This currency is a TurkeyBy Peter Rosenstreich
Want volatility? Look no further than the Turkish lira. As European markets opened, TRY took off on a roller-coaster worthy of Brighton Beach Cyclone, because investors are struggling with the meaning of President Erdogan’s re-election. Although his AKP party lost its parliamentary majority, with his ally MHP he can control parliament. USD/TRY rose to 4.6836 in seconds: TRY remains highly volatile. Don’t try to catch this falling sword.
Turkey’s large external debt makes it vulnerable to the USA’s rising interest rates. In theory Turkey should tighten its monetary policy, but this is uncertain. Erdogan has indicated that he should control monetary policy, and his bias is towards growth. Manufacturing purchasing remains weak, yet there is strong inflation. Data released today say consumer prices surged 2.61% monthly and 15.39% annually. Producer prices rose 23.71% annually. So the Central Bank is caught between this inflation and the pressure to ease rates. So, we are not hopeful that solid structural reforms will materialize.
AUD up on Chinese commentsBy Arnaud Masset
The Australian dollar added more than 0.50% on Tuesday after the Peoples’ Bank of China said it would keep the yuan stable. The announcement was made a few hours after the Reserve Bank of Australia’s monetary policy decision; however, the latter was a non-event as the central bank left interest rates unchanged. Like Chinese equities, the Australian dollar bore the brunt of the sell-off over the last few weeks, as trade tensions escalated. Earlier this morning, the Chinese yuan fell to an 11-month low against the US dollar with USD/CNY hitting 6.7214. The currency strengthened after the central bank’s comment: USD/CNY eased to 6.6850.
The People’s Bank of China has sent a strong signal. However, it is hard to say whether investors will fight the central bank and push the yuan lower or stop short selling the yuan. The PBoC is used to dealing with short-sellers, and it usually wins. For example in January 2017, offshore overnight deposit rates rose to prohibitive levels, which squeezed short sellers as funding costs exploded. We are not there yet, but now traders know: the PBoC is watching them.