EM currencies are crashing! The ZAR is down 4.5% this week, RUB off 5.3%, and TRY collapsed 14.4%. The crisis in Turkey and the problems that increased sanctions pose for the Russian economy are reverberating throughout the emerging market (EM) currency world, as most EM currencies fell against the dollar.
The EM currencies weren’t alone there however. NZD was off 2.4% after the RBNZ surprised the market by pushing back its forecast for a rate hike by a full year to Q3 2020. GBP meanwhile fell 2.0% on the week on more Brexit news – this does not surprise me.
The euro didn’t do too badly over the week as a whole, but it’s ending on a downtrend as the market begins to think of the impact of the Turkish crisis on European banks. The ECB’s Single Supervisory Mechanism (SSM), its department that monitors the Eurozone’s biggest banks, has started to watch European banks’ exposure to Turkey. A few major banks in Spain, Italy and France have significant operations in the troubled country, which isn’t helping the already troubled European banking sector.
My view about the crisis in Turkey is that it’s caused by one man, President Erdogan. Unfortunately he’s incapable of realizing that he’s the problem; on the contrary, he believes that his direction is essential for solving the problem. I only expect things to get worse there in the near term and therefore I think EM currencies and the euro are in for a rough week.
Amidst the turmoil, the US remains the world’s safe haven despite the worsening trade war between the US and China. The bid-to-cover ratio remained well above the 2017/18 average at the Treasury’s 10-year note auction on Wednesday even though it was a record amount on sale. Meanwhile, the Russell 3000 and Wilshire 5000 stock market indices made new record highs during the week.
The US currency has risen relative to virtually every major currency during the week, the tiny exceptions being JPY (+0.3%) and a few of the other Asian currencies, such as THB (+0.2%) and IDR (+0.14%). I don’t expect those EM Asian currencies to hold onto their gains for long though as contagion begins to spread through EM currencies. JPY however may benefit from the usual reaction of Japanese investors to international uncertainty, which is to hedge their overseas positions. So it looks likely to me that USD and JPY will be the best performers in the coming week.
The week ahead brings a number of important indicators.
The advance US retail sales figure, out on Wednesday, is expected to show a modest rise in sales. But given that it would be the sixth consecutive month with higher sales, that’s still pretty good. Moreover, strip out auto sales and it’s no longer so modest – ex autos is expected to be +0.4% mom, a pretty healthy number. Given the market’s propensity for buying USD nowadays anyway, I think this figure is likely to be positive for the dollar.
Tuesday will see several worthwhile European indicators. The preliminary German and EU-wide GDP and the ZEW survey will be released, as well as the final German CPI. Even though the advance EU-wide GDP was already released some time ago, the market does react to the German GDP data. Probably because investors figure that Germany is the economic locomotive of Europe and its performance now is an indicator of Europe’s performance in the future. In that respect, the expected slowdown in German growth bodes ill for the euro, especially if investors are already looking for reasons to sell the currency.
As you can see, the preliminary estimate of EU GDP is rarely revised from the advance estimate, and when it is, it’s generally only ±10 bps, so not that significant.
Brexit talks resume in Brussels on Thursday. The EU is hoping to sign some sort of a deal by September, but the UK side, which remains in disarray, is hoping to put it off a month or two longer. We can see how people are starting to get seriously worried about the impact of Brexit on the UK. The FTSE 250 index is an index of UK mid-cap stocks. They’re generally more responsive to domestic factors than the stocks in the FTSE 100, which are mostly large multinationals that only use the UK as a base. Until recently the domestic stocks have been outperforming as the concerns about international supply chains dominated, but this year the domestic stocks have been underperforming as investors worried about the concerns on the UK economy as a whole. It’s particularly noticeable that the acceleration in Q2 GDP failed to lift sentiment for either domestic stocks or the pound. Personally, I can’t see anything good coming out of these talks, but you never know – there’s a new UK negotiator, the pro-leave Dominic Raab, and a new Foreign Secretary, Jeremy Hunt, so there could be a change in the UK approach. But I wouldn’t bet on it.
As for the yen, I think the general increase in the global risk level is likely to keep the Japanese currency on a firm note during the week.
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