Markets over the past 24 hours have a sense of tranquility about them, but whether it’s merely the calm before the storm remains to be seen. Markets reacted positively to renewed hopes of a resolution to the US/China trade spat, with equities and metals gaining in yesterday’s session. The euro also took some respite on the back of the Turkish lira bounce. A number of European banks have large exposures to Turkey, including Italy’s UniCredit bank. Further deterioration in the lira could lead to further implications to Italy, whose yields have also come back into the fray with the two year having nearly tripled in the past month and returning to levels last seen around the political crisis back in May. If events in Turkey take a turn for the worse, it will also pose a dilemma for Draghi with the ECB trying to move forward with their tightening of monetary policy, but with a number of European banks tied up in Turkey, Draghi may deliver another ‘whatever it takes’ rhetoric.
Central banks in emerging markets this week have been forced to act unwillingly to try combat their currency. The Indonesian Rupiah hit its lowest level in three years against the US dollar, forcing the central bank here to raise rates unexpectedly by 25bps to 5.50 percent. Dody Budi Waluyo, Deputy Governor at Bank Indonesia commented that “Rupiah now does not reflect fundamentals yet, thus we need intervention since we need stability”. While in Hong Kong the Monetary Authority stepped in twice to sell $575m of its reserves after the local currency hit the weaker end of its trading band against the dollar. The repercussions of these actions will no doubt hamper emerging markets growth going forward and will continue to leave a cloud over these markets going forward.
On the currency front, EURUSD is back below 1.14 this morning, where support will be found at Wednesday’s low of 1.1287. EURGBP has also been on the rise after bouncing back from .89 which will continue to act as a support for a downtrend. GBPUSD has been on a downtrend