EUR struggles to hold gains
By Arnaud Masset
During the Asian session, the US dollar extended yesterday's gains but quickly lost its advance as risk sentiment continued to grow. After sliding to $1.1655, the single currency bounced back towards the 1.17 threshold. It's going to be a big week for the single currency as Mario Draghi's statement is much awaited by market participants. The European Central Bank governing council will gather this week in Frankfurt to discuss monetary policy and, as usual, attention will focus on the council's view of the economic outlook as well as inflation developments. Since the June meeting, investors have reviewed their expectations to the downside and do not expect the ECB to hike interest rates before summer 2019 at least.
Looking at euro price developments, the single currency has most likely bottomed out this year as US rates struggle to keep upside momentum. Therefore, $1.1510 would most likely remain the lowest level seen this year. Even though further euro appreciation appears the most likely scenario, the uncertainty generated by the trade war could cap those potential gains. The area's composite purchasing manager index has already eased to 54.3 in July, down from the previous 54.9, signalling a weak start into the third quarter. Although, we remain confident that the single currency is poised to appreciate against the greenback against the backdrop of stalling US rates and upcoming ECB tightening, the uncertainty generated by the trade conflict has skewed the game towards the USD, at least in the short-term.
Will a rate hike suffice to stabilize the Turkish lira?
By Vincent-Frédéric Mivelaz
The June 24 presidential elections in Turkey gave Recep Tayyip Erdogan a clear victory, confirming his mandate as Turkish leader for another five years. However, in the view of investors, this questions the independent status of the Central Bank of Turkey (CBT) in managing the country's monetary policy, given Erdogan's recent declaration that he wanted a greater say in monetary decisions.
President Erdogan has confirmed on multiple occasions his reluctance for higher interest rates, which are interpreted as a barrier to economic growth. This is rather bad news for the lira, which has already depreciated by 25.60% and 22.25% against USD and EUR since the beginning of the year.
Accordingly, the question raised is whether the new government will have sufficient credibility to support the lira or not. And today's CBT monetary policy meeting decision will be critical. Turkey's inflation increased by 3% intra-month and is estimated to be above 15%, while the current account balance continues to widen (USD 5.89 billion as of May 2018), partly due to a weaker lira, thus necessarily requiring higher interest rates.
The CBT intervened in the marketplace in early June by raising its one-week repo rate by 125bps to 17.75% to support the currency. Therefore, a move below 125 bps would be seen negatively by market participants, who would assume that the government maintains a certain degree of control over monetary authority, causing further TRY weakness.
The early trading session suggests further Turkish lira weakness, currently trading along 4.76. The USD/TRY is expected to decline further and the CBT announcement will have an impact on the intensity of the currency move. We expect the rate hike to remain at 100 bps, which will push the pair along 4.85 in the short-term.