TRY contagion spreads across the board
Head of FX Strategy
First, some key points for today’s suddenly much higher energy markets...
The risk-off tone linked to Turkish lira is seeing contagion into all global assets – traders should tread with caution as correlations across markets tend to all head toward one in these kinds of conditions – i.e., falling interest rates, falling stocks, falling risky currencies, rising JPY, rising USD, etc.
The TRY meltdown comes with Erdogan sending all of the wrong signals and continuing to take a defiant stance – we don’t dare guess where this might lead going into the weekend if his speech coming up at 11:00 GMT today doesn’t show a shift in tone. An FT article cites the 7.1 level in USDTRY as possibly important as it could be a level at which Turkey’s banks run out of excess capital.
Other EM FX: Other EM currencies are rather offered for obvious reasons on contagion from the TRY move, though USDCNY holding the line may be contributing to more stability than one would ordinarily expect – especially in Asia, of course. All bets off on the risk of volatility if 7.00 falls in USDCNY. If the risk off selling deepens, would expect further standout weakness in BRL and ZAR, with the recent drumbeat of sanctions news also pressuring the Russian ruble further and a further weakening there a risk if key support in Brent crude around 71.00-70.00 gives way.
Data later: US CPI up later and may not get the focus it deserves, but note that the core CPI is expected to print at 2.3% year-on-year again, an area touched but not exceeded a number of times since the global financial crisis.
The big news within the G10 is the fresh low for the cycle in EURUSD as the pair plunged through the 1.1500 level, a very important one locally and stretching back a few years from the 2015-2016 period as well. If the break holds and risk contagion deepens, USD and JPY are likely to remain the strongest within the G10 and EURUSD could be heading toward 1.1200 if it continues to trade south of the break level. Still, traders should remain on their toes.
The G-10 rundown
USD – the US dollar and yen are competing for status as top dog among the G10 as is often the case when risk appetite takes a beating. USD posting new highs versus EUR, GBP, AUD, and NZD now.
EUR – euro pressured on the ECB expressing concern about individual EU banks’ exposures to the Turkish situation, but flow obviously picking up heavily on the breakdown through 1.1500.
JPY – the yen trying to take the initiative even against the US dollar, but not fully achieving liftoff there – obvious correlation with risk appetite picking up as recycled Japanese savings into higher yielding markets around the world typically are at risk of reversing in situations like these.
GBP – sterling managing to fight back against the single currency slightly on the spin that EU banks are more exposed to Turkey – still, the chart points higher for EURGBP if the pair remains above 0.8950 on the risk of a no-deal Brexit.
CHF – EURCHF volatility accelerating on this latest move and SNB will have its work cut out for it in intervening if EU existential risks linked to Italian and other Club Med banks pick up on exposures to Turkey. The next levels are 1.1200 and even 1.1000 – with SNB discomfort and potential to act likely picking up into the latter level.
AUD – the focus on Aussie torn away from the iron ore rally and relative strength versus a struggling kiwi and back into its traditional role as a G10 proxy for risk appetite as the overnight downdraft in risk off sees AUDUSD punished to new lows for the cycle.
CAD – USDCAD looks a real laggard relative to what is unfolding elsewhere, and if crude oil punches lower, the pair could play some catch-up in expressing USD strength. Later today we get Canada’s latest jobs and earnings numbers.
NZD – the sudden focus on AUD as AUDUSD hit new lows has provided late comers to AUDNZD longs a fresh opportunity if that pair is to remain in a rally stance after the dovish RBNZ (though the pair needs to show signs of life ahead of 1.1000 today.
SEK – SEK falling even against a weak Euro today even as the July CPI release came in as expected with core inflation at 2.2% (real rates are -2.7% in Sweden right now with a policy rate of -0.5%!). Surely we see a shift soon from the Riksbank…
NOK – headline CPI an impressive 3.0% vs. 2.6% expected, but the core CPI beat less than expected at 1.4% vs. 1.2% expected. Decent NOK bump, but further risk off could punch oil prices and act as a headwind for further upside.
Upcoming Economic Calendar Highlights (all times GMT)
• 1100 – Turkey’s President Erdogan to Speak
• 1230 – US Jul. CPI – exp. Unchanged +2.3%/2.9%
• 1230 – Canada Jul. Employment Change / Unemployment Rate
• 1230 – Canada Jul. Hourly Earnings
Latest Market Insights
Outrageous Predictions 2023: The War Economy
- The constantly growing global need for energy drives the world's richest to huddle up and launch a R&D project in a size the world hasn't seen since the Manhattan Project gave the US the first atomic bomb.
French President Macron resignsThe political stalemate in France and the rise of Marie Le Pen following the 2022 elections corners President Macron, forcing him to give up on politics and resign from his position. At least for now.
Gold rockets to USD 3,000 as central banks fail on inflation mandateAs markets and central banks realise that the idea that inflation is transitory is wrong, and that prices will remain higher for longer, gold is sent through the roof, hitting a price tag of USD 3,000
EU Army forces EU down path to full unionWith continued challenges in the region and a US military that isn't aggressively enacting its former role as global policeman, the European Union agrees to create its own armed forces, bringing the whole region closer.
A country agrees to ban all meat production by 2030In an effort to become one of the global leaders on the path to net-zero emissions, one country decides to not only put a heavy tax on meat, but to ban domestic production entirely.
UK holds UnBrexit referendumFollowing a recession and domestic pressure, the United Kingdom is thrown into political turmoil that will end with a vote to wind back Brexit.
Widespread price controls are introduced to cap official inflationHistory tells us that with the war economy comes rationing and price controls. And this time is no different, as policymakers introduce strict price controls that lead to a range of unintended consequences.
OPEC+ & Chindia walk out of the IMF, agree to trade with new reserve assetSanctions against Russia have caused widespread turmoil due to US Dollar moves in countries across the globe that don't consider the US an ally. To relieve themselves from this, they leave the IMF and create a new reserve asset.
USDJPY fixed to the USD at 200 as Japan overhauls financial systemFollowing the challenges that faced the Japanese Yen in 2022, the Bank of Japan attempts to keep the currency from sliding. Unsuccessful on the long-term, Japan will launch a reset of its entire financial system.
Tax haven ban kills private equityWith the war economy comes an increased focus on national interests and sovereign nations' ability to assert themselves. In that regard, the OECD countries turn their attention on tax havens and pull the big guns out, banning them altogether.