Will Inflation Hit the Markets?

With US inflation at a 40-year high, in this week’s market update XTB’s market analyst Przemysław Kwiecień examines what this could mean for stocks, commodities and forex, the impact this will have on investors, and how the Fed might react. Expect to find answers to questions such as:

  • What does elevated inflation mean for stocks and commodities?
  • Are investors unprepared for monetary tightening?
  • What is the key data and levels for the pound this week?

Don’s miss our latest market update: Watch now!

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

GOLD Analysis – Bearish Indicators in Place

Gold remained silent even after the FED’s multiple announcements on rate hikes. Gold price will be on the watch this week during the testimony of FED Chair Jerome Powell.

XAUUSD closed the first week of 2022 with a 1.76% loss compared to its closing price of December 2021 at $1830. Inflation hedge – Gold seems to have a weaker edge over the strengthening US Dollar. Investment volumes of Gold decreased in Q3 2021, whilst in Q3 2020 total Gold bound to Investment was 495t a year after that number decreased to 235t. Gold tied to the investment had a dominating demand in Q3 2020 and has been decreasing since then.

Despite an increased purchases of Gold by global Central Banks in 2021, many CBs parted with their precious metal purchases to withhold the deflation of their local currencies as the US Dollar was gaining momentum by the end of 2021. Thus, Turkey had to sell 35.1 tonnes in 2021 to hold Lira from being depreciated, in 2020 Turkish CB purchased 163.1 tonnes of Gold. Largest Gold purchases in 2021 according to the data from the World Gold Council were made by Brazil 62.3 tonnes, Hungary 63 tonnes, India 73.8 tonnes, Japan 80.8 tonnes, Thailand 90.2 tonnes.

Largest CB increase/decrease in Q3 2021 looks as follows.

Based on this data, it is obvious that these Central Banks are hedging against the hike of the US Dollar Index. Kazakhstan, Uzbekistan and Russia will be more vulnerable during recent days against the US Dollar due to developments in Kazakhstan and these states will probably use their Gold purchases to withhold their currencies from depreciation, following the Turkish CB.

Left to right first row – USD/INR, USD/KZT, USD/UZS

Left to right second row – USD/BRL, USD/RUB, USD/TRY

While rate hike news in late 2020 and mid 2021 were referred to as a bullish signal for gold and bearish for the US Dollar Index, since mid 2021 markets more rely on FED’s redemption of goals, promises and forecasts. Despite some forecasts being flickering, achieving one of the main goals is considered bullish for the US Dollar. Positive economic data during this weeks release and Mr. Powell’s positive outlook on the economic recovery of the United States will ignite the bullish momentum of the DXY.

Daily XAUUSD chart projects a triangle pattern, and signals the retest of the lower edge of the triangle, based on the pattern’s rule.

MACD and RSI also signal a bearish trend continuation of XAUUSD up until the end of this winter.

Moving averages on a daily XAUUSD chart also do not favor the Gold bulls. MA200 and MA50 both are above the closing price of XAUUSD. Remarkably, the 200-day moving average is above the 50-day MA. This formation in technical analysis is referred to as a “Death Cross’ and always is a bearish signal.

There still is a dynamic support which was able to withhold Gold from sliding below $1700, however the lack of impulse and a pressure from the USD could force XAUUSD to break this support and go down to $1724 and $1680 below that.

Binance Adds Turkish Lira and Australian Dollar to new Trading Pairs

Popular cryptocurrency exchange, Binance, has added seven new trading pairs to its already exhaustive list. The new pairs are ALICE/BNB, ETH/UST, LRC/BNB, GALA/AUD, OOKI/BNB, ONE/ETH, and ATOM/TRY. Two of these new trading pairs contain fiat currencies.

Binance Adds 7 new Trading Pairs

With over 500 crypto trading pairs on its platform, Binance is one of the few exchanges with an extensive list of trading pairs. These new additions will only give more options to users of the platform. 

While some of the tokens in the new trading pairs are well known, others are fairly new. GALA, the Gala games ecosystem token, was one of the best performing cryptocurrencies of last year with over 26,000% rise in value. So, it’s not surprising that Binance is adding more fiat pairs for it.

On the other hand, OOKI, the native and governance of Ooki protocol, is a new coin. Having just been listed on Binance in December, new trading pairs seem like the next step. Ooki protocol is a decentralized protocol for DeFi and Dapps.

Another new token is Alice which was released in May 2021 for the multiplayer builder game, My Neighbor Alice. Players can buy and develop lands in the game while interacting with neighbors and performing activities. 

Launched in the height of the market, the price rose to an ATH of $42.55, but it’s currently trading below $12.

Binance also added two fiat currencies to the trading pairs with the Australian dollar (AUD) and Turkish Lira (TRY). These two options mean that Binance will see more fiat to crypto purchases for GALA and ATOM.

BNB Loses 5% in 24 Hours

With the addition of these new trading pairs, Binance is once again showing why it’s the number one crypto exchange in the world. Despite its various scuffles with authorities, the exchange has been able to maintain its lead against its competitors.

But the same can’t be said for BNB, its native token. After almost reaching a new ATH in November, the value has fallen significantly along with the rest of the market. In the past 30 days, it has lost around 21% of its value. 

Given more recent trends, its situation is not looking to change soon. BNB has suffered a 1.3% drop in 24 hours and currently trades at $447.

2022 Central & Eastern Europe Outlook: Sound Growth, but Deficits, Governance, Geopolitical Risks Are Concerns

Explainer video: Scope Ratings introduces its 2022 Global Sovereign Outlook

Download Scope’s 2022 CEE Sovereign Outlook (report)

We expect broad-based, if uneven, economic expansion in the 11 EU member countries of the region (CEE-11) to continue, marking aggregate calendar-year growth of 4.6% in 2022 – albeit somewhat slower than a 5.6% expansion this year. This includes: 4.1% in Poland next year (after 5.5% in 2021), 5.4% in Hungary (after 7.5%), 5% in Romania (after 7.2%), 4.8% in Croatia (after 8.8%). Slovakia (5.3% in 2022, after 3.7% in 2021), Bulgaria (4.8% in 2022, after 3% this year) and the Czech Republic (4.7% next year, after 3% in 2021) are seen bucking normalisation trends, with growth accelerating in 2022.

Outside the EU, Russia similarly grows a more moderate but nevertheless above-potential 2.7% next year, after 4.5% this year. However, Turkey is seen slowing sharply to 2.3% in 2022, after 10.8% in 2021, while Georgia normalises to 5.5% economic growth next year, after 9.8% this year.

A constraint remains elevated budget deficits of the region

One constraint remains still-elevated budget deficits preventing any meaningful reduction of government debt and exposing economies to further tightening in global financial conditions.

Budget deficits will have remained elevated around 5.5% of GDP on aggregate in the CEE-11 in 2021, after 7.1% of GDP in 2020, as governments have prolonged discretionary spending in support of households and business. As a result, public debt ratios peak in 2021 – around levels not seen since peaks of the global financial crisis – before stabilising and gradually declining from 2022. Altogether, an aggregate budget deficit of the CEE-11 shrinks to 3.8% of GDP in 2022.

Russia ought to get near a balanced budget over 2022-23. In Turkey, increasingly frequent economic crises have brought repeated requirement for the counter-cyclical use of budgetary resources. Scope sees Turkish general government deficits of 5.4% of GDP in 2022, further increasing to 6.4% in a 2023 election year, after a more-modest-than-anticipated 3.2% this year.

Quality of economic policies increasingly important given changing political landscape

Inflation is running above target across CEE markets, limiting the room central banks have to aid recovery through continued accommodation in monetary policies.

Under this context, the quality of economic policies is increasingly important for growth and sovereign credit quality in the region given a changing political landscape, prolonged fiscal adjustments, rising labour shortages, and evolving environmental and technological challenges.

Access of the CEE-11 to substantive EU investment funding provides an historic opportunity to raise longer-run potential rates of economic growth via expenditure on digitisation, infrastructure and climate change. Improved economic resilience and curtailed external-sector risk contribute to improving outlooks as concerns the Baltic states, Bulgaria and Croatia, the latter two benefitting from accession to the Exchange Rate Mechanism II and Banking Union of the European Union.

Even so, higher-than-usual policy uncertainty persists across some CEE-11 economies, notably in Poland and Hungary, where added tensions with the EU over the rule of law could result in further delay of EU financing and adversely impact growth and public finance outlooks. The CEE economies most integrated into global supply chains, such as Slovakia and the Czech Republic, whose economies are reliant on the shortage-hit automotive sector, face nearer-run slowdown in growth momentum.

Geopolitical tensions and sanctions risk impact outlook for Russia, while Turkey goes from crisis to crisis

Russia is benefitting from an improved outlook concerning commodity prices. Effective fiscal and monetary management has abetted stabilisation of its economy, while lowering exchange-rate volatility. These developments supported Scope’s earlier upgrade of Russia’s credit ratings to BBB+/Stable.

However, geopolitical tensions are running high. Latest US efforts to defuse crisis in Ukraine might prove crucial, but Russia faces risk that further international sanctions are adopted, weighing on investment and growth outlooks. The significance for the credit ratings of Russia from sanctions risk hinges at this stage upon whether Russia’s approach on Ukraine favours maintaining a status quo, attenuating outstanding conflicts, or, instead, favours escalating a geopolitical crisis with risk of more punitive sanction repercussions from western counterparties.

In Turkey, looser financial conditions have anchored very high growth of 2021 at expense of the intensification of macroeconomic imbalances, manifested in the depreciating lira and inflation of above 20%. Turkey’s policy framework, as President Recep Tayyip Erdoğan has consolidated personal control over government and the central bank, is inconsistent with the economy’s long-run sustainability.

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

Levon Kameryan is Senior Analyst in Sovereign and Public Sector ratings at Scope Ratings GmbH. Giacomo Barisone, Managing Director at Scope Ratings, co-wrote this article.

Turkey Nears Tipping Point: Capital Controls, Use of Reserves Unlikely to Prevent Lira Depreciation

The government in Ankara has few options available so long as President Recep Tayyip Erdoğan remains committed to lowering borrowing rates to accelerate economic growth and raise exports even under conditions of inflation running above 20% – eroding ordinary citizens’ disposable income.

Either the currency crisis gets bad enough for President Erdoğan’s advisors to say “enough is enough”, at which stage the central bank changes personnel and belatedly hikes rates – even if temporarily – to ease current selling pressure on lira and check inflation.

Or, as an alternative, the central bank resorts to “de-globalising” the currency – reintroducing capital controls, limiting access to foreign currency within the economy, seeking foreign currency from domestic banks and foreign allies, and going through reserves in defence of the currency – in line with what occurred between 2018 and 2020 when Erdoğan’s son-in-law Berat Albayrak ran economic policy.

The government’s exchange-rate pain threshold appears higher than in the past

Any decision to cut rates again, even as global central banks are generally tightening, at the monetary policy committee of 16 December could place even further pressure on lira, already having lost around half its value since February.

Inflation rose to 21.3% YoY in November, sending real policy rates to -5.2%, among the lowest in emerging markets.

Stemming this lira slump is critical but the government’s exchange-rate pain threshold appears higher than it was in 2018 or late 2020 when the central bank last hiked rates sharply to circuit break a currency rout.

Erdoğan has significantly consolidated his influence over economic decision-making by this stage, including monetary policy. The president appears much more “dug in” during this crisis with loyalists running the central bank and treasury and repeated mantra of how falling interest rates support growth and employment. In addition, the political stakes are much higher ahead of centenary elections due by 2023. Erdoğan and his Justice and Development Party are trailing in polling, so any public admission of failure on the economy such as vis-à-vis a rates reversal is likely to be seen by Erdoğan as damaging to credibility.

Observing steps of use of forex reserves and capital controls in slowing lira losses

We are already observing the government pursuing a “de-globalisation” strategy in using forex reserves to intervene in exchange-rate markets – after having previously committed not to do so – and adopting specific forms of capital controls to discourage depositing in foreign currency and selling of lira, to allow for lower rates while slowing currency losses. The catch is that defending lira via such a strategy is unsustainable long run.

The policy is expensive, and only buys time. Turkey racked up foreign-exchange reserve losses of over USD 100bn over 2018-20. Net reserves ex-swaps, standing at negative USD 42.3bn as of October, represent a lasting testament to consequences of this policy framework, which would be risky to attempt again with the domestic sector losing confidence in value of lira, precipitating further capital outflows.

Risk of political crisis with elections looming, on top of economic and lira crises

Instead of helping Erdoğan’s political cause, a lower interest rate policy to engineer higher economic growth appears to be aggravating his likelihood of re-election. The weak currency is instead exacerbating high inflation and loss of consumer purchasing power, which are central causes of popular discontent. Moreover, rate cuts are resulting in much higher long-end rates, tightening monetary conditions and exacerbating economic instability – hitting the poorest the hardest.

Should Erdoğan not alter course and electoral defeat were to appear inevitable, political tensions are likely to grow over 2022 and 2023 if the president turns to less democratic routes to hold to power. Risk of a political crisis, in addition to economic and lira crises, represents a vulnerability with bearing on B/Negative Outlook foreign-currency credit ratings we assign to Turkey.

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

Dennis Shen is a Director in Sovereign and Public Sector ratings at Scope Ratings GmbH.

 

2022 Global Economic Outlook: Covid-19, Structural Inflation, Monetary Tightening Challenge Global Outlook

Explainer video: Scope Ratings introduces its 2022 Global Sovereign Outlook

Download Scope’s 2022 Sovereign Outlook (report).

Entering 2022, new variants of Covid-19, elevated inflation, and withdrawal of fiscal and monetary support present risk for the robustness of recovery. GDP is seen, nevertheless, continuing to grow above trend over 2022 of 3.5% in the US, 4.4% in the euro area, 3.6% in Japan and 4.6% for the UK, even if, in most cases, normalising to a degree from elevated early-recovery growth of 2021. China is seen growing nearer trend of 5%.

Amid an uneven recovery, we see momentary slowdown over Q4 2021 and Q1 2022 across many economies, if not in some cases temporary output contraction, as countries of Europe reintroduce generally lighter restrictions on basis of renewed rise in Covid-19 cases, including those associated with a new Omicron variant. But we see economic rebound regathering traction by the spring of 2022.

As expected, full economic normalisation has remained vulnerable to renewed introduction of restrictions as transmissible virus variants challenge public-health systems, though we see severity of virus risk for economic recovery continuing to moderate with time as governments adopt more targeted responses, virus becomes more transmissible but less lethal, and businesses and people adapt ways of doing business. Nevertheless, risk to the 2022 outlook appears skewed on the downside.

More persistent inflation, even as it begins to moderate, supports increasing monetary policy divergence

Inflationary pressure is likely to remain more persistent than central bank projections, running above pre-crisis averages even after price changes begin to moderate by next year. This is likely to compel a continued divergence of monetary policy within the globe’s core economies, with associated risk of crystallisation of latent debt and financial-bubble risk as central banks pull back.

This is especially true as regards the UK and the US, where inflation might continue testing 2% mandates, although much less the case for Japan of course, with the euro area somewhere in between with inflation potentially remaining under 2% over the long run.

By end-2022, policy rates of leading central banks are expected to similarly diverge: remaining on hold with respect to the ECB and the Bank of Japan but with rate hikes next year from the Bank of England and Federal Reserve. The ECB is seen halting the Pandemic Emergency Purchase Programme (PEPP) next year but adapting PEPP and/or other asset-purchases facilities to retain room for manoeuvre and smoothen transition in markets.

Higher inflation holds both positive and negative implications for sovereign credit ratings

Higher and more persistent inflation holds both positive and negative credit implications as far as sovereign ratings are concerned. Somewhat higher trend inflation supports higher nominal economic growth, helping reduce public debt ratios via seigniorage, and curtails historical deflation risk of the euro area and Japan. However, rising interest rates push up debt-servicing costs especially for governments carrying heavy debt loads and running budget deficits. Emerging economies, with weakening currencies and subject to capital outflows, are particularly at risk.

Substantive accommodation from central banks has cushioned sovereign credit ratings over this crisis, so any scenario of much more persistent inflation limiting room for monetary-policy manoeuvre is a risk affecting credit outlooks. Bounds in central bank capacity to impede market sell-off due to high inflation compromising monetary space may expose latent risk associated with debt accrued in past years.

Monetary innovation during this crisis has supported credit outlooks

As many central banks tighten monetary policy amid policy divergence, peer central banks that might otherwise prefer looser financial conditions may see themselves compelled to likewise remove some accommodation, otherwise risking currency depreciation. At the same time, with governments dealing with record levels of debt and central banks owning large segments of this debt, “fiscal dominance” may coerce moderation in speed of policy normalisation.

Monetary innovation over this crisis such as flexibility made available in ECB asset purchases supports resilience of sovereign borrowers longer run, assuming such innovations were available for re-deployment in future crises.

Emerging market vulnerabilities entering 2022, while ESG risks becoming increasingly substantive

Emerging market vulnerabilities are a theme entering 2022, amid G4 central bank tapering, geopolitical risk, and a slowdown of China’s economy. Debate heats up furthermore during 2022 around adaptation of fiscal frameworks for a post-crisis age, with potentially far-reaching implications as far as sovereign risk. Environmental, social and governance (ESG) risks are becoming increasingly significant – presenting opportunities and challenges for ratings.

Sovereign borrowers with a Stable Outlook make up presently over 90% of Scope Ratings’ publicly rated sovereign issuers, indicating comparatively lesser likelihood of ratings changes next year as compared with during 2021, although economic risks could present upside and downside ratings risk. Only one country is currently on Negative Outlook: Turkey (rated a sub-investment-grade B).

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

Giacomo Barisone is Managing Director of Sovereign and Public Sector ratings at Scope Ratings GmbH.

 

Tech Sell-Off Continues

Gold, which peaked last week near $1877, has been dumped to around $1793. The tech sell-off in the US carried into the Asia Pacific session, and Hong Kong led most markets lower. The local holiday let Japanese markets off unscathed, though the Nikkei futures are off about 0.4%. Australia and India managed to post minor gains as the MSCI Asia Pacific Index fell for the fourth time in five sessions.

Europe’s Stoxx 600 has slid around 1.5% today, its fourth consecutive decline, but has clawed back nearly half the gains It is the longest retreat in two months. US futures are lower, with the NASDAQ leading the move. Near 1.64%, the US 10-year yield is at the upper end of this month’s range. Last month it reached 1.70%. European bond yields are mostly 4-6 bp higher, and peripheral spreads have widened a little.

The dollar is sitting in the middle of the major currencies. The dollar bloc, sterling, and the Norwegian krone, which are the risk-on, levered to growth currencies, are weaker. The euro, yen, and Swiss franc are little changed but firmer. The dollar briefly traded above JPY115.00 in Asia, without Tokyo, before being pushed back. The steady euro has taken some pressure off most of the regional currencies.

The Turkish lira has been in a virtual freefall following President Erdogan’s spirited defense of his efforts to drive down rates. There was around 10 lira to the dollar in the middle of November. Today, at its peak, there is about 12.48 lira to the dollar.

Asia Pacific

Over the weekend, Japan expressed willingness to cap its strategic reserves. Press reports indicated yesterday that India is amenable to coordinating a release of some of its oil stocks. South Korea may also participate. It has been under consideration for a couple of weeks, at least, in the US, and China appears willing to repeat September’s release of crude from its reserves. However, it seems naive to have expected OPEC+ to simply standby. January WTI posted a bearish outside down day ahead of the weekend by trading on both sides of the previous day’s range and settling below the previous session’s low.

Follow-through selling yesterday took it down about $1.20 from the close, but when OPEC+ announced that a coordinated release of the oil could prompt it to reconsider its own plans. It is to meet next week to review its strategy. Through yesterday’s low, January WTI had retreated by nearly 11% from the October 25 higher near $83.85. A band of resistance is seen between $78 and $80.

OPEC+ had previously agreed to boost output by 400k barrels a day per month to restore pre-pandemic output levels. That said, not all the members can produce their quota, leading to a shortfall. OPEC+, the IEA, and EIA all seem to agree that supply-demand considerations shift in next year, and the market will once again be in oversupply.

Moreover, OPEC+ argues that the real dislocation is not with oil as its with gas. The US imports about 2.9 mln barrels a day, India, about 4.2 mln, and Japan, about 3.1 mln barrels a day. South Korea imports around 2.5 mln barrels a day. Together it is around 12.7 mln barrels a day of imports. If together, 100 mln barrels are released, about eight days of imports would be covered. This is a high estimate. India, for example, has indicated it may release 5 mln barrels.

Australia’s flash November PMI was better than expected. Manufacturing edged up to 58.5 from 58.2, while services rose to 55.0 from 51.8. This produced a 55.0 composite reading, a gain from 52.1 in October. Recall, the pandemic and lockdown led weakness in the economy in the May-August period. The composite PMI bottomed in August at 43.3.

It has risen for three months but remains well off the peak in April of 58.9. Separately, New Zealand real retail sales were hit in Q3 by the social restrictions, but the drop was not quite as bad as feared. Reall retail sales fell 8.1% after a 3.3% increase in Q2. Economists (Bloomberg median) had anticipated a 10.5% pullback. The RBNZ meets the first thing tomorrow and is widely expected to hike 25 bp, to lift the cash rate to 0.75%. There is still a slight bias toward a larger move in the swaps market.

The dollar briefly traded above JPY115.00 for the first time since March 2017. We note that Japanese dealers were on holiday and did not participate in the move. As risk-off sentiment took over, the dollar was sold back to JPY114.50. Resistance in Europe has been found near JPY114.80. Note that there is an option for about $980 mln at JPY115.50 that expires tomorrow. The Australian dollar initially edged lower to almost $0.7210, its lowest levels since October 1 before steadying. A break of $0.7200 signals a retest of the late September low near $0.7170. Initial resistance is seen in the $0.7230-$0.7250 area.

The PBOC is sending plenty of verbal signals that it does not want to see strong yuan gains, and today’s fixing underscores that point. The dollar’s reference rate was set at CNY6.3929, wider than usual above the market expectation (Bloomberg) for CNY6.3904. The greenback is firm inside yesterday’s range. Caution is advised here as the PBOC could escalate its disapproval.

Europe

The flash EMU November PMI was better than expected. The aggregate manufacturing PMI rose to 58.6 from 58.3. The market anticipated a decline. The service PMI rose to 56.6 from 54.6, also defying expectations for a sequentially weaker report. The composite snapped a three-month slide and rose to 55.8 from 54.2. The cyclical peak was in July at 60.2.

A flash release is made for Germany and France. Germany manufacturing slowed slightly (57.6 from 57.8) and held up better than expected (Bloomberg median 56.9). Services actually improved (53.4 from 52.4). The composite rose to 52.8 from 52.0 to end a three-month downdraft after peaking in July at 62.4. French numbers were even better.

The manufacturing PMI rose to 54.6 from 53.6. The service PMI rose to 58.2 from 56.6. The composite improved to 56.3 from 54.7 to snap a four-month fall. Recall that yesterday the Bundesbank warned that the German economy may practically stagnate this quarter and that inflation may approach 6% this month.

The UK’s flash PMI was more mixed. The manufacturing PMI had been expected to have slowed but instead improved for the second consecutive month (58.2 from 57.8). Services were nearly as weak as anticipated slipping to 58.6 from 59.1. The composite eased slightly to 57.7 from 57.8, ending a two-month recovery from the June-August soft patch. Meanwhile, Prime Minister Johnson’s rambling speech yesterday hurt people’s ears, and in terms of substance, the changes to social care funding that may result in lower-income people having to sell homes to pay for support did not go over well. It is spurring talk of a possible cabinet reshuffle.

The euro has edged to a new low for the third session today, slipping to almost $1.1225 before catching a bid that lifted it back to $1.1275. There is an option for around 765 mln euros at $1.1220 that expires today. The nearby cap is seen in the $1.1290-$1.1310 area. The euro may struggle to sustain upticks ahead of tomorrow’s US PCE deflator report (inflation to accelerate). Sterling met new sellers when it poked above $1.3400. It has ground lower in the European session, and sterling fell to almost $1.3355. Note that the low for the year and month was set on November 12, slightly above $1.3350. We see little chart support below there until closer to $1.3165.

America

We suspect many pundits exaggerated the link between the renomination of Powell for a second term and the sell-off in US debt and technology shares. First, it was not a surprise. Second, it assumes a substantive difference in the conduct of monetary policy between Powell and Brainard. There isn’t. The difference was on regulatory issues and on the role of climate change. Third, the idea that the Fed may accelerate its bond purchases next month was sparked by the high CPI reading on November 10.

Yesterday, Bostic joined fellow Fed President Bullard. Two governors (Clarida and Waller) also seem to be moving in that direction (Waller may be faster than Clarida). The fact or the matter, nearly all of the high-frequency data for October, including employment, auto sales, retail sales, industrial production, and inflation, came in higher than expected. The US sees the preliminary November PMI today. It is expected to have risen for the second consecutive month after fall June-September.

The reception to yesterday’s US two- and five-year note auctions was relatively poor. The higher yields (compared with the previous auctions) did not produce better bid-cover ratios. Today’s the Treasury comes back with $55 bln seven-year notes and re-opens the two-year floater. Many observers see the debt ceiling constraint being likely an early 2022 problem rather than this year. Still, tomorrow’s sale of the four-week bill may be the test. Recall that at last week’s auction, the 4-week bill yield doubled to 11 bp.

Europe’s virus surge and social restrictions became a market factor last week. Many think that the US is a few weeks behind Europe. The seven-day infliction rate in the US rose 18% week-over-week. Several states, including Colorado, Minnesota, and Michigan, are being particularly hard hit. Nationwide 59% of Americans are reportedly fully vaccinated. However, it leaves about 47 mln adults and 12 mln teens unvaccinated.

The risk-off mood and the drop in oil prices are helping the US dollar extend its gains against the Canadian dollar. The greenback, which started the month below CAD1.24, is now pushing close to CAD1.2750 to take out last month’s high. A move above here would target CAD1.28 and then the September high near CAD1.2900. Still, the market is getting stretched, and the upper Bollinger Band is slightly below CAD1.2730.

The risk-off mood does not sit right with the Mexican peso either. The dollar settled above MXN21.00 yesterday, its highest close in eight months. The same forces have lifted it to MXN21.1250 today. However, the anticipated gain in September retail sales (0.8% Bloomberg median after a flat report in August) may not give the peso much support if the risk-off continues. The high for the year was set on March 8 near MXN21.6360.

This article was written by Marc Chandler, MarctoMarket.

Exclusive -Turkey’s State Banks Likely to Follow Central Bank and Slash Rates on Monday – Sources

The three big public lenders Ziraat Bank, Halkbank and Vakif Bank are expected to lower rates on corporate, individual, mortgage and other loans, the three banking sources told Reuters, speaking under condition of anonymity because they were not authorised to discuss it.

One lender sent an email to some staff on Friday, viewed by Reuters, notifying them of the plan to cut costs by some 200 basis points. Another senior banking source said state banks will on Monday reduce rates “significantly in order to match” the central bank’s 200-basis point cut in its repo rate.

Cemil Ertem, a chief adviser to the Turkish presidency and a Vakif Bank board member, said on Twitter that state banks had cut loan rates down to the central bank’s policy rate.

Ziraat Bank had no immediate comment. Halkbank declined to comment and a Vakif Bank spokesperson did not immediately respond to a request for comment on details of the plan.

Policy easing by a central bank typically triggers lower rates for borrowers, stimulating economic activity. But the size of last week’s rate cut to 16% shocked markets and was twice as sharp as the most dovish estimate in a Reuters poll.

It sent the lira to a record low against the dollar and boosted benchmark yields, including a jump in Turkey’s 10-year government bond to 20.53%.

INFLATION RISK

While the big state banks are expected to follow the central bank, the market reaction last week suggests that extending cheaper loans will be costly for them. And though a sharp drop in rates could help some businesses and consumers, many analysts say it also risks exacerbating rising inflation and lira depreciation which could soon force the central bank to reverse course and hike again.

The government’s Turkey Wealth Fund did not immediately comment on banks cutting borrowing costs. It fully owns Ziraat Bank, 75% of Halkbank and 36% of Vakif Bank, public data show.

The central bank declined to comment on the state bank plan or on any possible fallout.

Many analysts say the central bank’s credibility is tarnished by Turkish President Tayyip Erdogan’s publicly stated calls for lower rates in order to boost credit and exports, despite inflation running near 20% last month.

Governor Sahap Kavcioglu has said publicly that Turkey’s central bank sets policy independently. Last week the bank said it cut rates in part because inflation pressure is temporary.

A self-described enemy of interest rates, Erdogan has replaced much of the central bank’s top leadership this year. Turkey is now virtually alone in cutting rates while other central banks around the world are hiking to head off rising global price pressures.

‘RISK PERCEPTIONS’

State banks aggressively expanded credit last year to ease pandemic fallout.

But some private lenders say they are hesitant given the risks of stoking an economy expected to grow at nearly 10% this year, and possible defaults on companies’ foreign currency debt.

The chief executive of lender Isbank, Hakan Aran, said in a televised interview on Sept. 29 that credit costs will not fall unless inflation is brought down first.

“If state-run banks slash rates and turn on the consumer-lending spigot … the additional liras flooding the system will only drive more dollarisation – exacerbating financial and economic pressures,” said Emre Peker, a London-based director at Eurasia Group.

In its policy statement on Thursday, the central bank cited business’s difficulty in getting commercial loans due to tight monetary policy.

Central bank data shows that average rates on these loans has held near 20% this year, though one of the sources said it was between 17.5% and 18% at state banks. These rates are among those that banks are expected to cut on Monday, according to the three sources.

Thursday’s rate cut was the second by the central bank in two months, following a 100-basis-point cut in September. Policy easing has sent the lira tumbling 13% against the dollar since the beginning of September, to hit an all-time low of 9.75 in early trade on Monday, pushing inflation higher via imports.

Erich Arispe, Fitch Ratings senior director who covers Turkey, told Reuters on Friday that the jump in market yields after Thursday’s rate cut shows that “risk perceptions play a role in financing conditions” for Turkey.

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

(Additional reporting and writing by Jonathan Spicer; Editing by Daren Butler and Susan Fenton)

Turkish Lira Hits Record Low After Erdogan Seeks Expulsions

The currency had already hit record lows last week after the Turkish central bank (CBRT) cut its policy rate by 200 basis points, despite rising inflation, in a shock move derided as reckless by economists and opposition lawmakers.

The lira hit an all-time low of 9.75 by 18:40 GMT on Sunday, weakening from Friday’s close of 9.5950. Two bankers attributed the early weakness to Erdogan’s comments on Saturday. It has fallen nearly 24% so far this year.

“I worry … for Turkish financial markets on Monday. The lira will inevitably come under extreme selling pressure,” said veteran emerging market watcher Tim Ash at BlueBay.

“And we all know that (Central Bank Governor Sahap) Kavcioglu has no mandate to hike rates, so the only defence will be spending foreign exchange reserves the CBRT does not have.”

Erdogan said on Saturday he had told his foreign ministry to expel the envoys for demanding the release of businessman and philanthropist Osman Kavala, who has been held in prison for four years without being convicted.

By Sunday evening, there was no sign that the foreign ministry had yet carried out the president’s instruction, which would open the deepest rift with the West in Erdogan’s 19 years in power.

Erdogan’s political opponents said his call to expel the ambassadors was an attempt to distract attention from Turkey’s economic difficulties, while diplomats hoped the expulsions might yet be averted.

Turkey’s state banks were expected to cut borrowing costs on loans by around 200 basis points on Monday, according to three people with knowledge of the plan, following last week’s central bank rate cut.

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

(Additional reporting by Nevzat Devranoglu; Writing by Daren Butler; Editing by Alison Williams and Kevin Liffey)

Are the Technicals Anticipating a Soft US GDP Report? Could it be a “Sell the Rumor buy the Fact?”

Indeed, the greenback fell against all the major currencies, even the Japanese yen, against which it had reached new four-year highs (~JPY114.70) before pulling back. On the other hand, the Antipodean currencies and the Norwegian krone continued to lead the move against the US dollar. The Aussie rose to new three-month highs, while the Kiwi, Nokkie, and Canadian dollar saw four-month highs.

Emerging market currencies were more mixed than the majors. At the end of the week, Russia’s larger than expected 75 bp rate hike helped lift the rouble, the best emerging market currency, last week. It reached a 15-month high ahead of the weekend. The Chinese yuan reached its best level in five months last week.

On the other hand, the Turkish lira and Brazilian real came under intense selling pressure. Turkey’s central bank showed little concern about the lira’s exchange rate when it delivered a larger-than-expected 200 bp cut in the one-week repo rate. At 16%, it stands below the headline and core inflation rates (19.58% and 16.98%, respectively in September. The lira lost 3.7% last week and fell to a record low.

The lira dropped by 25% in 2020 and is off another 22.6% this year. Political and economic turmoil in Brazil gave Turkey a run for its money. The Brazilian real fell 3.3% last week, which almost doubled its depreciation this year to 8.00%. President Bolsonaro has lost the confidence of investors and local businesses. Brazil may report that inflation stabilized (above 10%) in October, ahead of the central bank meeting, which is widely expected to lift the Selic rate 100 bp to 7.25%. It would be the third such move this year after beginning the cycle with three 75 bp increases.

Dollar Index

The high for the year was set on October 12, near 94.55. It pulled back to around 93.50 early last week before consolidating. It met the (38.2%) retracement objective of the leg up that began in early September and came in about 93.55. The next important chart area is the 93.00-93.25. The momentum indicators are still headed lower, but prices have stabilized. A close back above 94.00 would suggest that minor correction is over.

The Dollar Index settled at the end of last month slightly below 94.25. If it does not recapture this by the end of next week, it will post the first monthly loss since July. The dollar’s losses may reflect some position adjustment ahead of a soft GDP report. However, the market could be vulnerable to a “sell the rumor buy the fact” as the market quickly turns its attention to the November 3 FOMC meeting and the start of tapering.

Euro

Although the single currency held above $1.16 since testing the $1.1570 area on October 18, the upside was limited to the $1.1670 area approached on October 19. Indeed, it has been confined to Tuesday’s range (~$1.1610-$1.1670) and traded in about a third of a cent range ahead of the weekend. The momentum indicators are pointing higher. Yet, the market lacks energy even though the five-day moving average cross above the 20-day moving average for the first time since mid-September.

The US 2-year premium over Germany rose for the sixth consecutive week and around 110 bp, it is the most since March 2020. It was closer to 200 bp before the pandemic. The ECB meets next week, but important decisions are not expected until the December meeting. The EMU reports Q3 GDP, and it is expected to have grown around 2% quarter-over-quarter. Lastly, rising energy prices and a weaker euro suggest that the preliminary October CPI risk is on the upside.

Japanese Yen

After rising to a four-year high around JPY114.70, the dollar appears to have entered a consolidation phase. It pulled back to about JPY113.40 ahead of the weekend. The weak close sets up a test on the JPY113.25 support area and then JPY112.75. We note that US yields remain firm, but the dollar-yen rate has become a bit less sensitive to it (the correlation has softened). The dollar’s four-week ascent against the yen ended last week with a roughly 0.65% pullback, which tested the trendline off drawn from the lows before last month’s FOMC meeting.

We have suggested that at least initially, the JPY114.50-JPY115.00 may mark the upper end of a new range for the dollar. If that holds, the market may have to fish for the lower end of the range, and perhaps it may be encouraged by a rally in US Treasuries either ahead of or in response to the Q3 GDP estimate, for which the Atlanta Fed’s tracker sees at 0.5% annualized.

British Pound

Sterling was practically flat last week despite the seventh consecutive weekly increase in the implied yield of the December 2021 short-sterling interest rate futures contract. The implied yield rose 10 bp to about 46 bp. In early September, before the surge in rates began, it was at 0.11%. Even at the end of the week, BOE officials (chief economist Pill) were still goading the market by saying a hike in November was “fairly balanced.”

Sterling’s rally, which began the month near $1.34, stalled around $1.3835 last week (fraying the upper Bollinger Band), just in front of the 200-day moving average (~$1.3850). This area also corresponds to the (50%) retracement of the sell-off since the May high ($1.4200). Momentum indicators are getting stretched but have not begun leveling off. Support is seen in the $1.3675-$1.3700 area.

Canadian Dollar

The Canadian dollar rose for the fifth consecutive week, albeit barely, and reached levels not seen since June. The market is aggressive in pricing in a hike several months before the Bank of Canada anticipated the output gap to be closed. The implied yield of the March 2022 BA futures rose 11.5 bp, marginally exceeding the increase of the previous two weeks. At 0.795%, it is 23 bp on top of the December 2021 contract yield.

The Bank of Canada meets next week and may subtly push against speculation of an early hike. After falling slightly below CAD1.2290, the US dollar reversed higher but again encountered selling pressure near CAD1.2385. Both the MACD and Slow Stochastic appear to have leveled off in oversold territory. However, it probably requires a move above CAD1.2400-CAD1.2425 to suggest a corrective phase as opposed to consolidation.

Australian Dollar

The Aussie rose 0.6% last week, its third weekly advance. The move extended its gains to 3.3% this month. It settled last month around $0.7225. It is not just against the US dollar; speculative participants have driven the Aussie up on the crosses, including the yen and euro. The $0.7500 area corresponds to the (50%) retracement objective of the slide from early May that began by $0.7900 and bottomed in late August close to $0.7100.

The next (61.8%) retracement is found just shy of $0.7600, but before that, the 200-day moving average (~$0.7565) must be overcome. The momentum indicators are stretched, and the Slow Stochastic has already begun curling over. The Aussie finished last week below its five-day moving average for the first time this month. Initial support is seen around $0.7450, and a break signals a move to $0.7400. If that goes, there is room for another cent pullback.

Mexican Peso

The peso extended the previous week’s gains that had halted a four-week slide. Indeed, the peso’s nearly 0.75% gain last week put it near the best performers in the emerging market universe. Anticipation of more aggressive rate hikes, even before the bi-weekly CPI, reported before the weekend, accelerated more than forecast. The peso may have also benefited from a rebalancing of portfolios away from Brazil, where neither the political nor economic environment is favorable. The sell-off in bonds, stocks, and currency gives the sense that foreign investors are joining domestic investors in abandoning President Bolsonaro.

The Brazilian real managed to fall nearly as much as the Turkish lira (~3.3% vs. 3.6%). Before the weekend, the US dollar recorded a new low for the month (MXN20.1250) ahead of support seen near MXN20.10. A break sets up for a test on more important support around MXN20.00. The MACD and Slow Stochastic reflect the strong downside momentum. The latter has begun entering oversold territory. Mexico reports September trade, employment, and Q3 GDP next week. Growth is expected to have shifted lower to around 0.5% from 1.1% and 1.5% in Q1 and Q2, respectively.

China

If we begin by acknowledging that the yuan is closely managed and observe that it has risen four consecutive weeks to levels not seen since June, it seems reasonable to conclude that officials desired some yuan strength. And that strength should be kept in perspective. It is a little less than 1% this month. Still, the 0.8% gain last week was more than the cumulative gains of the previous three weeks and was the biggest advance since the last week of May when the dollar’s three-year low (~CNY6.3570). The dollar finished last week near CNY6.3835.

Some speculate that Beijing’s efforts to secure energy supplies and dampen commodity prices are consistent with a stronger currency. However, the volatility of commodities overwhelms the exchange rate volatility that PBOC officials tolerate. Also, the exchange rate is a blunt instrument, creating unintended consequences. Some demand for the yuan may have stemmed from the dollar bond issuance last week (four tranches for $4 bln). The momentum studies on the offshore yuan are stretched.

This article was written by Marc Chandler, MarctoMarket.

Marketmind: No Escaping the Inflation Beast

A look at the day ahead from Dhara Ranasinghe.

Data on Thursday showed China’s factory gate prices grew at their fastest pace on record in September, a day after figures showed another solid increase in U.S. consumer prices.

The take away from markets is that transitory or not, central banks are likely to respond to higher inflation sooner rather than later.

And with minutes from last month’s Federal Reserve meeting showing policymakers’ growing concern about inflation, investors have again brought forward rate-hike expectations.

Fed Funds futures have pulled forward expectations for the first hike from late in 2022 to almost fully price a 25 basis point hike by September.

In addition, money market pricing suggests the Bank of England could move before year-end, the cautious European Central Bank could tighten next year and the overtly dovish Reserve Bank of Australia could raise rates by end-2023 — a trajectory that doesn’t gel with the central bank’s guidance.

Singapore’s central bank on Thursday unexpectedly tightened monetary policy, citing forecasts for higher inflation.

Markets, having priced in higher inflation and a tighter monetary policy outlook, appear to be in a calmer mood in early Europe. Asian shares rallied overnight, European and U.S. stock futures are higher too. U.S. Treasury yields, while a touch higher, are holding below recent multi-month highs.

Still, China property shares fell as investors fretted about a debt crisis in the sector.

The Turkish lira, at record lows versus the dollar, is also in the spotlight after Turkey’s President Tayyip Erdogan dismissed three central bank officials.

Key developments that should provide more direction to markets on Thursday:

– BOJ policymaker rules out stimulus withdrawal even after economy recovers

– Taiwan’s TSMC posts 13.8% rise in Q3 profit on global chip demand surge

– Japan dissolves parliament, setting stage for general election

– Data: Spain harmonized inflation rate(Sept), Canada manufacturing sales (Aug)

– United States: Initial Jobless Claims (Oct), Jobless Claims 4-week Average, PPI (Sept), NY Fed Treasury Purchases 22.5 to 30 years, 4-week and 8-week T-Bill Auction

– Central Banks: Fed’s Bowman, Bostic, Barkin, Bullard, Daly and Harker, ECB’s Elderson, and BoE’s Tenreyro and Mann speak

– Earnings: UnitedHealth, Bank of America, Wells Fargo, Morgan Stanley, Citigroup, US Bancorp, Walgreens Boots Alliance, Fast Retailing, Domino’s Pizza.

(Reporting by Dhara Ranasinghe; Editing by Rachel Armstrong)

 

Turkey’s Erdogan Overhauls Monetary Policy Committee, Lira Hits Record Low

It said those dismissed were deputy governors Semih Tumen and Ugur Namik Kucuk, along with another MPC member, Abdullah Yavas.

Erdogan appointed Taha Cakmak as a deputy central bank governor and Yusuf Tuna as an MPC member, it said.

Analysts viewed the move as fresh evidence of political interference by Erdogan, a self-described enemy of interest rates who frequently calls for rate cuts.

The lira weakened to a record low of 9.1900 against the dollar after the announcement, a loss of 1% on the day. It has weakened about 19% so far this year, driven by concerns about monetary policy.

It later pared some of the day’s losses, to stand at 9.1325 at 05:33 GMT.

Last month, the central bank unexpectedly cut its key rate to 18% from 19% despite annual inflation of nearly 20%, sparking a new selloff in the lira, which was also hit by the dollar strengthening against other currencies.

The MPC overhaul came after the presidency said on Wednesday evening that Erdogan had met Central Bank Governor Sahap Kavcioglu, publishing a photo of Erdogan standing next to him.

OPPOSITION

A source told Reuters that both Yavas and Kucuk had lately opposed some decisions taken by the MPC, while Kucuk had also been against reserve sales to support the lira in previous years.

“Kucuk had a sentence at the MPC that is still remembered at the bank: ‘The lira’s stability, reputation and the price stability that comes with these are prerequisites for economic growth and development based on productivity. Growth provided by other means will not be permanent,'” the source said.

“‘If you keep the interest rate lower than where it needs to be today, the level you have to raise the interest rate to tomorrow will be higher than the level it needs to be today,'” the person quoted Kucuk as saying.

“I think it is a loss for the (central bank),” the source said of the removal of the members.

Kavcioglu said this week that the rate cut was not a surprise and had little to do with the subsequent lira sell-off.

The bank’s next policy-setting meeting is on Oct. 21.

Last week, three sources familiar with the matter said Erdogan was losing confidence in Kavcioglu, less than seven months after he sacked Kavcioglu’s predecessor, and that the two had communicated little in recent weeks.

Erdogan has made a series of changes to the MPC in recent years. He fired three bank governors in the last 2-1/2 years over policy disagreements, hitting the lira and badly harming the credibility and predictability of monetary policy.

“Firing central bank officials in the middle of the night without a very good explanation is not how you build central bank credibility or bolster market confidence,” one foreign investor said on Thursday.

Headline inflation hit a 2-1/2 year high of 19.58% in September, while a core measure – which Kavcioglu has been stressing over the last month – was 16.98%.

Erdogan appointed Kavcioglu in March after ousting Naci Agbal, a policy hawk who had hiked rates to 19%. Erdogan ramped up pressure for easing in June when he said publicly that he spoke to Kavcioglu about the need for a rate cut after August.

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

(Reporting by Daren Butler, Additional reporting by Ezgi Erkoyun, Nevzat Devranoglu, Jonathan Spicer and Ali Kucukgocmen; Editing by Dominic Evans and Stephen Coates)

Energy Costs Add to Emerging Central Banks’ Inflation Headache

In a bold response to the price pressures, the Czech National Bank (CNB) on Thursday raised its main interest rate by 75 basis points, its biggest hike since 1997. It cited rising energy prices as well as supply-chain disruptions and domestic factors like higher costs in owner-occupied housing and services.

The country’s prime minister said the hike would damage the economy, illustrating the dilemma emerging central banks face as they try to head off inflation, already running above target levels, while sustaining fragile economic recoveries from the COVID-19 pandemic.

Benchmark European gas prices have surged more than 300% this year due to factors including low storage levels, outages and high demand as economies rebound, dragging up wholesale electricity costs.

The Czech Republic, Poland, Hungary and Romania were more exposed to the rise than the rest of the European Union because energy and utilities account for a relatively large share of their consumer price index baskets while their electricity supplies are more exposed to carbon-intensive sources, Goldman Sachs analysts said.

Turkey has been clobbered too, with natural gas prices for industrial use and electricity production rising by 15% last month.

Consumer prices had generally grown by more in countries where the economic rebound had been faster between the third quarter of 2020 and the second quarter of 2021, said S&P Global Ratings lead economist Tatiana Lysenko, highlighting Poland, Hungary, Russia and Brazil.

“Inflationary pressures in emerging European economies are proving to be more persistent than we anticipated,” said Lysenko.

“EMEA central banks will continue to navigate a complicated landscape, seeking a balance between supporting the recovery and anchoring inflation expectations in an environment where supply-side pressures may last longer than previously anticipated.”

With higher global energy and food prices showing few signs of easing and the Czech Republic, Hungary and others also facing tighter labour markets, inflation pressures should linger.

Goldman Sachs forecasts inflation for the year at 4.5% in Romania, 3.9% in the Czech Republic and 3.7% in Poland.

The Czech central bank said more rate rises would follow Thursday’s big hike as it aimed to prevent people and firms from getting used to inflation overshooting its 2% target.

Hungary plans to tighten policy more too, with base interest rate hikes of 15 basis points in the coming months, deputy central bank governor Barnabas Virag said on Friday.

Virag’s comments and the Czech hike gave a boost to both country’s currencies, with the Czech crown hitting one-month highs against the euro.

Poland may also be tempted to deliver an earlier than expected hike, say analysts.

Citi analysts said they expect Poland to deliver its first rate hike in March or April 2022, but they added that faster-than-expected hikes were possible if the bank became more confident about the strength of economic growth.

Turkey is likely to prove an exception, however. President Tayyip Erdogan’s desire for stimulus often trumps an orthodox approach to monetary policy.

Despite inflation running above target at 19.25%, the central bank last month slashed its policy rate by 100 basis points to 18%.

“Turkey is most vulnerable to higher energy costs as they have historically caused its balance of payments to deteriorate as import costs have increased,” said David Rees, Schroders senior emerging markets economist.

“The lira has come under pressure after the recent surprise rate cut and may continue to sell-off if energy prices rise further.”

The lira has slumped to record lows recently, reawakening memories of a 2018 currency crisis and eroding the earnings of Turks.

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

(Reporting by Tom Arnold; Editing by Hugh Lawson)

Turkey to Open 1,000 Markets to Counter High Inflation, Erdogan Says

Construction would quickly begin on the shops to provide Turks “cheap and high quality goods” and to “balance out markets”, he said, after consumer price rises to levels well above a 5% official target.

Frustrated by stubbornly double-digit inflation and sliding opinion polls, Erdogan’s ruling AK Party government has again begun pointing the finger at supermarkets and opened probes into potential exploitative pricing.

“We gave the order for about 1,000 of these businesses to open around Turkey, starting at 500 square-meters each,” Erdogan told reporters after visiting an agricultural credit cooperative outlet in Istanbul.

“These are places where prices are suitable to our citizens’ budgets,” he said of the commercial outlets.

Annual food inflation of nearly 30%, a global jump in commodity prices and the sharp depreciation of the lira currency have driven inflation higher throughout the year.

Inflation has remained in double digits for most of the past five years, eating into household earnings and setting Turkey well apart from emerging market peers.

Analysts say the central bank’s depleted credibility is primarily to blame for Turkey’s inflation problem. Erdogan fired the last three bank governors over policy disagreements.

Under pressure from the president for stimulus, the bank unexpectedly cut its key rate by 100 basis points to 18% last month, sending the lira to record lows.

Yet in recent weeks the government began high-profile inspections of Turkey’s largest supermarkets for “unreasonable pricing” and “consumer victimisation”. It also probed some restaurant breakfast prices in the eastern province of Van.

Vice President Fuat Oktay said on Saturday that increasing food production in villages is vital to head off exploitative pricing.

In early 2019 – on the heels of a currency crisis that sent inflation soaring – the government opened its own markets to sell cheap vegetables and fruits directly, cutting out retailers it accused at the time of jacking up prices.

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

(Editing by David Clarke and Frances Kerry)

Marketmind: E-Day and Central Banks Galore

A look at the day ahead from Karin Strohecker.

Whether or not the payment is made, few harbour hopes that China’s overextended property sector – a dominant force in Asia’s corporate bond market – will escape disruption. In turn the hit to the country’s financial system, commodity imports and economic growth is bound to be felt globally.

And there’s little solace to be had from a more hawkish Fed, likely beginning to trim its monthly bond purchases as soon as November. At the end of two-day meeting on Wednesday, the Fed also signalled interest rate increases may follow more quickly than expected as its turn from pandemic crisis policies gains momentum.

Autumn storm clouds are also gathering elsewhere with the U.S. debt ceiling nearing and the flu season approaching fast in many parts of the world.

But for today, optimism prevails.

Evergrande shares rose as much as 32% in Hong Kong after its chairman sought to reassure retail investors, many Asian markets are trending higher. Both European and U.S. stocks futures point to cautious gains with crude oil futures rising and the dollar taking a breather.

The central banking marathon continues with policy makers in the U.K., Switzerland, South Africa, Turkey and Norway all due to give their verdict. Norway is set to become the first major western central bank to deliver post-pandemic rate hikes.

Data on PMIs coming in from around the globe meanwhile should give markets more hints to gauge the economic trajectory ahead.

Key developments that should provide more direction to markets on Thursday:

– Evergrande seeks to reassure retail investors as key debt deadline looms

– Central banks: Norway, UK, Switzerland, South Africa, Turkey, Taiwan, Philippines

– Bank of England expected to keep rates steady as inflation risks mount

– Fed issues quarterly accounts

– U.S. weekly initial jobless claims

– Auctions: US 4 week bills, 10-yr TIPS

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

(Reporting by Karin Strohecker, editing by Dhara Ranasinghe)

Erdogan’s Waning Patience: Four Questions for Turkey’s Central Bank

The bank has kept its benchmark rate at 19% since March, when Erdogan installed Sahap Kavcioglu as its latest governor. That makes it one of the highest policy rates in the world – although so too is Turkey’s inflation rate, which touched 19.25% last month.

Ahead of a monetary policy meeting set for 2 p.m. (11:00 GMT) on Thursday in Ankara, here are four key questions:

IS A RATE CUT COMING?

After months of hawkish talk that allowed the lira to recover from an all-time low in June, the central bank has changed its tune in the last few weeks.

On Sept. 1 conference calls with investors, Kavcioglu did not repeat a longstanding pledge to keep the policy rate above inflation. Two days later, data showed inflation did indeed surpass 19% https://tmsnrt.rs/3yTLHBq, leaving real rates negative.

Kavcioglu also began downplaying this “headline” inflation figure and instead stressed that a “core” measure – which is lower – is more appropriate given the fallout from the pandemic.

In a speech on Sept. 8, he said a near 30% spike in food inflation represents “short-term volatilities”, so the bank will focus more on the core measure that dipped to 16.76%. He added that policy was tight enough and predicted a falling price trend in the fourth quarter.

Investors have taken all this as a dovish turn that suggests that rate cuts are on the way. Some have warned of a “policy mistake” if they come too soon.

Fourteen of 17 economists polled by Reuters expect easing to begin in the fourth quarter, with two, including the Institute of International Finance, predicting it will start this week.

“Though most expect no rate cut, the bank’s new guidance suggests it would not be surprising to see one on Sept. 23 if it takes a slight deceleration in core inflation as permanent,” said Ozlem Derici Sengul, founding partner at Spinn Consulting, in Istanbul.

HOW LONG WILL ERDOGAN WAIT?

Many analysts say Erdogan appears to be growing impatient for monetary stimulus, given loans are expensive and he faces a tough election no later than 2023. A few say a prompt rate cut could even signal plans for an early vote.

In recent months, the central bank has urged patience due to unexpected inflation pressure brought on by rising global commodities prices and a surge in summer demand as pandemic restrictions eased.

Despite the risk of currency depreciation https://tmsnrt.rs/3neUCLN and stubbornly high inflation, Erdogan will likely get what he wants soon.

A self-described “enemy of interest rates”, he ousted the last three central bank chiefs over a 20-month span due to policy disagreements.

In June, Erdogan said he spoke to Kavcioglu about the need for a rate cut after August.

In early August, he said “we will start to see a fall in rates” given it was “not possible” for inflation to rise any more.

Market tensions “are set to increase as President Erdogan continues to pile on political pressure for rate cuts, while inflation pressures are building,” said Phoenix Kalen, global head of emerging markets research at Societe Generale.

WHEN WILL INFLATION COOL DOWN?

Annual headline inflation should remain high through October and begin to dip in November due to the base effect of a jump late last year, since which it has continued to rise.

The government forecasts inflation will drop to 16.2% by the end of the year, while Goldman Sachs and Deutsche Bank see 16.7%. That should provide a window for at least one rate cut in the fourth quarter, most analysts say.

Yet because Turkey imports heavily, further lira weakness could push inflation higher and complicate or even thwart any easing. High import costs were reflected in the 45.5% annual jump in the producer price index last month.

Another risk is that the U.S. Federal Reserve removes its pandemic-era stimulus sooner than expected, which would raise U.S. yields and hurt currencies of emerging markets with high foreign debt, like Turkey.

Analysts say the biggest problem is the central bank’s diminished credibility in the face of political interference, leading to years of double-digit price rises and little confidence that inflation will soon return to a 5% target.

Ricardo Reis, a London School of Economics professor who presented a paper this month at the Brookings Institute, found that Turkey’s “inflation anchor seems definitely lost” based on market expectations data from 2018 to 2021.

HOW ARE INVESTORS AND SAVERS PREPARING?

When Kavcioglu downplayed inflation pressure earlier this month, the lira weakened 1.5% in its biggest daily drop since May. It has depreciated nearly 15% since Erdogan replaced Kavcioglu’s hawkish predecessor Naci Agbal in March.

Foreign investors hold only about 5% of Turkish debt after reducing their holdings for years.

Still, some say that rebounds in exports, tourism revenues and in the central bank’s foreign reserves make lira assets more attractive.

“With inventories so low in Europe, I can’t see how exports are not going to continue to do well,” said Aberdeen Standard Investments portfolio manager Kieran Curtis.

“It does feel to me like there is more of a move towards loosening from the authorities (but) I don’t think anyone is expecting a cut at the next meeting,” he said.

In Turkey, soaring prices for basic goods such as food and furnishings have prompted individuals and companies to snap up record levels of dollars and gold. They held $238 billion in hard currencies this month.

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

(Additional reporting by Ali Kucukgocmen in Istanbul and Marc Jones in London; Editing by Hugh Lawson)

Turn Around Tuesday or Dollar Rally Resumes?

The Japanese yen and Canadian dollar are among the more resilient, and the Australian dollar and sterling among the heaviest. Emerging market currencies are mostly lower, except the South Korean won and Turkish lira. Even the Hungarian forint, where the central bank is widely expected to be the first EU country to lift rates today, is weaker. The US 10-year yield continues to recover from the drop to almost 1.35% early yesterday and appears capped near 1.50%.

European yields are mostly softer, while Australia and New Zealand saw a seven basis point jump in the yield of their 10-year benchmarks. Asia Pacific equities responded strongly to yesterday’s rally in the US, led by a 3%+ gain in Tokyo and 1.5% in Australia. Japan’s shares gained the most in around 12-month after yesterday’s first purchases by the BOJ in a couple of months. Hong Kong and Singapore failed to participate in the recovery after Monday’s slide.

Europe’s Dow Jones Stoxx 600 and US indices futures are trading lower. Commodities are sporting a weaker profile. Copper is paring yesterday’s gains. Iron ore fell 3.6% in Shanghai to bring this week’s loss to over 8%. Steel rebar has fallen by nearly 5% this week. Gold snapped a six-day drop yesterday with a 1% gain but stalled in front of $1800 and is trading heavier again today. August WTI initially extended yesterday’s 2.6% gain and reached $73.35, its highest level in nearly two years, before slipping back to around $72.50.

Asia Pacific

A leading adviser to the Japanese government called for a JPY1 trillion (~$9 bln) investment in semiconductor chip development this fiscal year and more in the coming years to revive the national industry. The US, China, EU, South Korea, and Taiwan are all trying to strengthen their capacity. It is becoming, as the Japanese adviser said, as important as food and energy security. A new advanced fabrication facility costs more than $10 bln, according to some estimates. The US has earmarked a little more than $50 bln, while Taiwan’s TSMC alone has announced plans to invest $100 bln over the next three years. South Korea’s Samsung and Hynix are talking around $150 bln investment over the next decade.

Since last week’s stronger than expected jobs data, several observers now expect the Reserve Bank of Australia to temper its emergency policy next month. Some attribute this to yesterday’s drop in Australian bank shares, the most in a year, but the logic is elusive, and the beginning of the normalization of monetary policy is understood to be supportive of financial institutions. Indeed financials recovered today, rising 2%.

The dollar is at a three-day high around JPY110.50 near midday in Europe after staging an impressive recovery after falling to almost JPY109.70 yesterday. Last week’s highs in the JPY110.70-JPY110.80 area are the immediate target. It might take a push higher in the US yields to get lift the greenback above the JPY111.00. Initial support is in the JPY110.20-JPY110.30 area. Note that the dollar has fallen only once against the yen in the last eight sessions. The Australian dollar remains confined to the pre-weekend range (~$0.7475-$0.7560). Some link the Aussie’s weakness to the drop in iron ore prices. Still, it is finding support just below $0.7500 in Europe. Initial resistance is seen near $0.7520 and then $0.7550.

The greenback edged higher against the Chinese yuan for the fourth consecutive session and the ninth day in the past 11. It is at its best level since early May (~CNY6.4745). The PBOC set the dollar’s fixing lower for the second consecutive session than the bank models in the Bloomberg survey anticipated (CNY6.4613 vs. CNY6.4626). Heavy bond issuance by local government and quarter-end demand tightened liquidity conditions in China and sent the overnight repo rate six basis points higher to 2.31%, bringing the cumulative increase to 44 bp over the past three sessions to its highest level in four months.

Europe

After striking the bilateral trade agreement with Australia earlier this month, the UK will formally apply to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership today. The UK had initially filed the request to join the bloc in February. The CPTPP covers about 15% of the world’s GDP. Reports suggest the UK is looking forward to opportunities to export autos, services, whiskey, and beef and lamb. In addition to Australia, the UK already has struck deals with seven of the bloc members.

Hungary is expected to become the first EU country to lift rates, followed by the Czech Republic tomorrow. Although expect a 30 bp hike to 90 bp, there is the risk of a larger move. The Deputy Governor spoke of “decisive action.” However, like many others, price pressures have risen before the economic strength has fully returned. Also, the central bank anticipates a stimulative budget next year ahead of elections. The one-week repo rate is at 75 bp.

It is adjusted once a week on Thursdays and may be brought into line with the base rate that will be hiked today. The central bank may also phase out other stimulus measures. It appears the market is expecting about two hikes. The Czech Republic is expected to hike its key repo rate by 25 bp tomorrow to 50 bp. The market also has almost 50 bp of tightening discounted for H2.

The eurozone’s preliminary June PMI will be released tomorrow. While manufacturing may stabilize at elevated levels, the service sector is expected to have accelerated as the vaccination program has intensified. The composite is expected to rise to around 58.8 from 57.1. The UK’s flash PMI is expected to moderate slightly as the contagion increased and forced a postponement to the economy-wide re-opening into the middle of next month. The risk may be on the downside of the median forecast in the Bloomberg survey for 62.5 from 62.9 in May.

The euro finished yesterday near its high of around $1.1920 but has come back offered today. Last Friday and yesterday, the euro found bids near $1.1850. We suspect it may not have to return there to catch a bid today. We are looking at the $1.1870 area for a possible base. Similarly, sterling, which mounted an impressive recovery yesterday from below $1.3790 to almost $1.3940 stalled, is testing the $1.3860 near midday in Europe. However, it too may find support near here, and a move back above $1.3900 would help stabilize the tone.

America

In prepared remarks for his appearance before the House Select Subcommittee on the Covid Crisis, Fed Chair Powell reiterates the view that once the supply imbalance is addressed, price pressures will ease. While Powell is unlikely to break new ground, his comments will help blunt the more hawkish comments of Bullard and Kaplan. Many think that the dot plots showed the fraying of the average inflation target regime, with 11 of the 18 Fed officials seeing two hikes in 2023 and seven anticipating a hike next year. Powell and the Fed’s leadership can be expected to push back and defend the approach.

The bipartisan effort to find a compromise on the infrastructure initiative may be drawing close. A key issue is how to pay for it, and President Biden has rejected the proposal to index the gasoline tax to inflation. Moreover, the compromise is for a $579 bln package, which pales in comparison with what Biden has proposed. One strategy that is being debated is to go do as much as the bipartisan effort will allow and then come back for the remainder using the reconciliation process.

However, that would require the full support of all the Democrats in the Senate, which does not look possible. Separately, there appears to be growing concern that the Senate’s minimum global corporate tax will not be ratified.

The US reports May existing home sales today. They are expected to have fallen for the fourth consecutive month. The overall level remains elevated, but the pace has slowed. Some link it to the lack of supply of new homes as construction is delayed. Tomorrow, the US reports new home sales (a small increase is expected following a nearly 6% decline in April) and the flash PMI (which is expected to soften from strong levels). In addition to Powell’s testimony, regional presidents Mester and Daly will speak today. Canada and Mexico’s economic calendars are light ahead of tomorrow’s April retail sales reports.

The US dollar reversed lower against the Canadian dollar yesterday after reaching almost CAD1.2490. It fell to about CAD1.2355 but stabilized today. So far, it has been confined to a roughly CAD1.2360-CAD1.2395 range. The CAD1.2400-CAD1.2425 offers nearby resistance. A convincing break of CAD1.2350 could spur a test on CAD1.2300. The greenback found support a little below MXN20.50 and appears to be carving out a new range. If the MXN20.40-MXN20.50 is the lower end of the new range, then the MXN20.70-MXN20.75 might be the upper end.

This article was written by Marc Chandler, MarctoMarket.

Turkey: Political Interference At Central Bank, Weak Lira Risk Policy Mistakes Ahead Of Elections

Structural depreciation of lira – averaging 17% annual losses against the dollar since 2015 – and increased state intervention to slow currency devaluation have reduced the domestic sector’s confidence in the lira.

The proliferation of cryptocurrencies as investors seek protection is a sign of a growing currency crisis. Unless the authorities reverse policy missteps, growing domestic loss of trust in the currency risks structurally higher inflation and balance of payment problems longer term.

Continued heavy political interference into monetary policy

However, President Recep Tayyip Erdoğan’s removal last month of a third senior member of the central bank’s powerful Monetary Policy Committee (MPC) in two months underscores ever greater political interference in monetary policy making. Erdoğan commented publicly of his expectations of a return to single-digit inflation and interest rates this year, and cited on Tuesday July or August as a possible timetable for rates to begin declining.

By stacking the MPC with figures who favour reduced rates, the president has raised the stakes for forthcoming central bank meetings – starting with the session due 17 June. While new central-bank governor Şahap Kavcıoğlu and his deputies will be given some time from the president, the president’s patience is waning.

Pressure for easing rates at odds with elevated levels of inflation

Pressure for more accommodative monetary policy remains at odds with Turkey’s high inflation rate, running at an annual 16.6% in May. Any easing of Turkey’s currently significant positive real benchmark interest rate of 2.1% could make the economy more vulnerable to capital outflows, lira depreciation and higher inflation.

The central bank is in a bind: it may have a tacit mandate to hold rates unchanged for a short period, but likely does not have one to hike rates should this be later required.

Policy missteps partially reflect Erdoğan’s party’s poor ratings in polling

Policy missteps are partially a function of Erdoğan’s attention on the latest opinion polling. They suggest all-time lows in support for the president’s AK Party and rising popularity of the President’s possible rivals in the next presidential elections – such as Istanbul Mayor Ekrem İmamoğlu and Ankara Mayor Mansur Yavaş.

In view of the criticism of the management of the economy, the president feels pressure to reverse the course of the economy during this Covid-19 crisis. Unfortunately, in the past, Erdoğan has given priority under such conditions to supporting higher short-run economic growth, rather than seeking to correct underlying economic imbalances and achieve sustainable longer-term growth.

GDP expanded 7% YoY in the first quarter, supported by lira lending growth of 25% YoY in April.

Increase in pre-election economic and institutional risk

Importantly, Erdoğan is unlikely to simply step aside in next elections. If he cannot engineer higher economic growth and higher employment to reverse declining popularity, he could resort to more significant oppression of his political opponents, intensifying economic and institutional risks ahead of the vote by 2023.

Degradation of economic policies leads decline in official reserves

The degradation of economic policy making has led to some decline in central bank foreign-currency reserves – after more than USD 100bn of reserves were spent in defence of lira in 2020 alone. Gross reserves stood at USD 92.4bn on 23 May – roughly unchanged from levels as of end-2020 – but swap-adjusted net reserves remained near all-time lows at negative USD 54.3bn in April.

In part, loss of official reserves has reflected impact of the pandemic on tourism revenues, contributing to deterioration in the current-account balance to -5% of GDP in the year to March 2021 from a 1.7% of GDP surplus in the year to August 2019.

It is difficult to see how structural deterioration in fundamentals could be easily reversed with Erdoğan increasingly in the driver’s seat over economic policy.

Our next scheduled review of Turkey’s B/Negative foreign-currency credit ratings is on 10 September.

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

Dennis Shen is a Director in Sovereign and Public Sector ratings at Scope Ratings GmbH.

China Raises Reserve Requirement for FX, Stemming the Yuan’s Rise

Japan, Australia, and Singapore, for notable exceptions. Europe’s Dow Jones Stoxx 600 took a seven-day advance into today’s action and is struggling to extend it. US futures have edged slightly higher. European bond yields have edged higher. The dollar is little changed against the major currencies. Outside of the Australian dollar, which is about 0.3% higher, around $0.7735, the other major currencies are +/- 0.15%. Emerging market currencies are mostly firmer, led by the Turkish lira, which was helped by a stronger than expected Q1 GDP (1.7% quarter-over-year and 7% year-over-year).

The JP Morgan Emerging Market Currency Index is extending its advance for the fourth consecutive session. Gold is holding above $1900, while oil is firm, and July WTI is extending last week’s 4.3% rally as it tries to solidify a foothold above $67 ahead of tomorrow’s OPEC+ meeting. Industrial commodities, such as copper, iron ore, and steel rebar have moved higher to build on the recovery seen at the end of last week.

Asia Pacific

China’s composite May CPI crept up to 54.2 from 53.8. It was the result of a slightly disappointing manufacturing reading that slipped from April’s 51.1 to 51.0. The non-manufacturing PMI, however, was stronger than expected, rising from 54.9 to 55.2. The recovery appears to be morphing into a steady pace expansion. Caixin PMI is next (manufacturing PMI tomorrow) with May trade figures and reserves possibly before the end of the week.

Japan has extended the formal emergency to June 20, with Opening Ceremonies for the Olympics scheduled for July 23. The emergency threatens to delay the economic recovery. April industrial output, retail sales, and housing starts were reported earlier today. Industrial production is aided by exports and rose 2.5%. While better than March’s 1.7%, it still fell shy of projections for a nearly 4% gain. Retail sales, however, sorely missed forecasts and illustrates, at least in part, the impact of the social restrictions on consumption.

The 4.5% month-over-month fall was more than twice the decline expected and was the biggest slump since last April. The broader measure of household spending is due out later this week. Housing starts were a bright spot. The 7.1% year-over-year advance bested expectations and was the first back-to-back gain in two years. Next up, the final manufacturing PMI reading. The preliminary report showed a slower pace of expansion (52.5 from 53.6).

The Reserve Bank of Australia meets first thing tomorrow. No change is expected, but the statement will be scrutinized for clues for what officials will decide next month when it reviews its asset purchases and three-year interest rate target. Shortly after the central bank meeting, Q1 21 GDP will be reported. A 1.1% quarterly advance is expected after a 3.1% expansion in Q4 20.

A series of comments by Chinese officials appeared to talk the yuan lower, emphasizing that the recent gains were unlikely to last due to speculation, potential Fed tightening, and or rate adjustments in the emerging markets. It was having a little impact until the PBOC announced a two percentage point increase in reserve requirements for foreign exchange positions. The new requirement starts June 15, and the reserve requirement will stand at 7%.

The PBOC’s reference rate for the dollar, set at CNY6.3682 (compared with expectations for CNY6.3656, the median in Bloomberg’s survey, also seemed to be a protest. The offshore yuan recovered on the announcement. The US dollar was rebuffed ahead of the weekend after a brief foray above JPY110 for the first time since early April. The greenback was sold in the European morning to around JPY109.65. Support is seen in the JPY109.40-JPY109.60 area. The Australian dollar is firm in the upper end of the pre-weekend range when it approached $0.7750. Recall that it had tested the month’s low (~$0.7675) and rebounded back above $0.7700, where it has remained today. The $0.7800 is the real nemesis for the Aussie bulls.

Europe

The eurozone’s May inflation is front and center. French data before the weekend showed a 0.4% rise for a 1.8% year-over-year gain. It was up from 1.6% in April. Italy reported a flat month-over-month rate today, which lifts the year-over-year rate to 1.3%, both slightly softer than expected. Spain’s 0.5% increase matched expectations and lift the year-over-year rate to 2.4% from 2.0%. German states have reported, and the domestic measures were mostly 2.5-2.6% higher year-over-year.

This warns of the possible upside risk to the national harmonized measure that rose 0.5% for a 2.1% year-over-year advance in April. The aggregate figure is out tomorrow. The risk is that the headline rises a little more than the 0.2% gain expected, which could see the year-over-year rate test 2%.

The fifth round of Europe-led talks to revised the 2015 pact that limits Iran’s nuclear developments began yesterday. This round of talks could be the last given the proximity of the June 18 Iranian elections. Separately, the possibility that a deal is struck and some Iranian oil can return to the market is part of the constellation of considerations for OPEC+ when it meets tomorrow to sort out its plans to boost output.

It is generally expected to maintain current output quotas, with a rise expected (~840k barrels a day) in July. Meanwhile, it appears that after four inconclusive elections in four years, Israel may be on the verge of a new government that will not include Netanyahu after one of the Prime Minister’s key allies defected to the coalition being forged by former Finance Minister Lapid. Of note, that coalition may rely on an Arab party to secure a majority. The Israeli central bank meets today and is widely expected to maintain the 10 bp base rate.

The euro fell to a two-week low below $1.2135 before the weekend and rebounded to poke above $1.22 before the end of the session. According to Bloomberg data, the euro has settled between $1.2192 and $1.2195 for the past three sessions. It is confined to around a fifth of a cent range today, hovering around 10 ticks on either side of those settlements. The pre-weekend high was $1.2205, and the euro has been stopped just in front of it so far today.

If it holds, it would be the fourth consecutive session of lower highs. Sterling also appears to be going nowhere quickly. It closed above $1.42 last Thursday for the first time in years, but there has been no follow-through buying. It met sellers today as it tried to push back above $1.4200. Initial support is seen around $1.4150, but better support is closer to $1.41.

America

The disappointing US April employment report underscores the importance of this week’s May estimate. Moreover, a strong upward revision to the April series would seem to be consistent with other data inputs. Auto sales on Wednesday may also be important. After the surge in April (18.5 mln vehicles as a seasonally-adjusted rate), the chip shortage may take a toll. The median forecast in Bloomberg’s survey is for a 17.5 mln pace.

Note that the chip shortage is seeing new car buyers opt for 2020 models and dealers buying cars with expiring leases as less than expected miles were driven last year, boosting the resale value. Fed president and governors have numerous speaking opportunities this week, and the general message has confirmed what the market already thought it knew, namely that a formal discussion on tapering is possible in the coming months.

As we have noted, many are talking about the Jackson Hole Fed conference at the end of August and/or the September FOMC meeting as likely venues. Despite the talk, the 10-year yield settled just below 1.60% before the weekend. Chair Powell speaks on Friday at a Bank of International Settlements function.

Canada reports Q1 GDP figures tomorrow (expected 6.8% at an annualized pace after 9.6% in Q4 20), but the jobs data at the end of the week is more important. Like the US, Canada’s April report disappointed. It lost 129.4k full-time positions and 207k jobs overall. However, while the US job creation is expected to have accelerated, the median forecast in Bloomberg’s survey anticipates another loss of jobs (~25k).

Mexico’s data highlights include worker remittances (which continue to exceed the trade surplus) and the PMI. However, the central bank’s inflation report on Wednesday is expected to solidify the cautious stance in light of the recent rise in price pressures. The market appears to be pricing in as much as 75 bp of tightening over the next year. In addition to April industrial production and May trade figures and PMI, Brazil reported Q1 GDP. It is expected to have grown by 0.8% after a 3.2% expansion in Q4 20. The year-over-year rate is expected to turn positive. Before the weekend, Fitch affirmed Brazil’s BB- rating and retained the negative outlook due to the risks that fiscal consolidation is not delivered.

The US dollar remains in its trough against the Canadian dollar. The CAD1.20 offers critical technical support, while the upside is blocked by the 20-day moving average (~CAD1.2115). The greenback briefly rose above the moving average last Thursday for the first time in a month, and those gains were quickly sold into, and the sideways churn continues.

The greenback was bid to two-week highs against the Mexican peso (~MXN20.0770) ahead of the weekend but also retreated to settle a little below MXN19.94. The MXN19.90 area offers initial support. The market may be reluctant to take the greenback above MXN20.00 in today’s thin activity. The dollar is testing support near BRL5.20. It has not traded below there since January. A break would target BRL5.0. The central bank meets on June 16 and already appears to have committed to the third 75 bp hike this year.

This article was written by Marc Chandler, MarctoMarket.

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

Turkish Lira Nears Record Low, Rattled by U.S. Ties and Rates Policy

By Jonathan Spicer and Ece Toksabay

The currency, among the worst performers in emerging markets this year, weakened as much as 0.6% to 8.48 versus the dollar, close to its 2021 low water mark and closing in on its record of 8.58 reached in early November.

“Market negativity is intense. (The) risk of an overshooting episode is unfortunately elevated,” Robin Brooks, chief economist at the Institute of International Finance, said on Twitter.

The lira shed 3.5% in the last three trading days as it became clear that U.S. President Joe Biden would officially recognise the 1915 massacres of Armenians in the Ottoman Empire as a genocide.

Turkey, a NATO ally, sharply criticised the White House’s decision, which was announced on Saturday, and said it undermined trust and friendship.

Turkish assets are particularly sensitive to strains in relations with Washington given past fallout from U.S. sanctions and economic threats, including a spat in 2018 with then- President Donald Trump that sparked a lira crisis and recession.

President Tayyip Erdogan’s spokesman and adviser, Ibrahim Kalin, told Reuters that Washington should act responsibly since it was in no one’s interest to “artificially undermine ongoing relationships for narrow political agendas.”

“Everything that we conduct with the United States will be under the spell of this very unfortunate statement,” he said in an interview on Sunday.

Adding to investors’ jitters, Central Bank Governor Sahap Kavcioglu, who was appointed a month ago, said late on Friday that while he would keep monetary policy tight for now, any rate hike would send a bad message for the real economy.

“Who is happy with high interest rates?” he said in his first televised interview as bank head.

RATE CUTS

The lira was at 8.4600 at 0630 GMT, and has dipped the last six straight trading days.

It plunged as much as 15% last month after Erdogan sacked Naci Agbal, a respected policy hawk, as central bank governor and appointed Kavcioglu, who like Erdogan is a critic of tight monetary policy and has espoused the unorthodox view that it causes inflation.

Agbal had raised the policy rate to 19% to curb inflation that has risen above 16% and is expected to hit 18%. Many foreign investors who snapped up Turkish assets under Agbal fled when he was fired.

Analysts expect the bank to begin cutting rates around mid-year and some predict Kavcioglu could revert to a costly policy, conducted before Agbal was appointed in November, of selling foreign currency (FX) reserves to support the lira.

The political opposition has pressed Erdogan and his ruling AK Party to account for some $128 billion in sales in 2019 and 2020, which were made by state banks and backed by central bank swaps, sharply depleting its FX reserves.

In the interview, Kavcioglu defended the sales in the face of what he called “attacks” that began with the 2018 crisis.

Kavcioglu “seemed quite confident about the quality of reserves, saying (they) were only shifted from assets to liabilities,” said Ozlem Derici Sengul, founding partner at Spinn Consulting.

But “losing assets and holding liability means the system remains quite fragile against a situation like a bank run where households and companies need their FX deposits,” she said.

Erdogan has fired three central bank chiefs in two years, eroding monetary credibility.

(Additional reporting by Daren Butler; Writing by Jonathan Spicer;Editing by Gareth Jones)