The USD has continued to push higher overnight, with the Bloomberg dollar index making a new high for the year. The Turkish lira appreciated and this helped support a general recovery in risk appetite.
After a tumultuous few days, the Turkish lira has managed to stage a meaningful recovery overnight. The TRY is up around 7%, although to put that in context it is still down 25% this month and 40% this year. Reuters reported that the Turkish central bank had been making liquidity available to banks at 19.25% over the past two days, higher than the benchmark 17.75% repo rate, and suggesting the central bank may have covertly hiked rates to avoid the attention of President Erdogan. Meanwhile, Erdogan kept up his confrontation with the US, calling for a consumer boycott iPhones and other US consumer electronics and blaming what he called an “explicit economic attack” for the lira currency crisis. Despite the overnight reprieve, we suspect the lira will remain under downward pressure until there is a diplomatic resolution with the US, the Turkish central bank raises rates significantly or there is a clear directive from Erdogan to cool the economy and repair Turkey’s imbalances.
The appreciation in the lira has seen a general increase in risk sentiment overnight, with US equity indices up by between 0.5% to 0.7% and core global bond yields rising slightly. The S&P500 is 1% from its all-time high reached in late January. In contrast, European equity indices were flat to lower, and the Eurostoxx banks index made a fresh low overnight.
In FX markets, the EUR, GBP and AUD have all made new lows for the year amidst a backdrop of continued USD strength. The EUR initially rose from 1.14 to 1.1420 after German Q2 GDP beat expectations and the Turkish lira rallied, but it has since moved sharply lower to 1.1330, its lowest level since mid-2017. The sell-off in the EUR despite better than expected European data (German and EU GDP, ZEW survey) is indicative of negative sentiment towards the EUR, including from trend-following/momentum investors after the recent break below key support at 1.15. NZD/EUR has bounced off its multi-year low of 0.5718 set on Friday in the wake of the MPS and is now back towards 0.58.
The GBP reacted negatively to a mixed UK labour market report that showed a surprise fall in the unemployment rate but lower than expected job growth. Wage growth excluding bonuses was in line with expectations. With the BoE unlikely to raise rates for some time (the market prices the next hike for 12 months’ time), UK economic data will be a second-order consideration for the GBP compared to Brexit negotiations for now.
The NZD is down slightly on the day but has outperformed most of the G10 (with the exception of the CAD). After reaching a high of 0.6610 in the middle of the London trading session, the NZD has since moved back to 0.6570 amidst a broad-based strengthening in the USD. The NZD remains near its lowest level since early 2016, but its outperformance over the past two sessions is suggestive of some investor profit-taking on short positions.
The NZD/AUD has moved higher again, towards 0.91, and has now fully reversed its post-MPS decline. There wasn’t much reaction to the weaker than expected Chinese activity data yesterday, with analysts pointing to the fact that the data pre-dates the more recent easing measures undertaken by the Chinese authorities. More important for the cross will be the Australian wage price index released this afternoon, with our colleagues in NAB looking for a slightly below-consensus 0.5% quarterly increase.
NZ swap rates pushed higher yesterday by between 2 to 3bps amidst some profit-taking. There hasn’t been any meaningful change in near-term OCR expectations however, and the market still prices up to 8.5bps of RBNZ cuts into the OIS curve by June 2019.
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