Lira after-tremors push investors back to the side lines.
The case for safety
After the lira appeared to break definitively back below roughly 6.2 per dollar (Thursday’s half-hearted ‘attack’ failed between 6.1359-6.2111), a retreat of European stock markets and Wall Street futures quickened. Gradations of red are not particularly dark, but given the week’s gyrations, it is understandable investors have kept the path to the exits within sight. Indeed, despite Thursday’s news of a possible thaw in Sino-U.S. trade relations, there’s little prospect that the latest wave of U.S. tariffs, scheduled for next, week will be postponed. New talks are hopeful but may not prevent possible escalation on the near horizon. For investors, that contributes to the case for a safe Friday, after Thursday’s fortunate break.
Turkish respite remains
Bearish interest in emerging market currencies continues to cycle through key candidates, including Turkey’s lira. Largely though, as various singers have sung, including the late Aretha Franklin, "The Thrill is Gone” from that trade. At least for the moment. A return to peak EMFX sell-off is almost inevitable eventually, unless dollar pain on developing economies’ funding costs eases. But it would be surprising to see another full-blown rout on Friday, or anytime soon. Partly because the EMFX bear trade remains relatively crowded. Ideal conditions—including the element of surprise—have passed, whilst option premiums are elevated across the curve, and margin requirements are still hefty.
CBRT fiddles some more
Similar marginal action from the CBRT as per earlier this week followed Washington’s warning that it was ready to tighten the economic screws further, if the wait for a resolution on the issue of a detained American pastor continues for much longer. The central bank offered cheap short-term funding of $1.5bn via a foreign exchange auction, paying 19.25% on the lira and 2% for the dollar. Only $55m was allocated, whilst a regular repurchase auction was later cancelled. Considering that lira selling is nowhere near Monday’s fever pitch, policymakers are likely to continue combining lip service with minor moves. This is risky. However, again, the market shows every sign of the fatigue that follows an extraordinary ramp. A near-identical repeat so soon is a minority base case. Naturally though, tensions, jitters and volatility around emerging economy currencies will be constants for the foreseeable future.
Italian yield alert
This all makes attempted comebacks by the euro and sterling look forlorn, even as a long-in-the-tooth yen updraft, the only major chink in the dollar’s armour, shows few signs of easing. In any case, Atlantia’s fumbled handling of the tragedy in Italy, is now contributing additional drag on the single currency. Hence attempts by the 10-year BTP spread to benchmark bunds have been thwarted again. It stood at 284.60 a short while ago, the same width as during the height of late May turmoil. Italy-EU Budget negotiations also approach. Falling EUR/USD trend line resistance, just overhead, will probably cap any near-term bounce.
Sterling slips on silly season
If anything, ‘no-deal’ pessimism has deepened this week, so sterling faces similar prospects, despite positive economic glimmers. A vacuum of material news during the ‘Silly Season’ partially accounts for heightened nail biting. Before too long, Downing Street will face the perils of the Conservative Party conference and October’s EU Summit. Sterling traded against the dollar has been repeatedly capped beneath $1.274 this week. A close below there on Friday would strongly suggest another visit to low mid-$1.265s that pave the way to the psychological $1.25.