registered address: 26th Floor, 40 Bank Street, Canary Wharf, London E14 5DA. Company number 7413871. Registered in England & Wales.

This website, including the information and materials contained in it, are not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in the United States, Belgium or any other jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation.

It is important that you understand that with investments, your capital is at risk. Past performance is not a guide to future performance. It is your responsibility to ensure that you make an informed decision about whether or not to invest with us. If you are still unsure if investing is right for you, please seek independent advice. Saxo assumes no liability for any loss sustained from trading in accordance with a recommendation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc. Android is a trademark of Google Inc.

©   since 1992