OANDA Market Insights podcast (episode 31)

OANDA Senior Market Analysts Craig Erlam reviews the week’s business and market news with Jazz FM Business Breakfast presenter Jonny Hart.

This week’s big stories: Turkey rates rocket, Sterling up on Brexit hopes, Carney house price warning, Beijing welcomes trade talks offer.

Prospect of Sino-US talks lifts markets

China open to US invitation for trade talks

It’s been a more positive start to trading on Friday, with talks of new Sino-US trade talks potentially helping to lift risk appetite among investors.

Stocks in Asia ended the week on a high, with major indices recording gains of around 1% and those in Europe up by a slightly more modest 0.3% or so. US futures are roughly tracking those gains in Europe which potentially highlights the increased risk of a trade war for Asian markets compared to Europe and the US at the moment. Still, with Trump also apparently preparing to announce the next $200 billion of tariffs on China, who are responding with closer ties with US foe Russia, we are clearly not currently close to a resolution.

The US economy has been gathering positive momentum despite the risk of a trade war and today’s retail sales data is expected to provide further evidence of that, with spending expected to have risen by 0.4% last month. This would continue the steady trend of rising sales over the course of the year as consumers spend the additional income that tax cuts afforded them thanks to last year’s reforms.

DAX gains ground as investors upbeat after ECB meeting

Carney appears in Dublin after fresh Brexit warning

Mark Carney is due to speak in Dublin this morning which is sure to attract some attention, coming a day after the Bank of England kept interest rates on hold and, arguably more interestingly, the Governor risk the wrath of Brexiteers with more gloomy predictions. Carney met with the cabinet on Thursday and laid out what the bank considers to be a worst case no deal Brexit scenario, which included house prices falling by 35%, something Brexiteers will be keen to stress is more project fear from a closet remainer.

I think there’s a good chance that Carney steers clear of Brexit forecasts when possible in the coming months for fear of being seen as interfering in the process. The central bank may also be planning a similar approach after raising interest rates last month and giving itself the freedom to take a step back now for the rest of the year.

Dollar marks time as China data neutral

Lira steadies after CBRT hike but significant risks remain

The actions by the CBRT on Thursday appears to have had the desired effect for now, with the lira having since stabilized at around six to the dollar, which is still extremely high compared to earlier in the year but around 15% off its peak a month ago. While inflation is still expected to continue to rise from around 18% currently and the economy could face a tough recession, the moves by the central bank may prevent a much greater crisis.

USDTRY Daily Chart

OANDA fxTrade Advanced Charting Platform

The question now is whether President Recep Tayyip Erdogan will be willing to accept the central bank going against his wishes and raising interest rates, or whether he’s going to seek to control the central bank as well which could have devastating effects. We may have some stability in the near-term, which is welcome, but I have little confidence that this will last and feel a lot more needs to be done to reassure investors.

Economic Calendar

For a look at all of today’s economic events, check out our economic calendar.

Turkish central bank aggressively hikes rates

The Central Bank of Turkey increased its benchmark interest rate on Thursday to 24 percent, a hike of 625 basis points from the previous rate of 17.75 percent. The Turkish lira jumped more than 5 percent on the news, firming to around 6.1 against the dollar.

The move, which exceeded market expectations of an increase of between 300 and 400 basis points, boosted the lira and saw Turkish sovereign dollar bonds gain across the curve to their highest level since the end of August. The lira touched as high as 6.0030 against the dollar immediately following the announcement.

The rate hike came alongside a pledge by the bank to enact strong monetary tightening in order to support price stability amid recent economic turbulence.

CNBC

CBRT takes the focus off BoE and ECB meetings

Turkish central bank needs aggressive hike to settle investors

Markets are trading relatively flat ahead of a slew of central bank meetings on Thursday, with the BoE, ECB and CBRT all scheduled to make interest rate decisions.

While the Bank of England and European Central Bank would typically steal the spotlight, it’s actually the Central Bank of the Republic of Turkey that will likely steal the headlines today. With inflation in Turkey close to 18% and the currency having repeatedly fallen to all-time lows against the dollar, it’s become quite clear to all that the central bank needs to step in with a substantial hike and its unexpected pledge last week that its monetary stance will be adjusted, suggests it will do just that.

This would be quite controversial though with President Recep Tayyip Erdogan having been very clear about his opposition to higher rates. Having made his desire for control clear, investors will be monitoring today’s decision very closely to see just how independent the central bank really is. A rate hike looks obvious but how aggressive they’ll be will give a strong indication of how much influence Erdogan has over them.

USDTRY Daily Chart

OANDA fxTrade Advanced Charting Platform

Traders will be very quick to express their disapproval if the central bank is seen to be not responding aggressively enough which could result in a substantial decline in the Turkish lira. There is currently an expectation of a more than 4% increase in interest rates and it may take more to satisfy investors and avoid such a depreciation. Anything short of this could be bad news for the lira both in the near and long-term.

BoE unlikely to change message as Brexit negotiations enter crucial stage

The ECB and BoE decisions will likely be relative non-events compared to the CBRT. Both central banks have recently announced some monetary tightening – BoE raising interest rates and ECB tapering QE and announcing its end date – and are in no rush to speed the process up.

With Brexit negotiations heating up, the BoE will more than happy to drift into the background having come under fire for its views in the past. With the outlook so uncertain and hanging on the outcome of these negotiations, there’s little upside to the central bank making any changes to its policy message between now and the end of the year and I expect that to come across over the next few meetings.

ECB expected to maintain slight tightening plans

While the ECB may be less affected by the Brexit negotiations, it has set out a path for the next year that will see it slowly exit its easing program and with the economy experiencing a slight slowdown, it’s going to be in no rush to change course in the near-term. The first rate hike may be a little more delayed than it previously alluded to but I don’t expect it to hint at that until QE has ended.

Economic Calendar

For a look at all of today’s economic events, check out our economic calendar.

TRY weakens as CBRT meeting approaches

The Turkish lira weakened slightly on Tuesday as investors weighed up expectations for this week’s central bank meeting, where the monetary policy committee is expected to raise interest rates.

TRY has lost more than 40 percent of its value this year due to concerns over President Tayyip Erdogan’s grip on monetary policy and, more recently, over a diplomatic row between Ankara and Washington.

Erdogan, a self-described “enemy” of interest rates, wants lower borrowing costs to keep credit-fuelled growth on track.

Investors say rates need to rise, but the bank might not be able to meet market expectations partly because of Erdogan’s antipathy to higher borrowing costs.

The lira stood at 6.4850 to the dollar at 1053 GMT, weakening from a close of 6.4636 on Monday.

At the last monetary policy committee meeting in July, the central bank left its one-week repo rate unchanged at 17.75 percent, confounding expectations. The lira has since lost some 26 percent of its value and official data showed last week that annual inflation surged to 17.90 percent in August.

In a statement released shortly after the inflation data, the central bank promised to take the necessary action to support price stability, raising market expectations for a rate hike at Thursday’s meeting.

“With the assumption of USD/TRY remaining stable at around the 6.40s, we expect CPI to peak at 20.7 percent (year-on-year) in December,” Morgan Stanley economist Ercan Erguzel said in a note.

“Combined with ongoing financial stability concerns, this makes it necessary for the CBT to adjust its monetary policy stance.”

The sharp depreciation in the lira and its wider impact on the economy have also sparked concerns over Turkish companies’ financials. However, ratings agency Moody’s said on Tuesday that most rated Turkish companies could handle refinancing risks despite the rising uncertainties.

“Healthy liquidity profiles and well staggered debt maturities should shield most rated Turkish non-financial companies’ credit quality from potential refinancing risks over the next 12-18 months,” Moody’s said, adding that the two most vulnerable companies are Dogus Holding DOGUS.UL and Yasar Holding.

It said the greatest risk to Turkish companies’ credit quality was the possible reduction in corporate access to borrowing, in addition to the depreciating lira weighing on the companies’ financials.

Reuters

USD/ZAR touches two year high on Turkey contagion

Turkey attempts to calm markets

USD/TRY retreated from record highs above 7.00 struck early in today’s trading as markets took notice of comments from Turkish authorities on Sunday that they have drafted a stability plan. Turkey’s central bank said it had lowered reserve requirement ratios for banks to free up liquidity and assured markets that it would take all necessary measures to maintain financial stability. Turkish Finance Minister Berat Albayrak also said the banking watchdog had also limited swap transactions in the currency. While the kneejerk reaction to the “plans” lifted vulnerable currencies off their lows, sentiment is still extremely fragile and could turn dramatically.

USD/TRY has dropped about 4.7% from its record peak at 7.1412 this morning to trade at 6.8015 but is still down almost 40% this month. The contagion effect did not spare other emerging currencies, with the South African rand falling as much as 8.9% versus the dollar in early trading touching its lowest level in more than two years and USD/SGD touched a 13-month high of 1.3766. USD/MXN is also pushing higher, gaining 2.2% on the day.

USD/TRY Hourly Chart

Source: Oanda fxTrade

Asian equity markets were also caught up in the currency mayhem with all regional indices in the red. Nikkei225 down 1.25%, Australia’s ASX dropped 0.42% and China’s A50 shares down 0.5%. Across the currency spectrum, the US dollar remains in demand followed by the JPY and CHF as the quest for safe haven assets remains dominant. USD/JPY has slid 0.54% TO 110.25 while US 10-year yield is holding steady at 2.86%.

Oil drifts lower despite tight supply fears

Anticipated tight supply conditions pushed oil prices higher as trading got under way though concerns about a possible near-term drop in demand capped gains. In the longer run, oil demand is seen rising to 1.5 million barrels per day in 2019, up from 1.4 million barrels per day this year, according to the monthly IEA market report released Friday. WTI is currently trading at 67.65 after touching 68.17 earlier.

WTI Hourly Chart

Source: Oanda fxTrade

It’s a slow data slate to start the week. The full data calendar can be found here: https://www.marketpulse.com/economic-events/

OANDA Market Insights podcast (episode 27)

Source: Oanda Market Pulse

Euro touches lowest in more than a year as Turkey effect continues

Turkey says it has an action plan

The EUR touched a 13-month low versus the US dollar as trading got underway this week, with markets preparing for more turmoil involving the Turkish lira. The seemingly unstoppable downward spiral in Turkey’s currency and economy is raising concerns about European banks’ exposures to the country helped spark contagion fears while safe haven flows saw German 10-year bond yields edge lower.

The EUR touched 1.1366, the lowest since July last year though has since rebounded as traders focused on comments from Turkish Finance Minister Berat Albayrak who said the country had drafted an action plan to ease investor concerns. He added that the banking watchdog had also limited swap transactions in the currency. There were no details on the so-called plan, so the bounce so far has been muted. The lira extended its weakening bias, hitting a new record low of 7.0081 versus the US dollar. EUR/USD is currently trading at 1.1381.

EUR/USD Daily Chart

Source: Oanda fxTrade

Oil attempts to keep its firmer bias

Tight supply conditions pushed oil prices higher as trading got under way though concerns about a possible near-term drop in demand capped gains. In the longer run, oil demand is seen rising to 1.5 million barrels per day in 2019, up from 1.4 million barrels per day this year, according to the monthly IEA market report released Friday. WTI is currently trading at 67.91 after touching 68.17 earlier. Near-term, WTI appears capped by the 100-hour moving average which currently sits at 68.27.

WTI Hourly Chart

Source: Oanda fxTrade

China data scheduled

We are awaiting some second-tier loans data from China this morning. Growth in new loans is expected to slow to 1.21 billion yuan in July while the M2 money supply is expected to advance 8.2% y/y that month. Foreign direct investment could also be released today.

Sentiment readings for Australia’s business conditions and business confidence are also due sometime this morning. The last readings were 15 and 6 respectively.

The full MarketPulse data calendar can be viewed here: https://www.marketpulse.com/economic-events/

OANDA Market Insights podcast (episode 27)

OANDA Market Insights podcast (episode 27)

OANDA Senior Market Analyst Alfonso Esparza reviews the week’s business and market news with Jazz FM Business Breakfast presenter Jonny Hart.

This week’s biggest stories: US sanctions against Iran, Turkish lira collapse after steel sanctions and market reaction to UK GDP data

Big revisions offset July miss on payrolls

Another strong US jobs report expected today

The PBoC giveth the PBoC taketh

USD/CAD Canadian Dollar Lower on Contagion Fears

Canadian Jobs Impress but Loonie Lower on Global Contagion Fears

The Canadian dollar is lower on Friday. The USD/CAD is trading at 1.3083. Statistics Canada released a stronger than expected employment report with a huge gain of 54,100 jobs driving the unemployment rate down to 5.8 percent in July. The loonie failed to gain momentum from that economic indicator release given the current geopolitical climate.

A flight to safety from investors has given a boost to traditional safe havens like the JPY, CHF, USD and gold. The Turkish lira has been in free fall and has triggered contagion fears as Spain, Italy and France have high exposures.


usdcad Canadian dollar graph, August 10, 2018

The strong jobs report adds to the probability the Bank of Canada (BoC) will hike the benchmark interest rate one more time in 2018. The BoC raised its overnight target rate to 1.50 percent on July 11 with the growth of the economy picking up for a follow up rate hike in October.

The Canadian currency was lifted by the solid jobs report, but not enough to send the loonie into the black on Friday. The indicator comes during a tense trading environment where risk appetite is subdued.

Edogan sworn in with increased powers

Recep Tayyip Erdogan will cap his years-long drive to transform Turkey’s government on Monday as he’s sworn in as an executive president with vastly expanded powers.

Erdogan, modern Turkey’s longest-serving ruler, will be sworn in at parliament late in the afternoon. In the evening, he’ll mark the inauguration of the presidential system at a grand reception attended by foreign dignitaries, before unveiling the members of a cabinet expected to be pared to 16 positions from the current 27.

The coronation of the presidential office as the nexus of political power takes place at a critical juncture. The 64-year-old president, who has governed since 2003, won a mandate in the June 24 elections to govern with sweeping new powers on the platform that a powerful presidential office would ensure stability in turbulent times. Those times have already arrived, with the economic boom he’s presided over threatening to turn into a bust, and a crackdown on dissent gaining new momentum.

Bloomberg