It’s the depths of summer trading where boredom with lacklustre markets can become a real threat but Friday provided a tropical storm, that’s threatening to turn into a hurricane. Friday was one of those days that people will look back on go “do you remember when…..?”. In this case, we’re looking at the potential collapse of the Turkish financial system as the value of the currency plummets. TRY has dropped over 100% in less than a year against the USD but much of that move, over 50%, has come in the last 7 weeks with a 30% decline in the last week and almost 20% on Friday alone – we can see where this is going.
These types of moves are unheard of in normal market conditions and with Turkey appearing to be on the verge of insolvency, its President spoke on Friday denying there was any problem and suggesting the problem was an economic attack by the US on Turkey. He requested the exchange of any foreign currency they had into TRY, stating there was no problem, which is concerning to say the least. The US and Trump did not help matters however, as the US President announced a doubling down on tariffs against Turkey.
Contagion is the primary fear for markets and that’s no surprise then than risk off was the major play. Global stocks have been facing some selling across the board and markets are favouring safe haven assets in a flight to safety, while riskier assets including broader EM markets and currencies are all facing selling. The primary benefactors of the risk off move has been in currency markets, as the USD and JPY have both found themselves in heavy demand, while the euro has been exposed as a close counterpart to Turkey and faced selling as there are some concerns of financial contagion into the European system.
EURUSD faced a big gap lower when market opened overnight, I was checking early prices at 9.00pm last night and early guidance had EURUSD trading at 1.1373 and while a momentary intervention from the Turkish Central Bank helped calm things, this lasted all of about 20 minutes and euro is back under sale (along with TRY), with EURUSD touching fresh 12 month lows and now trading back below 1.1400. The selloff in GBPUSD has been less aggressive, the pound is less exposed to the turmoil but GBPUSD is currently sitting just below 1.2800 but still looks like we could see a pop higher soon. The big question now is will the Fed continue on their path to an additional two rate hikes this year? Markets are currently still pricing this in but a reversal will see some very fast and heavy USD selling.
Turkey will continue to be the primary focus for markets and we’ve no data of note across the wires today. 1.1300 area should provide some light support for the euro but should contagion concerns really pick up, the single currency might well find itself under some real pressure and that 1.1000/1.1100 region is not off the cards should selling really accelerate. Any rally should be well capped ahead of 1.1500 for now. EURGBP looking towards .8880/90 area for support while any rally into .9000 area will find sellers. GBPUSD is finding support towards 1.2735/40 area while and bounce higher will run into some sellers around 1.2885 area.