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)

Turkey Inflation Above 16% in Test for New Cenbank Chief

ISTANBUL (Reuters) – Turkey’s annual inflation climbed above 16% in March for the first time since mid-2019, data showed on Monday, piling pressure on new central bank governor Sahap Kavcioglu to maintain tight policy after his surprise appointment.

Consumer prices were up 16.19% year-on-year, higher than 16.11% in a Reuters poll and 15.61% in February. Inflation remains well above a 5% official target and has been in double digits for most of the past four years.

Month-on-month CPI inflation was 1.08%, the Turkish Statistical Institute said, compared to a Reuters poll forecast of 1.04%.

The former central bank governor, Naci Agbal, had raised the policy rate to 19% from 10.25%. But he was ousted on March 20 – after only four months on the job and two days after a last rate hike – prompting a 12% drop in the lira to near record lows.

President Tayyip Erdogan has abruptly ousted four bank chiefs in less than two years, hurting Turkey’s monetary credibility and contributing to the currency’s long-term decline, which in turn has driven up overall inflation via imports.

Kavcioglu has in the past criticised tight policy, including making the unorthodox claim shared by Erdogan that high rates cause inflation. Yet he has told investors and bankers in recent weeks rates must remain high due to high inflation.

The producer price index rose 4.13% month-on-month in March for an annual rise of 31.2%, the data showed.

The monthly CPI price rise was underpinned by demand in the health, education and hospitality groups, including restaurants, after coronavirus measures were eased.

Annual rises were driven by higher energy and import prices which raised transportation-related prices by nearly 25%.

According to a February forecast, the central bank expected a maximum of 17% inflation in March and a bit more in April. Analysts predict it will rise through April, when Goldman Sachs expects it to peak at 18%.

(Reporting by Oben Mumcuoglu and Ezgi Erkoyun; Editing by Jonathan Spicer & Shri Navaratnam)

Market Pushes First Rate Hike into 2022

US futures are pointing higher, led by the Dow, while the NASDAQ lags. The US 10-year yield is little changed after surging before the weekend on the back of the stronger than expected employment report. It is hovering around 1.71%. The dollar is narrowly mixed. Sterling is the strongest, rising above last week’s high and knocking on resistance near $1.3880, the top of a two-week range. The dollar-bloc currencies are also firm.

European currencies, including the Scandis, euro, and Swiss franc, are the laggards. Emerging market currencies are also mixed, leaving the JP Morgan Emerging Market Currency Index a little changed after rising by about 0.35% last week. Gold is softer, holding below $1730 in quiet turnover. OPEC+ decision to boost output is weighing on oil prices today. May crude that closed at $61.45 is now more than a dollar lower. The low for the second half of last week was closer to $58.85.

Asia Pacific

When the IMF announces its updated forecasts tomorrow, there will likely be two drivers. The US fiscal stimulus is significant, and so is the recovery of China’s economy. The weakness seen in China’s service PMI readings was attributed to uneven recovery that favored supply over demand. That was partly a reflection of asynchronous activity. The service PMI has picked up, and this could signal that the world’s second-largest economy is seeing a broadening of economic activity.

Separately, the State Administration of Foreign Exchange report last year’s capital inflows. They were nearly evenly divided between direct (~$265 bln) and portfolio ($255 bln). That said, note that direct investment may include retained earnings, not just acquisitions or greenfield investment. While direct investment rose by 14%, portfolio flow surged by 73%, as global benchmarks including China’s asset market. Flows into the bond market dominated portfolio flows, rising 86% to $190.5 bln.

Foreign investors bought more than $64 bln of Chinese shares. However, China is also a larger exporter of savings too, and SAFE reported that China’s financial accounts were in deficit for the first time since 2016. There are three channels. First, Chinese investors are diversifying savings offshore, buying foreign bonds and stocks. Second, there is outbound foreign direct investment, and third, banks have expanded their foreign loans and deposits.

Saudi Arabia feels sufficiently confident in the outlook for Asia’s recovery that it announced it will boost prices next month. Aramco will raise the premium over the benchmark for Arab light by 40 cents to $1.80. The increase is a little more than expected. On the other hand, Aramco announced it was cutting the premium to Europe by 20 cents. The 10-cent cut in the premium on most oil grades sent to the US may say something about the competitive environment.

The dollar is in a narrow range against the yen (~JPY110.50-JPY110.75) as the market consolidates recent gains. There is an option at JPY111.00 for $460 mln that expires today. The pre-weekend low was a little below JPY110.40. The Australian dollar has fallen in five of the past six weeks but is flattish today, near $0.7620. Resistance is seen around $0.7640, and initial support near $0.7600 has been tested. The offshore yuan is quiet, with mainland markets closed but a touch lower for the third consecutive session. It has fallen for the past two weeks.

Europe

While France’s survey data is holding up better than expected, the government chopped this year’s growth forecast to 5% from 6% due to the tighter social restrictions. Macron, well aware of his slump in the opinion polls, wanted to avoid a new nationwide lockdown. The mutations and spreading contagion have proved too much. The French economy contracted by a little more than 8% last year. Maron may have also been assuming funds from the EU. At the end of March, the German constitutional court stepped in to hear a challenge after the EU plan was widely supported in both chambers of parliament. The process is paralyzed for at least the time being, and this means that countries, including France, cannot count on the assistance.

The UK is about to enter a new phase in combatting the virus. In a speech later today, Prime Minister Johnson will launch a program to encourage everyone in England to take a coronavirus test every two weeks. Free kits will be widely available. Nearly all adults have had at least one jab (31.5 mln). The next phase in lifting social restrictions is set for a week from today. A covid-status certification (“passport) will be developed and could help expedite the re-opening of sporting events, theater, and clubs.

Turkey reported inflation accelerated last month. The 1.08% increase in March follows the 0.91% increase in February. The year-over-year rate stands at 16.19%, up for the sixth consecutive month and the highest level July 2019. The core rate is even higher at 16.88% and more than 0.5% above expectations. Producer prices also soared. The 4.13% monthly gain was near twice expectations and lifts the year-over-year rate to 31.2%. Rising energy prices and the weak lira appear to be the main culprits. Separately, military officers reported pushed back against President Erodgen’s Black Sea policy.

After pulling out of the international convention to protect women last month, there is suspicion that Erdogan is considering withdrawing from a 1936 treaty that regulates passage from the Mediterranean to the Black Sea. At least ten former admirals were detained. The lira is a little firmer today. It fell by 10% last month following the former governor of the central bank’s dismissal after a 200 bp rate hike. Today’s inflation report will make it harder to reduce rates at the April 15 CBRT meeting.

The euro approached $1.17 at the end of March and traded to about $1.1785 ahead of the weekend. Unable to resurface above $1.18, it is under a bit of pressure following the strong US jobs report and the new lockdowns in Europe. There is a 210 mln euro option at $1.18 that expires today and one ten-times bigger that expires tomorrow. The market is poised to rechallenge the lows. Sterling is firm and rose above last week’s high (~$1.3855) to its best level in two weeks ($1.3870). However, sellers emerged ahead of the $1.3880 resistance, and a return into the $1.3820-$1.3840 comfort zone is likely.

America

The March US employment data quantified what we have all known, and that is that the world’s largest economy is accelerating. The 916k increase in non-farm payrolls was well above most expectations, and the January and February job growth was revised higher (+156k). The report, coupled with the surge in auto sales (17.75 mln, two million more than in February and more than million above the median expectation in Bloomberg’s survey), likely sets the tone for the upcoming high-frequency data. Moreover, the early projections call for job growth to possibly continue to accelerate this month as the vaccine rollout broadens and more people return to their jobs. The US lost about 22.4 million jobs last spring, and roughly 14 mln people have returned to work. That leaves employment around 8.4 mln lower than in February 2020.

Interest rate futures appeared more volatile than usual after the employment report, which when the equity market is closed may not be surprising. Of note, the December 2022 Eurodollar futures contract was sold aggressively, and the implied yield settled at 56 bp, the highest in a year. The June 2021 contract implies a 17.5 bp yield. This would seem to be consistent with a rate hike, which the median Fed forecast does not expect until after 2023, by the end of next year. The December 2022 Fed funds futures contract implied a 31.5 bp yield, up from 12.5 bp implied in this month’s contract.

Today, the US economic calendar is busy with the final Markit services and composite PMI, the ISM services, and factory and durable goods orders. Only the ISM represents new news, as the flash PMI and preliminary durable goods orders steal most of the thunder. The conviction that the US economy is accelerating will not be challenged by high-frequency data given the strength of the employment data, auto sales, and fiscal stimulus in the pipeline. Canada has a light week of data, but what it does report is important.

In addition to trade and IVEY’s PMI, it reports March jobs data. Another robust report could fuel speculation that the Bank of Canada could change its forward guidance regarding its asset purchases (at the April 21 meeting). Mexico reports worker remittances (larger than its trade surplus) and the manufacturing PMI (remains below 50 boom/bust level). The week’s highlight is the monthly CPI report on April 8. It is likely to confirm the bi-weekly readings that put inflation above the central bank’s 2%-4% and encouraging investors to give up ideas of another rate cut.

The Canadian dollar is edging higher today after slipping ahead of the weekend. The US dollar recorded its low for last week just before strong US employment figures near CAD1.2530. Resistance was encountered ahead of CAD1.2600 before the weekend and earlier today. A retest on the CAD1.2530 area, and possibly CAD1.2500, is likely in the next day or two. Meanwhile, the greenback took out March’s lows against the Mexican peso last week, but the downside momentum is stalling near MXN20.26-MXN20.27. A move above MXN20.35 could signal a move toward MXN20.50. The US dollar fell by about 1.3% against the peso last week.

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

This article was written by Marc Chandler, MarctoMarket.

Turkey: Persistent Challenges in Monetary Governance Increase Risk to Macroeconomic Stability

Saturday’s announcement of the sudden change in central-bank leadership, shortly after a market-friendly, above-expectation 200bp tightening of rates on Thursday, underlines President Recep Tayyip Erdoğan’s wish for looser monetary policy in support of unsustainably high growth.

Under new Governor Şahap Kavcıoğlu, the central bank is less likely to be proactive near term in addressing challenges of a weaker lira, rising inflation and elevated credit growth. Instead, Turkey’s significant macroeconomic imbalances may return to being exacerbated rather than counteracted by central bank policy.

Undermining credibility of Turkey’s central bank

The sudden dismissal of Ağbal – after he had pre-emptively raised rates 875bps since November last year, achieving a high real rate in the process – undermines once more the credibility of Turkey’s central banking.

Ağbal’s untimely exit is likely to result in a fresh deterioration of Turkish reserves after the short-run stabilisation during his tenure. Gross Turkish reserves rose by around USD 9bn since November to a still-inadequate USD 92bn as of 14 March. Net capital flows ex-foreign direct investment had returned to net inflows rather than net outflows.

With more question marks around central-bank independence as well as around monetary-policy efficacy, we are likely to see the central bank turn again to drawing upon diminished foreign-exchange reserves to prop up an ailing currency. The latest lira sell-off is especially untimely as the currency was already under pressure under a context of outflows from emerging markets triggered by US reflation concerns.

Low official reserves may dwindle further

Official reserves could see downside risk as well due to renewed capital outflows and a wider current-account deficit. Reserves had not recovered from damage done over recent years with net foreign assets ex-short-term swaps of negative USD 53bn as of January (an all-time low), so a fresh drop in reserve stocks increases the risk of a balance-of-payments crisis.

Comparatively robust growth of 1.8% in 2020 and 6.2% expected by Scope this year, enhanced by elevated lending growth, resulted in widening economic imbalance. Turkey’s current-account deficit expanded to 5.6% of GDP in the year to January 2021, near 2018 lira crisis lows.

Erdoğan’s consolidation of power main factor in deteriorating creditworthiness

We have been sceptical in the past about growing investor optimism over market-friendly changes in Turkish central-bank policy since November considering the country’s unchanged institutional framework in which President Erdoğan ultimately oversees monetary governance and retains his unorthodox belief that high rates cause inflation.

Erdoğan’s consolidation of power through the executive presidency remains a prime factor underscoring the structural deterioration of the sovereign’s creditworthiness.

In the end, Kavcıoğlu could see abrupt dismissal should a crisis escalate.

While Turkish authorities have refreshed pledges to deliver a permanent fall in inflation and ensure exchange-rate flexibility, the Turkish president’s interventions in monetary governance have contributed to the country becoming increasingly prone to economic crisis over recent years with significant structural damage to realised growth, the health of public finances and external sector resilience.

A misunderstanding with respect to limited space for monetary easing

At its core, there remains a misunderstanding within Turkish leadership with respect to the limited monetary policy space the government has to prematurely ease rates with rising inflation. Turkey simply cannot seek to emulate the ultra-low-interest policies of advanced economies with reserve currencies such as the US and the euro area, when the value of lira itself faces a crisis of confidence and Turkish inflation is nearly 16% – more than three times the official target. Any easing of monetary policy will result in greater currency volatility and possibly a return to other illiberal steps such as back-door rate increases in time or implementation of types of capital control to avoid overly rapid draining of reserves.

Persistent weaknesses in Turkey’s governance framework are captured in Scope’s B/Negative foreign-currency ratings.

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.

It’s The Risk-On Market Sentiment Taking Gold Fractionally Lower

Currently, the dollar is down 0.17% and fixed at 91.77. The 10-year note also declined from the highs witnessed last week and is currently fixed at 1.679%. Bitcoin futures are currently trading down by 5.13% and fixed at $55,910. It seems that the dollar, Bitcoin, and 10-year notes, which have been the primary reasons that the precious metals downside pressure, have subsided at least for the moment.

Rather it seems to be portfolio balancing as market participants moved back into the tech-heavy NASDAQ composite with specific companies rebounding after trading under pressure for the last two weeks. The NASDAQ composite showed gains head and shoulders above the S&P 500 as well as the Dow, gaining 1.26% in trading today. The composite index is currently at 13,374.94, up approximately 160 points.

Tesla, for example, is currently up to $22.84 and fixed at $677.50 per share. Amazon is up to $44 and is currently fixed at $3119. Shopify is up to $35.72 and fixed at $1156.98, And Nvidia is up to $13.28 and fixed at $526.94.

Another reason cited for today’s decline in precious metals was Turkey. Both their currency and equities markets tumbled after President Erdogan fired the head of their central bank. MarketWatch reported that “Turkey’s currency and stocks collapsed after the abrupt termination of its central bank head, a move that led investors to take a cautious stance toward risky assets on Monday.”

gold 2 march 22

In an article penned by Steve Goldstein, he quoted Phoenix Kalen, a strategist at the French bank Societe Generale, “With Naci Agbal’s removal from the CBRT, Turkey loses one of its last remaining anchors of institutional credibility. During his short tenure, Agbal had succeeded where various predecessors had not – in cultivating trust in the central bank’s inflation-targeting framework, in restoring monetary policy independence, in encouraging international investors to re-engage with the crisis-prone Turkish narrative, in driving an 18.0% rally in the lira against the dollar, and most crucially – in arresting and even reversing the damaging trend of dollarization in the economy.”

gold march 22

Market sentiment shifting towards equities and the issues reported in Turkey have been the primary causes taking gold fractionally lower, with the most active April 2021 Comex contract down $2.90 and fixed at $1738.80. However, silver is experiencing a much sharper decline, currently down 1.77%, taking the most active May 2021 Comex contract to $25.85 an ounce, after factoring in today’s decline of $0.47.

silver march 22

Government spending has already allocated four trillion last year, in addition to the most recent aid package costing $1.9 trillion. Now the Biden administration is considering adding an additional $3 trillion worth of debt as it looks at two additional recovery packages. The $3 trillion would be spent to improve infrastructure, climate change, and reducing economic inequities, according to the New York Times. CNBC reported that “The White House is going to propose splitting the mammoth initiative into two bills, though Republican support for either plank could be hard to secure as Biden aims to increase taxes on corporations and the wealthiest Americans.”

For more information on our service, simply use this link.

Wishing you, as always, good trading and good health,

Gary S. Wagner

Bull or Bear? Chart Analysis

Watch the video to get answers to the following questions:

  • Why is the Turkish lira dropping?
  • What are the latest decisions from the FOMC and the BoJ?
  • Which Indices are worth keeping an eye on?
  • What’s on the calendar for the week ahead?

Key events to keep in mind this week include:

  • Flash PMIs (Wednesday)
  • US PCE inflation and inflation expectations (Friday)

Don’s miss our latest market update:

Turkey’s New Central Bank Chief to Meet Bankers as Lira Teeters

By Ebru Tuncay and Jonathan Spicer

In his first comments as governor, Sahap Kavcioglu said on Sunday the bank would continue to set policy to permanently lower inflation, which has been stuck in double digits for most of the last four years.

President Tayyip Erdogan abruptly sacked former central bank chief Naci Agbal in the early hours of Saturday, two days after a sharp interest rate hike, and named Kavcioglu, who like the president is an outspoken critic of tight monetary policy.

It was the third time since mid-2019 that Erdogan had ousted the head of the central bank, again threatening credibility that Agbal had begun to restore with a more orthodox approach since he took the reins in early November, analysts said.

“It is going to be a dark and long day on Monday,” said one local fund manager.

Cristian Maggio, EM strategy head at TD Securities, said the lira was likely to shed up to 5% initially, and possibly 10-15% in coming days.

“This announcement demonstrates the erratic nature of policy decisions in Turkey, especially with regard to monetary matters,” he said. Kavcioglu represents a risk of “looser, unorthodox, and eventually mostly pro-growth policies from now on”.

The online call with the heads of Turkey’s big private and public lenders will aim to address the current market and policy situation, said the two sources with direct knowledge of it.

The central bank did not immediately comment on the call. Kavcioglu, a former banker and lawmaker in Erdogan’s ruling AK Party (AKP), visited the central bank’s headquarters in Ankara earlier on Sunday.

The call could shed light on how policy might shift given Kavcioglu’s public calls for looser policy. In a newspaper column last month he said — contrary to monetary orthodoxy — that high rates “indirectly cause inflation to rise”.

WEEKEND OF QUESTIONS

In his less than five months in the job, Agbal had hiked the key rate to 19% from 10.25%, including a 200 basis point rise on Thursday to head off inflation near 16% and a recent lira slide.

His hawkish stance lifted the lira from record lows beyond 8.5 per dollar in November, dramatically cut Turkey’s CDS risk measures and started to reverse a years-long trend of funds abandoning local assets.

The lira had gained more than 3% since Thursday’s hike.

But after Erdogan ousted Agbal in the early hours of Saturday, investors told Reuters they had worked through the weekend to predict how quickly and sharply Kavcioglu might slash rates — and how much the currency would retreat from its Friday close of 7.2185 versus the dollar.

The heads of some local treasury desks estimated that offers could range from 7.75 to nearly 8.00 on Monday. At Istanbul’s Grand Bazaar on Saturday, one trader said a dollar bought 7.80-7.90 of the local currency.

Turkish stocks and bonds were also expected to drop in early-week volatility.

Kavcioglu said in Sunday’s statement that policy meetings will remain on a monthly schedule, suggesting any rate cuts may wait until the next planned meeting on April 15.

(Additional reporting by Nevzat Devranoglu in Ankara and Can Sezer in Istanbul; Writing by Jonathan Spicer; Editing by Catherine Evans)

Darkest Before Dawn

This includes the release of the preliminary January PMI figures at the end of the week. Japan is extending its national emergency to another five prefectures, which collectively account for over half of the nation’s GDP. Germany’s Merkel, not given to hyperbole, warns that the lockdown may last ten more weeks. The Dutch do not appear far behind. England is talking bot tightening its restrictions. Even China appears to be experiencing a flare-up. The pandemic is out of control in the US, although the curve appears to be flattening in some areas.

It was widely recognized that the virus and vaccine are going to dictate the economic story in 2021. The new variant of the virus is more contagious and the roll-out of the vaccine has been frustratingly slow in most countries. The recovery in Q3 seen among the high-income countries was a dramatic snapback but for many, it was not the beginning of a sustained recovery. That recovery may be several months away. The point is that the economic risks for the remaining Q4 20 data and for Q1 21, which just began, are on the downside.

If that is indeed the case, then why have bond yields risen? Is this another disconnect between Main Street and the House of Finance, like stocks rallying during the pandemic? It is darkest before dawn and whether it is four months or six months, the investors expect better news in the second half of the year. At the same time, there will be a new stimulus push in the US. The UK Chancellor of the Exchequer will have to extend aid as the lockdown is extended and intensified. It is likely Germany will have to, as well. Italy’s projected debt issuance is a third higher than it was a couple of weeks ago.

At least four Fed officials have said they could consider tapering before the end of the year. To be specific, the four are regional presidents, while the governors, including Powell and Clarida, have played this down. Currently, the Fed is buying $80 a month of Treasuries (about 55% have been notes of 4.5-years or less before maturing and about 13% in the 20-30 year bucket) and $40 bln a month in Agency mortgage-backed securities. No one is saying that tapering is imminent and a majority of officials that have spoken suggest it does not look particularly likely this year at all. That was also the thinking in last month’s primary dealer survey conducted by the Federal Reserve.

Yet if tapering is not the real culprit for the sharp rise in US yields this year, what is the driver? Where you begin your narrative points you in the direction of the answer, In one telling, the US 10-year yield has risen by around 45 bp since the election as investors discounted greater supply and became more committed to the reflation trade, which means higher real rates, and arguably a sensitivity for higher inflation. At the same time, the price of oil has surged.

The February WTI futures contract closed in October near $36.5. It approached $54 a barrel before profit-taking kicked-in ahead of the weekend. Recall that end of last January it was around $50.50. The deflationary thrust from oil prices has ended. Inflation expectations often track significant moves in oil prices.

Asian demand, including China’s apparent inventory accumulation, drove industrial metal prices higher at the end of last year. On the other hand, supply concerns following last week’s disappointing report on US plantings saw corn and soy prices rise to 6-7 year highs, and cotton traded at a two-year high. The CRB index has risen by over 22% since the end of October.

Even the coming Treasury supply may be exaggerated by partisans. The idea from both sides is that Biden will press ahead with the Democratic control of the legislative branch to push through the rest of the $3.2 trillion bill passed by the House of Representatives last year. However, we suspect it is more likely that Biden, judging from his disposition and that he learned from his experience with Obama, will avoid antagonizing the opposition and souring the relationship from the get-go. Instead, he is likely to find a compromise and make it bipartisan even if it results in a small package. In appointments and temperament, Biden is moderate.

Biden will be inaugurated on January 20. The day before, Yellen will speak at her confirmation hearings. In addition to broad economic issues, she will likely be asked about the dollar. As an economist, she recognizes that ideally one wants the currency to move in line with policy, otherwise it blunts or undermines it. At the Federal Reserve, she recognized that dollar policy is a Treasury remit. That makes it her call now.

The “strong dollar” mantra that existed before 2016 cannot simply be returned to now. A new formulation is needed to confirm that the US will not purposely seek to devalue the dollar to reduce its debt burden or for trade advantage. To signal a multilateral spirit, Yellen may be best served by reiterating the G7 and G20 stance that markets ought to determine exchange rates, that they should move in line with fundamentals, and avoid excess volatility. It does not have to be the final word, but as the first word, it would be reassuring.

Four G10 central banks meet in the coming days. The gamut of outcomes is likely, with the ECB, ironically, being the least perhaps the least interesting. Since it met on December 10, the pandemic has gotten worse and social restrictions and lockdowns have intensified and lengthened. The uncertainty of the US election and UK-EU trade negotiations has been resolved. Key hurdles to the EU’s budget and Recovery Fund were lifted.

The day before the last ECB meeting, the euro settled near $1.2080. It settled last week around $1.2150. March Brent was trading a little below $49 is rallied to almost $57.5 last week before consolidating. The 10-year German Bund yield has risen around 10 bp (to around minus 50 bp) and Italy’s premium has softened from almost 120 bp before the December meeting to almost 100 bp before widening again (115 bp) amid the political challenges in Rome. There is little for the ECB to do now.

The extension of the emergency in Japan to cover the area which generates more than half of the country’s output raises the downside risks. The central bank is likely to formally recognize this in one or two ways. It may shave its downgrade its qualitative assessment. It could also adjust its forecasts. In its last forecasts, issued in October, it anticipated the economy to contract 5.5% in the current fiscal year. Its previous forecast was for a 4.7% slump. The BOJ could also reduce the projection of growth for the next fiscal year, which was seen at 3.6%, up from 3.3% last July.

While peak monetary policy may generally be at hand, the Bank of Canada may be an exception. The overnight target rate sits at 25 bp. It is clear that officials do not want to adopt a negative rate, but Governor Macklem has suggested the lower bound for Canada maybe a little lower than where it is now but still above zero. Given the economic consequences of the spreading virus and some disappointing high-frequency data, the market (overnight index swaps) has a few basis points of easing discounted. It may not exactly be clear what a small rate cut achieves, but last year, the Bank of England and the Reserve Bank of Australia delivered small moves of 15 and 10 bp respectively.

Before this intensification of the virus, the Bank of Canada had seemed to be a candidate for an early exit from emergency policies. Now Norway’s Norges Bank appears at the front of the line. At its last meeting in the middle of December, the central bank brought forward its anticipated first hike to the first half of 2022. Since the December meeting, the high-frequency data points suggest that economic activity and prices are more resilient than feared.

The economy contracted by 0.9% in the three months through November. It was also half as bad as economists projecting. Underlying CPI, which adjusts for tax changes and excludes energy, rose by 3% year-over-year in December. The record drawdown from the sovereign wealth fund provided an early and strong fiscal cushion.

Two emerging market central banks of note meet as well next week. Turkey’s new central bank governor Agbal has made several steps that have given notice that there is a new economic regime. On Christmas Eve he delivered a 200 bp hike outstripping median forecasts for a 150 bp move. The one-week repo rate now stands at 17%. Inflation reached 14.6% last month.

Since the end of last October, the Turkish lira has been the strongest currency in the world, appreciating by about 13.4% against the US dollar. It is still off a little more than 19% since the end of 2019. Over the past three months, the yield on its 10-year dollar bond has fallen by about 105 bp to 5.60%. The market is signaling another rate hike is not needed.

The South African Reserve Bank can also stand pat, though for different reasons. SARB cannot afford to cut any further. Its repo rate is at 3.5% and December CPI stood at 3.2%. After cutting by 300 bp last year, the central bank held steady at the last two meetings of 2020. The implied policy path of SARB’s projections points to a rate hike in Q3 and Q4 this year., though we are a little skeptical that it can be delivered.

This article was written by Marc Chandler, MarctoMarket.

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

CEE 2021 Economic Outlook: Region Set for Uneven 2021 Rebound amid Higher Debt, External Risks

Download Scope Ratings’ 2021 Central and Eastern Europe Sovereign Outlook

We forecast real GDP in the EU’s 11 member states in central and eastern Europe (CEE-11) to grow next year by 4.1% after a contraction of 5.3% in 2020. Meanwhile, Russia’s economic recovery in 2021 is set to be sluggish (2.5%), following a softer contraction in 2020 (-4.5%) compared with that of many other major economies around the world. In Turkey (growth forecast of 0.7% in 2020 before 6.2% in 2021), the risk to the economy’s external-sector stability remains real.

The Covid-19 crisis has proven exceptionally difficult for the CEE region on several fronts, from unprecedented supply and demand shocks to regional services sectors to disruptions to global supply chains in which several countries are heavily exposed – such as those with large automotive sectors. However, enhanced economic resilience of recent years has allowed EU CEE economies to be better positioned to cope with the crisis of 2020 than over 2008-09 with the global financial crisis.

The second set of lockdowns are likely to have halted or reversed many recoveries over the winter period, following the rebound in economic activity mid-year. However, Scope expects a renewed, uneven recovery to be underway by the spring of 2021 even though it will not be until after 2021 that output returns to pre-crisis levels in most economies of the region.

EU agreement on recovery fund provides an economic tailwind

Uncertainty will remain elevated for some period to come, with much hinging on progress in distributing coronavirus vaccine, though we see some encouraging economic tailwinds, notably an agreement around EU funds after Poland and Hungary’s earlier veto threat was pulled.

Regional central banks are unlikely to tighten monetary policy any time soon as they seek to sustain the recovery amid generally benign inflationary conditions. Here, Turkey is an exception – needing to maintain a tight rates policy to regain market confidence. We generally expect less volatility in regional currencies next year compared with 2020 as economic growth recovers.

Fiscal risks, Turkey’s monetary policy among top themes to watch

We identify several other important themes for 2021:

  • Russia’s macroeconomic reforms have led to a higher degree of economic self-sufficiency, mitigating the negative impact of this year’s crisis on the economy. However, the uncertain outlook for the oil sector, even after the OPEC+ agreed on a hike in petroleum supplies from January on, geopolitical risks and the absence of more profound structural reforms to raise potential growth are set to weigh on recovery.
  • Despite a near-term market-friendly shift in policy frameworks as represented in the Turkish central bank’s November 2020 rate hike, a market-friendly reorientation of Turkey’s economic policies will need to not only be maintained but strengthened. 2021 is expected to be a bellwether year for the country’s ratings trajectory.
  • For Georgia, a ratings concentration in 2021 will be on external-sector and fiscal risks, as well as on structural reform progress. We expect 4.5% growth in Georgia next year, after a 5% contraction in 2020.
  • Fiscal risks have increased, especially for non-euro-area CEE governments. Romania’s and Turkey’s public debt ratios are expected to continue increasing from about 35% in 2019 to above 60% by 2024. For most other CEE countries rated by Scope, however, we see stabilisation and/or eventual gradual declines in debt ratios. CEE countries need to advance domestic capital markets to ensure the stable rollover of higher post-crisis public-debt stocks.
  • The new long-term EU budget for 2021-27 presents a major opportunity for CEE-11 to boost investment, including in spending to address environmental risks related to climate change. CEE governments need, moreover, to raise labour-force participation rates after the crisis and address shortages of skilled labour.

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

Levon Kameryan is Analyst in Sovereign and Public Sector ratings at Scope Ratings GmbH.

Turkey: Central Bank Decision Calms Investor Nerves, But a Sustained Policy Reorientation Needed

The Turkish central bank backed up words with action in last week’s monetary policy decision – raising the key repo rate 475bps to 15% from 10.25%. In addition, the central bank indicated that commercial banks will have access to financing exclusively via the one-week repo auction window, with the repo rate henceforth the “only” indicator of monetary policy.

This ends for now a phase of “backdoor”, unorthodox rate increases via alternative tools that the central bank had employed to avoid any unwanted attention from President Recep Tayyip Erdoğan – who prefers low interest rates – and which had failed to assuage market concerns of too-easy central bank policy.

The central bank’s rate increase, both in its scale and in the consolidation of various policy instruments, was intended to address investors’ immediate concerns, ease pressures on the lira and stem a full-blown currency crisis. This has eased some concerns that central bank policy would remain behind the curve under new governance.

Shift near term to a more market-friendly, conventional monetary policy

The sizeable 30% depreciation in lira this year before ex-Central Bank Governor Murat Uysal’s dismissal appears to have been the final straw that forced this month’s reset of economic governance and the shift, at least near-term, towards a more market-friendly, more conventional monetary policy framework under Governor Naci Ağbal.

With this rate hike, Ağbal demonstrated that he holds enough influence and sway with the Turkish president to convince him to tolerate higher rates near term to fight inflation. Turkey’s real policy rates were negative before Thursday’s policy change with an annual rate of inflation of 11.9% in October. Real policy rates have since flipped to +2.8%

Complacency quickly returned after rate hike initially calmed investors’ nerves in 2018

That said, we have been here before. In 2018, the central bank raised rates by 625bps and similarly consolidated multiple policy instruments to reverse a sharp lira sell-off, only for complacency to speedily re-emerge by the following year as the lira stabilised and inflation receded.

The Turkish government’s underlying bias in favour of looser monetary policy has not dissipated overnight. Nor has Turkey’s executive presidency, in place since 2018 and which overtly subverts central bank independence, changed.

Possibility of greater near-term lira stability, but longer-term governance risks remain

While any sustained return to conventional monetary policies amid this year’s crisis could support greater lira stability in the short run and possibly help begin a process of rebuilding depleted foreign-exchange reserves, longer-term risks remain that significant institutional and governance deficits of the past re-emerge once the immediate crisis is in the rear-view mirror.

An important upcoming task is using this forthcoming window to rebuild Turkey’s official reserves, which stood at USD 82.4bn on 15 November, compared with USD 105.7 at year-end 2019 and USD 134.6bn at a 2013 peak. Official reserves cover around 61% of short-term external debt. Net reserves excluding short-run swaps with domestic banks stood at all-time lows of negative USD 47.5bn in September, cut sharply from (positive) USD 18.5bn at end-2019.

The government needs to tackle external-sector weaknesses

The risk that a longer-standing structural depletion of Turkey’s foreign-currency reserves poses to the economy’s external sector stability remains real and calls upon the near-term shift in policy frameworks to not only be maintained but strengthened. This will require tighter, more sustainable monetary, fiscal and structural economic policies over a longer period both in crisis and outside of crisis – something that has been lacking in the past – which prioritise lower but more sustainable economic growth.

In addition, Turkey needs to strengthen its flexible exchange rate regime – a traditional credit strength – and reduce severe external sector vulnerabilities, such as structural current account deficits, economic vulnerabilities to capital outflows and high FX exposures.

Scope downgraded Turkey’s foreign-currency long-term issuer and senior unsecured debt ratings to B from B+ on 6 November, while affirming Turkey’s long-term issuer and senior unsecured debt ratings in local currency at B+. Scope revised the Outlooks on Turkey’s long-term ratings in both foreign and local currency to Negative from Stable. Scope will next review Turkey’s sovereign ratings and Outlooks in H1-2021.

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.

TRY: Hopes of Deliverance

Two days ago, the Turkish President Erdogan fired the central bank governor Murat Uysal. One day ago, the President’s son-in-law Berat Albayrak – the Finance Minister of Turney – announced we would go too. These events may well be a consequence of the fact that the Turkish lira lost very much value this year, the inflation is very high, and the Turkish central bank was reluctant to raise the rates under these conditions… so far. Hopes that this “so far” would change are the emotional spark that pushes the lira.

On the other hand, we don’t really know what stands between those announcements in the circles of Turkish financial authorities. It may also be that it was just another personnel toss that Erdogan did to ensure the faithfulness of those who rule the lira. In this case, we will see the Turkish lire get back into the negative zone.

The reality is: the Turkish lira doesn’t care who is the Turkish central bank governor or the minister of finance. The actions are what matters, who delivers them – doesn’t. And as long the direction of the monetary policy in Turkey – which is very politely called “unorthodox” by observers – stays the same, the lira will do nothing but lose value. Therefore, don’t take this drop as a game-changer yet. Rather, it’s a good offer for a tactical entry.

This post is written and submitted by FBS Markets for informational purposes only. In no way shall it be interpreted or construed to create any warranties of any kind, including an offer to buy or sell any currencies or other instruments. 

The views and ideas shared in this article are deemed reliable and based on the most up-to-date and trustworthy sources. However, the company does not take any responsibility for accuracy and completeness of the information, and the views expressed in the article may be subject to change without prior notice. 

TURKEY, LIRA, ERDOGAN: Swamps of Greatness

What’s happening

Azerbaijan and Armenia are at war – again. Who started it – doesn’t matter anymore. What matters is who wants what and what position every side takes in this conflict. And there is definitely more than just Armenia and Azerbaijan – about these, you wouldn’t probably hear in another 10 years, if not the conflict. As you understand – there is Turkey.

At least because the Turkish President clearly expressed his view on the situation. There is also Russia. And Europe. And even the US – in fact, half of the world may be involved in this small regional conflict of the two nations which don’t have any sound weight on a global scale.

The core

Azerbaijan is a Turkic-speaking nation, Muslims. Within their territory, there is a region of Karabakh where Armenians live – a different language, background, and Christians. Armenians of Karabakh say “we have nothing to do with Azerbaijan, we want to be separate”. Azerbaijan says “that’s our land – if you want to stay on it, it will remain ours”.

So for Azerbaijan, Armenians of Karabakh are separatists and terrorists. For the Armenians of Karabakh, Azerbaijan is an oppressor state trying to expel you from your homeland, at the very least. A clear stalemate – or a balance, if you prefer.

The nutshell

The state of Armenia which borders Azerbaijan obviously supports the Armenians of Karabakh inside of Azerbaijan. In the meantime, Turkey clearly supports Azerbaijan as these are the two nations of similar blood, culture, and language.

Now, if it was only between Armenia, Azerbaijan, and Turkey – Armenia with Karabakh obviously have no chance: neither demographically, nor militarily, economically, or strategically. But there is a Russian military base in Armenia: Armenia is, or has been until now, a strategic vanguard post of Russian power projection into the Middle East since the conquest of Caucasus by the Russian Empire in the XIX century.

That means, although the time of old empires is gone, the two nations – namely, Russia and Turkey – still clash in this region. Now, Turkey is NATO, but it has been behaving not exactly pro-NATO lately: especially, the US has not been very happy with Turkey. In the meantime, Russia, even despite having a military base in Armenia, prefers to stay out of the battle as it sells arms to and has economic ties with both Armenia and Azerbaijan.

That means

The Turkish President is pushing Turkey into yet another unsolvable conflict. As patriotic as it may appear to some Turks, in supporting their brother nation against Armenians, economically, it is yet another burden on the Turkish lira: war needs money, money needs to be loaned – or, printed.

Geostrategically, it alienates Turkey even more – at least, from Europe. Because Europe, as much as it would like to see Russia lose some weight, doesn’t want to see Turkey rise as a regional power to become undisputed in the Middle East. And the latter – becoming undisputed in the Middle East – is exactly the aspiration of the Turkish President.

Erdogan wants to make Turkey great again (sounds familiar, right?), like how it was in the time of the great Ottoman sultans who projected their power as far as until Vienna, in their best times. Now, as the wealthier classes disapprove of Erdogan’s autocratic and religion-imposing grip, the poorer classes mostly support him on patriotic feelings. These feelings need to feed on something – and what may be better than another patriotic war to make the poor people yell “hooray” to their president?

Up means less

The 100-MA and 200-MA have been almost identically looking upwards on the weekly chart. That means the TRY has been losing value against the USD across the years, with minor deviations. In addition to that, the trajectory seems to be accelerating its upward slope vertically – the Turkish lira is increasing the pace of depreciation.

The historical level of 8.00 appears to be just around the corner – maybe, by New Year, we will see it crossed. Technically, going that far away from the Moving Averages would be a ground to expect a nearing correction downwards. But if and when it happens, it will be a temporary technical downturn compared to the strategic upward pressure Erdogan’s politics are exerting on USD/JPY.

What does it mean for Turkey? Poverty. Same as for any other developing nation that gets driven into yet another line of old-victories-based patriotism while the developed world gets more developed and the USD keeps gaining against the TRY. Turkey is becoming a poor self-locked nation. Its people will see less wealth, less financial capacity, less financial freedom (as well as any other freedom) in commemoration of the glorious days of the Ottoman sultans.

What does it mean for you? A guarantee that your position game with USD/TRY will see no glitch: TRY will keep losing – Erdogan guarantees that. Even if he miraculously realizes how deep he pushed Turkey into the swamps of surrounding conflicts, the long-term damage to the Turkish economy is already inflicted and will be increasing.

And that’s in addition to the virus damage that decimated international tourism, and other long-term consequences related to Turkey’s international prestige. Ties with Europe and loosening – the chart of EUR/TRY looks almost the same. So it will be safe to extrapolate the trajectory as far as you need – the Turkish lira’s chance to rise is now as low as zero.

P. S.

It’s always interesting to watch the change of paradigms. Erdogan is trying to project an image of a strong leader. He wants to be something separate from the line of his predecessors – including Mustafa Kemal Ataturk, whose photos, pictures, and images are almost in every home, shop, or office in Turkey. And that’s for a reason. Your people will call you “the father of Turks” (as this is what “Ataturk” stands for) when you accomplish something no less than making a nation: re-building the entire country from zero, collecting the nation on the ruins of the vast Ottoman Empire, fighting back the victorious enemy empires slicing your country, and finding a new way for a new state so that your people can carry on with their lives.

That new way was secularism: putting religion out of public conscience and state affairs in the name of progress and economic development. And that new direction worked. For almost a century, Turkey has been following the direction set by Ataturk to become a strong regional power that no state can deny. And very importantly, a state that other countries are willing to interact too. Now, Erdogan’s direction is fundamentally different from that of Mustafa Kemal. Erdogan is bringing back religion and gradually turning Turkey away from the outer world, particularly Europe and the US. What’s his direction then? Isolation.

What’s the leader image he wants to be affiliated with now? Mehmet Fatih, the great sultan who finally conquered Constantinople and converted the emblematic Byzantine church of Hagia Sophia into a mosque. Erdogan just did the same, probably hoping that Turkish people will think of him the same as what they think of Mehmet Fatih. And some do. But the difference is: these are not the times of empire expansion.

Erdogan is sourcing stronger social momentum from his people, but this momentum has no outer space to propel through, no outer lands to conquer, no room for expanding state frontiers. In other words, no extensive way of development, like it was in the Ottoman empire. Neither does he provide inner space for intensive development and inner improvements – in fact, he is doing all the opposite: limits freedoms, makes the social structures more rigid and tense.

So the picture is becoming like this: the internal pressure in Turkey increases, while there are no ways to channel that pressure, neither outside nor inside. Now, what happens when you keep increasing the pressure in a rigid metal structure? Implosion. Or explosion. Doesn’t matter: nothing good happens. Let’s hope that no such thing happens to Turkey. Otherwise, it will need another Ataturk to build it back from the ashes. This time – economical.

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Turkish Lira’s Plunge Throws Institutional, Economic Challenges Into Sharp Focus

Scope Ratings has ranked Turkey as among its “Risky-3” out of a sample of 63 economies most at risk of a balance of payments crisis, given the lira’s history of significant volatility and the high proportion of government and private sector debt denominated in foreign currencies.

The rating agency downgraded Turkey’s credit ratings to B+ from BB- on 10 July to reflect growing risks to external sector stability and deterioration in the governance framework including risks stemming from long-run foreign-exchange reserve depletion. The lira trades presently 33% below an August 2019 peak against the dollar. The Turkish currency also hit fresh all-time lows against the euro this past week, before making up some losses after evidence of policy tightening.

Early signs of reversal in the direction of policy tightening, but unlikely enough

Friday’s closure of the one-week repo financing window forces central bank funding of banks to the costlier overnight window – an effective 150bp hike. Next, regulators are expected to ease an unorthodox “asset ratio”, effective since 1 May, which has compelled lenders to raise lending activities unsustainably. Lira lending from the consolidated banking system rose 45.9% YoY as of July. The banking supervisor this week, moreover, announced easing of some rules that restrict foreign banks from access to lira liquidity, under strict conditions in regard to the use of such liquidity.

“So, we’ve now sort of returned to the 2018 lira crisis response playbook of backdoor rate hikes via shifting funding between central bank windows, to avoid unwanted attention for central bankers from President Recep Tayyip Erdoğan were policy rates themselves hiked, whilst, moreover, easing foreign exchange reserves deficits via funding from foreign sources like Qatar,” says Dennis Shen, lead analyst on Turkey at Scope. “Unfortunately, what ultimately eased the crisis in 2018 more tangibly was a return towards conventional policymaking and a significant hike in the policy rate itself.”

“In consideration of elevated inflation of 11.8% in July, Turkey’s real policy rates remain among the world’s lowest. However, a rate hike will not be straight-forward given politicisation of the central bank and interventions from the President, who has a stated preference for low rates. A significant rate hike would be helpful in stabilising current exchange rate devaluations; however, tightening would also come at some price to Turkey’s fledgling economic recovery.”

The lira’s recent weakness against the dollar and other major currencies comes even as global risk sentiment has improved since a March ebb, which should otherwise support emerging market currencies.

Lira’s decline exacerbates macro imbalances

“Deterioration in the value of the lira not only raises inflation, but also undermines debt sustainability given 50% of Turkey’s central government debt denominated in foreign currency, up from 27% in mid-2013,” says Shen.

“Any sustained deterioration in the exchange rate can spiral increasingly easily into a problem for the government’s future servicing capacity of its public debt,” Shen says.

Turkish general government debt is set to rise to more than 40% of GDP this year, up from a comparatively low 28% in 2017. Non-financial companies have a significant net foreign currency debt position of USD 165bn as of May 2020.

The impact of the Covid-19 pandemic in curtailing Turkey’s income from travel and tourism receipts impairs private sector foreign exchange reserve liquidity as well as the current account – the latter which returned to a deficit of just above 1% of GDP in the year to May 2020.

Inadequate foreign exchange reserves have been diminished further

Ankara has diminished what were already inadequate foreign currency reserves this year in trying to defend the exchange rate. Gross official reserves (including gold) fell to USD 90.2bn as of 31 July, compared with USD 105.7bn at the start of 2020.

“However, we need to net out central bank foreign-exchange liabilities to domestic banks and, importantly, bilateral short-term foreign-exchange swap liabilities.”

FX swaps stood at a record high USD 54.4bn at end-June as the central bank has entered such arrangements with domestic financial institutions, including state-owned banks, to artificially elevate gross reserve levels. Swap-corrected net reserves declined to a record low of negative USD 32.5bn in June, a turnaround from positive USD 18.8bn at end-2019 and USD 56.0bn at a 2011 peak.

“Absent the roll-over of such swap arrangements, the country’s reserves are negative – in other words, Turkey’s balance of payments is precarious unless the country’s underlying economic and external sector weaknesses are swiftly corrected,” says Shen.

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. Matthew Curtin, Senior Editor of Economic Research at Scope, was a contributing writer for this comment.

Dollar Bounces, Gold Slips, while Equities Hold Their Own

In the emerging market space, the liquid and accessible currencies, like the Turkish lira, Mexican peso, and Russian rouble, are down the most. The lira has fallen 1% after intrasession volatility that pushed it to a record low against the euro yesterday. That seems to be the source of the pressure on the lira against the dollar.

The South African rand is among the weakest among emerging market currencies today even though the IMF approved a $4.3 bln loan, the most granted so far to assist in combatting the virus. Despite the correction in the foreign exchange market, equities are mostly firm. In the Asia Pacific region, only a few markets could not sustain gains.

Japan, Taiwan, and Australia were among them. South Korea led the region with a nearly 1.8% gain. Europe’s Dow Jones Stoxx 600 is up almost 0.5% after falling for the past two sessions (~2%). US shares are little changed. US bond yields backed up yesterday, with the 10-year yields popping back above 60 bp. This exerted upward pressures in Asia and Europe. Gold reached $1981 before the profit-taking pushed it to about $1907 from where it is recovering. September WTI is little changed around $41.50 a barrel.

Asia Pacific

China is resorting to local lockdowns to combat the new outbreak in the virus. The 61 cases reported Monday were the most in four months. Separately, New Zealand became the latest country to suspend the extradition treaty with Hong Kong. That means that of the intelligence-sharing Five Eyes, only the US has not done so, though it has threatened to do so.

India has banned almost 50 Chinese apps to largely check the workaround the 59 apps banned last month. Another 250 apps are under review. India has cited threats to user privacy and national security. This is a new front in the confrontation with China. The US and Japan are considering their own bans on some Chinese apps.

The dollar is in a quarter of a yen range on either side of JPY105.45, as it is confined to yesterday’s range. The upside correction does not appear over, and the greenback could test previous support and now resistance near JPY106, where an option for $600 mln expires today (and a $1.8 bln option expires Thursday).

The Australian dollar is little changed as it moves within the $0.7065-$0.7180 range that has confined it for around a week now. It has held above $0.7115 today, but it may be retested. The PBOC set the dollar’s reference rate at CNY6.9895 today, nearly spot on where the models suggested. After falling to a four-day low near CNY6.9870, the dollar recovered back above CNY7.0. China seems intent on not allowing the US to get an advantage by devaluing the dollar, something that President Trump has advocated. A stable dollar-yuan rate in a weak dollar environment means that the yuan falls against the CFETS basket. Against the basket, the yuan is at its lowest level in a little more than a month.

Europe

News from Europe is light and the week’s highlights which include the first look at Q2 GDP (median forecast in the Bloomberg survey is for a 12% quarterly contraction), June unemployment (~7.7% vs. 7.4%), and the first look at July CPI (median forecast is for a 0.5% decline for a 0.2% increase year-over-year) still lie ahead.

Today’s focus is mostly on earnings and bank earnings in particular. European banks are being encouraged to extend the hold off of dividend payout and share buybacks that were first introduced in March. This may be worth around 30 bln euros. The UK is fully aboard too. In terms of loan-loss provisioning, European banks are expected to set aside around the same amount as they did in Q1, which was about 25 bln euros. In comparison, the five largest US banks have added a little more than $60 bln in the first half to cushion sour loans.

Fitch lowered its five-year growth potential for the UK from 1.6% to 0.9%. It also took EMU’s potential to 0.7% from 1.2%. This could weaken the resolve of asset managers, where industry surveys suggest a desire to be overweight European stocks and the euro on ideas of economic and/or earnings outperformance. That said, the number of analyst upgrades has surpassed the number of downgrades in Europe for the first time this year.

The euro reached $1.1780 yesterday. As the momentum stalled in Asia, some light profit-taking has been seen that saw it briefly dip just below $1.17 in early European turnover. Intraday resistance is seen near $1.1740-$1.1750. In the recent move, the session high has often been recorded in North America, and we’ll watch to see if the pattern holds today. The market may turn cautious ahead of tomorrow’s outcome of the FOMC meeting.

Sterling poked above $1.29 yesterday for the first time in four months. It made a marginal new high today (~$1.2905), but it too is consolidating. Support is seen in the $1.2830-$1.2850 area. As the euro was trending higher against the dollar yesterday, it also rose to about CHF1.0840, its highest level here in July. However, today’s consolidation has seen the euro slip back to around CHF1.0775. Look for it to find support above CHF1.0760.

America

The US reports house prices, Conference Board consumer confidence, and the Richmond Fed’s July manufacturing survey. Even in the best of times, these are not the typical market movers. The focus instead is three-fold: corporate earnings (today’s highlights include McDonald’s, Pfizer, and 3M), the negotiation over the fiscal bill, and the start of the FOMC meeting. Canada has not economic reports, while Mexico’s weekly reserve figures are due. It continues to gradually accumulate reserves. They have risen by about 4.5% this year after a 3.5% increase last year.

The Economic Policy Institute estimates that a cut in the $600 a week extra unemployment insurance to $200 a week will reduce aggregate demand and cut the number of jobs that were projected to be created. It expects a loss of about 2.5% growth and 3.4 mln fewer jobs. After this week’s FOMC meeting and the first look at Q2 GDP, the US July employment report is due at the end of next week.

It is one of the most difficult high-frequency economic reports to forecast. Still, the outlook darkened after last week’s increase in weekly initial jobless claims, which covered the week that the non-farm payrolls survey is conducted. Another increase, which is what the median forecast in the Bloomberg survey expects, is only momentarily going to get lost in the excitement around the GDP report.

The relatively light news day allows us to look a little closer at Mexico’s June trade data that was out yesterday. Mexico reported a record trade surplus of $5.5 bln. Yet, it is not good news. Mexico is hemorrhaging. The IGAE May economic activity index, reported at the end of last week, showed a larger than expected 22.73% year-over-year drop. The 2.62% decline in the month was nearly three times larger than economists forecast. With the virus still not under control, the government’s forecast for a 9.6% contraction this year is likely to be overshot. The record trade surplus was a function of a larger decline in imports (-23.2%) than exports (-12.8%).

Auto exports are off more than a third (34.6%) this year, to $47.5 bln. Other manufactured exports are down 3.4% to $113.8 bln. Petroleum exports have fallen by nearly 42% in H1 to $8.0 bln. Agriculture exports edged up by 7.3% to $10.5 bln to surpass oil. The peso’s strength reflects not the macroeconomy but its high real and nominal interest rates in the current environment. Yesterday, the dollar fell below MXN22.00 for the first time this month. The June low was near MXN21.46.

The US dollar initially extended its losses against the Canadian dollar, slipping to CAD1.3330, just ahead of last month’s low (~CAD1.3315) before rebounding to almost CAD1.3400. The upside correction could run a bit further, but resistance in the CAD1.3420-CAD1.3440 area may offer a sufficient cap today. The greenback found support against the Mexican peso near MXN21.90 and bounced back to around MXN22.07. Resistance is seen near MXN22.20. The peso is up about 4.5% this month, but within the region has been bettered by Chile (~+6.75%) and Brazil (~+6.15%). The Colombian peso’s almost 2..2% gain puts it in the top 10 best performing emerging market currencies so far this month.

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

Central and Eastern Europe: Monetary Policy is easing Covid-19 Capital Market Disruption

“The capacity to implement bond-buying programmes and interest-rate cuts by central banks has varied considerably across the Central and Eastern Europe (CEE) region, while government borrowing rates have risen in some countries with elevated external-sector and public-finance risks alongside observation of sizeable portfolio outflows,” says Levon Kameryan, an analyst at Scope and author of a new report on CEE capital markets developments.

Overall, in the case of euro area CEE countries, low borrowing rates and investors’ relatively sanguine sovereign risk assessments reflect actions undertaken by the ECB – notably the large-scale asset-purchase programmes – in addition to the euro’s reserve-currency status. 10-year yields for euro area CEE governments increased only modestly so far in 2020 at currently around 0.6% for Slovakia and Slovenia, and below 0.3% in the case of the three Baltic states.

Monetary easing in non-euro EU CEE has abetted fiscal stimulus programmes

Among non-euro area EU CEE, large-scale fiscal stimulus packages in Poland, the Czech Republic and Hungary are backed by central bank policy responses that mitigate the tightening in financial conditions. Quantitative easing by the countries’ central banks might amount to as much as 10% of GDP in the case of Poland and 3% of GDP for Hungary.

The National Bank of Poland also reduced its reference rate by 50bps twice this year to 0.5% effective from April. The Czech central bank, on the other hand, has not announced quantitative easing so far, but has reduced its benchmark two-week repo rate three times to 0.25% by early May, from 2.25% in February. Hungary’s local-currency 10-year yield has reverted to January levels at 1.9% at time of the writing, after picking up to 3.3% mid-March. On the other hand, Czech and Polish yields of 0.8% and 1.3% respectively are currently somewhat lower than they were in January pre-crisis.

In the region, Romania, however, has less room for a bolder policy response due to elevated exchange-rate risk given a high proportion of foreign-currency public- and private-sector borrowing, as captured in Scope’s BBB-/Negative ratings for Romania.

The Romanian central bank cut its policy rate by 50bps to 2% in March and started its first-ever QE programme in April, although the size is modest. The central bank is unlikely to make further aggressive interest rate cuts that would risk weakening the value of the leu. Romania’s local currency 10-year government bond yield had increased to 4.4% at the time of the writing, from 4.1% as of January lows despite the policy rate cut, reflecting the country’s weak public finances, exacerbated by higher spending triggered by the 2020 crisis.

Severe external risk in Turkey

External risks in Turkey are further exacerbated by economic mismanagement, with real interest rates in negative territory after incremental rate cuts, which have amplified weakness in the exchange rate. The Turkish lira is currently trading around 10% lower against the dollar and 7% weaker against euro compared with end-February. Turkey’s 10-year lira government borrowing rates have increased sharply in 2020, to 13.3% at time of writing, from January lows of under 10%, despite cuts of 250bps in central bank policy rates over the same time period.

Additional fiscal measures and rate cuts forthcoming in Russia

In contrast, Russia’s fiscal stimulus has so far been modest, with additional fiscal measures and interest rate cuts likely to be forthcoming given its substantial liquid reserves (National Wealth Fund assets of 11.3% of GDP) and policy space. Direct purchase of government bonds on the secondary market is not expected to be on the central bank’s agenda, but longer-term repo funding of banks to support such purchases is possible.

Russia’s 10-year yield fell to 5.4%, supported by monetary easing, after picking up to over 8% mid-March, when Brent crude oil prices fell below USD 30 a barrel.

Russia’s reserves cover almost five times outstanding short-term external debt and support the external resilience of the Russian economy. On the other hand, Turkey’s official reserves cover only about 70% of short-term external debt, which poses a significant risk of a deeper balance-of-payment crisis if lira depreciation gets worse.

Read more in the rating agency’s report on CEE markets

Levon Kameryan is an Analyst in Public Finance at Scope Ratings GmbH.

Yuan Slumps as US-Chinese Tensions Rise

India was an outlier, suffering a 2.4% loss, and Taiwan’s semiconductor sector was hit, and the Taiex fell 0.6%. European markets are off to a strong start with a 2% gain in the Dow Jones Stoxx 600 to cut last week’s loss in half. The benchmark is approaching a two-week downtrend line near 399. US shares are higher, and this could lift the S&P 500 to test the key 2945-2955 area.

The US 10-year yield is little changed near 64 bp, but European bonds are lit with peripheral yields off 4-8 basis points. The dollar is mixed. The dollar-bloc currencies and Scandis are firm, while the European complex and yen are heavier. Risk appetites are also evident among emerging market currencies, where the South African rand, Mexican peso, Turkish lira, and Hungarian forint are higher.

The JP Morgan Emerging Market Currency Index is in a sawtooth pattern of alternating gains and losses for more than a week. It fell before the weekend and is higher now. The Russian rouble has been helped by the continued recovery in oil prices, where the July WTI traded above $31. Gold racing higher after pushing to new multi-year highs at the end of last week. The yellow metal is extending is advance for a fifth session and tested the $1765 area in Europe.

Asia Pacific

Japan reported its GDP contracted by 0.9% in Q1 or 3.4% at an annualized rate. It was a little better than expected though the Q4 19 loss was revised slightly to show a 1.9% quarterly contraction (earthquake and sales tax increase). This quarter understood to be considerably worse with expectations of a quarterly decrease of around 5.0-5.5%. Separately, even if not totally unrelated, the latest Asahi poll shows support for Prime Minister Abe is off about eight percentage points to 33%, the lowest in two years. The two big knocks include the handling of the virus and efforts to secure the power to appoint senior prosecutors.

At the same time that the US was announced a tighter ban on the sales of chips to Huawei, China took steps to dramatically increase its output of 14-nanometer wafers. Taiwan Semiconductor Manufacturing Corporation (TSMC) plans to build a wafer fabrication plant in Arizona needs to also be understood in this context too. The US prohibited without a license the sales of chips to Huawei if designed or made by US-produced technology and hardware. That would apply to TSMC, whose biggest customer is Huawei.

The US export controls were circumvented by servicing Huawei out of foreign fabrication facilities. The new actions seek to close the loophole, and it seems that China had been preparing for this be stockpiling in semiconductor chips.

The dollar is confined to less than a third of a yen range above JPY107.00 and is within the pre-weekend range. So far, it is the first session in four that the dollar held above JPY107.00, though this could be challenged in the North American session today. On the top side, a $2.2 bln option at JPY107.50 expires today. After settling on its lows before the weekend, the Australian dollar bounced back to test the $0.6455 area. Resistance is around the pre-weekend high near $0.6475.

The option for roughly A$635 mln at $0.6495 that expires today looks safe. A closed blow $0.6440 would likely signal that the corrective forces remain in control. Given the heightened tension between the US and China and the greenback’s strength seen late last week, today’s PBOC fix was closely watched. The dollar’s reference rate was set at CNY7.1030, which was a bit stronger than the bank models suggested. The dollar reached its highest level since it peaked on April 2 near CNY7.1280. The highest close was on March 25 near CNY7.1150 and is under threat today.

Europe

Bank of England Governor Bailey reportedly denied that zero interest rates were under consideration last week. And the BOE’s chief economist Haldane seemed to suggest that negative interest rates were among the unconventional measures that were being considered. We suspect that the contradictory signals are more apparent than real.

With the base rate at 10 bp, unconventional policy options are being discussed. Haldane was making this more academic point. Bailey was signaling the policy thrust, which is to say that expanding its asset purchase program holds more promise. The UK 2-year yield, which fell below zero last week, is now near minus five basis points.

The economic data highlight of the week is the preliminary PMI reports. The aggregate composite is expected to rise from the record low of 13.6 in April to 27.0 in May, according to the median forecast in the Bloomberg survey, as both the manufacturing and service sectors are forecast to improve. Ahead of the report, the European Commission is slated to announce its policy recommendations for a recovery package for next month’s meetings.

The euro is trading heavily but within the pre-weekend range. It has found a bid at $1.08, where a nearly 530 mln option will expire today. On the topside, the pre-weekend high was near $1.0850, and the 20-day moving average is just below there, likely keeping the $1.0875, expiring option for about 565 mln euros out of play. Sterling gapped lower (below $1.21) on the back of the talk of negative rates, but recovered to $1.2125 in the European morning.

It is struggling to maintain the downside momentum that has seen it fall for five consecutive sessions coming into today. Note that the lower Bollinger Band is found near $1.2115 today. The Turkish lira‘s short-squeeze is extending for its eighth consecutive session. News that Clearstream and Euroclear will not settle lira trades appears to have encouraged further buying back of previously sold lira positions. The US dollar found support near TRY6.81, as domestic demand (for debt servicing?) emerged.

America

The US calendar is light today. The highlight of the week includes the Philadelphia Fed survey (the Empire State manufacturing survey rose to -48.5 from -78.2) and the preliminary PMI (which is also expected to improve). April housing starts, and existing home sales will also be reported, and no fewer than eight Fed officials speak, including Powell (and Treasury Secretary Mnuchin) before the Senate Banking Committee tomorrow. Canada reports April CPI and retail sales figures this week. Mexico’s data highlight is the April retail sales report.

Conventional wisdom sees the negative yields in the US fed funds futures and concludes that investors are betting that the Fed cuts the target rate again. Some suggest that investors may be trying to push the Fed hand, deliver it a fait accompli, force it to cut, perhaps against its wishes. It is hard to argue against this. It seems to intuitively true.

Yet, the markets are not only about betting and taking on risk, but they are also for hedgers and people trying to layoff risk. The negative yields can be explained, even if no one thought the Fed would adopt negative rates. Imagine businesses that need to protect themselves against the chance.

They buy “insurance” from the seller, who then goes to the market to layoff the risk. Financial intermediaries may also choose to hedge the risk of sub-zero rates. Negative rates in the US appear to be more about swapping from floating to fixed rates and the related hedging then actually reflecting expectations of negative Fed policy rates.

Brazil is being punished. The currency and equity market are among the hardest hit, losing a third of their value. It is not simply a function of macroeconomics. Policy matters. The self-inflicted political crisis adds to the challenge posed by the crippling pandemic. President Bolsonaro has lost the confidence of investors who had been prepared to like him after several tumultuous years. The loss of the second health minister in a month during a pandemic that appears to give Brazil the fourth most cases in the world.

The US dollar is consolidating within the pre-weekend range against the Canadian dollar (~CAD1.4020-CAD1.4120). A six-week downtrend line is found today near CAD1.4160. With stronger risk appetites today, initial support near CAD1.4060 would be pressured in North America. The greenback is also consolidating against the Mexican peso with a heavier bias. Lows from the end of last week around found near MXN23.75. Below there, support is seen around MXN23.50, which also corresponds to the lower Bollinger Band. The dollar posted a key downside reversal on May 14 against the Brazilian real. Still, the follow-through dollar selling ahead of the weekend was reversed in late turnover, and the greenback finished on session highs (~BRL5.8560). The dollar’s record high was set near BRL5.9715.

This article was written by Marc Chandler, MarctoMarket.

The Dollar is Searching for its Price Ceiling

The dollar index tracks the USD against the six most popular world currencies, where the yen and the euro can be considered the main catalysts for a decline, having lost 3.0% and 2.6%, respectively.

Nevertheless, smaller and secondary currency pairs also deserve traders’ attention, the movement in which is a kind of manifestation of profound processes of financial markets. Judging by these movements, the longstanding carry-trade idea becoming obsolete, as the high-yielding currencies of emerging markets are no longer highly profitable and the central banks of these countries are softening their policies in the attempt to revive economic growth.

A close up of a map

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Against the backdrop of the coronavirus epidemic and the Chinese authorities’ efforts to stimulate the economy, the Yuan is weakening. The Dollar is again worth more than 7 Yuan due to the easing of monetary policy of the authorities and fears of investors about a sharp cooling of China’s economic growth. The 7.0 mark was and remained an essential barometer of sentiment in China.

The price dynamic above this level reflects the continued uncertainty in markets about future growth prospects. In early 2017 and late 2018, the Yuan was heavily protected by PBC near this level. The signing of Phase One trade agreement also returned the renminbi underneath this waterline. However, the demand for the Dollar pushed the pair higher earlier this week.

The weakness of the Yuan and the Chinese economy also affected the Australian Dollar. AUDUSD is declining again this week, updating its 2009 lows below 0.67.  It was a kind of waterline at 0.70, and the pair failed its attempt to climb higher at the end of last year.

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A separate story is a Turkish Lira. This currency does not depend on problems in China so that it can be viewed as a different story. The USDTRY broke through 6.0 this week, following another cut of the rate by the Turkish Central Bank. TCMB has been more focused on reviving economic growth in recent months, rather than curbing inflation.

The steady downward trend of the lira against the Dollar has been observed for more than a month, and last week the pair crossed the 6.0 level, returning to last year’s highs. Above the current mark (6.08) the pair was only in May 2019 and from August to October 2018 during the period of extreme volatility in the pair. It seems that now the markets are trying to find the “ceiling” for the pair, the growth above which will be sensitive for the policymakers, forcing them to stand up for their currency.

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The same can be said about the South African Rand, which crossed the mark of 15.00 in USDZAR, which was repeatedly tested for strength in recent years but did not stay long. The weakening of the Rand against the Dollar looks more surprising as it is happening against the background of robust gold price growth, that previously determined the price direction of ZAR.

This article was written by FxPro