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Turkey rattles markets, US-China trade tensions continue and Canada / Saudi dispute continues...

By OFX

Sterling had a bad start to last week, as Brexit concerns weighed over the pound throughout the European and US sessions. Comments by international trade secretary, Liam Fox in a Sunday Times interview, noted that the chances of a no deal scenario with the EU were around “60-40” and on the back of this, the sterling was sold off heavily, touching an 11 month low of 1.2920.

Further weakening of the pound continued as a report in the Financial Times on the economic health of Turkey rattled the markets and GBP/USD dropped below 1.28. The article reported that the Eurozone’s chief financial watchdog had raised concerns over EZ lenders exposure to the country whose currency has devalued by around one third over the past year. USD/TRY has jumped from 5.0 through 6.0 since the beginning of August as concerns over Turkey’s deficit, inflation and its deteriorating relationship with America see investors flee. Turkish PM, Recep Tayyip Erdogan has been at loggerheads with America since seeing off a coup two years ago during which an American priest, Andrew Brunson was arrested for allegedly “supporting terrorism.” Cable is currently at its lowest level since June last year, as investors flee the fragile pound and head for the safety of the dollar, yen, gold and US Treasury’s.

Last week began as a typically quiet August week in the Eurozone, however, we did see some news emerging from Italy that caught the market's eye. The recently formed coalition party primarily made up of separatist parties, the League and Five Star Movement are putting together a budget which they aim to implement next year. Finance minister, Giovanni Tria has sought to allay fears that the planned spending increases will not increase debt or lead to an exit of the Eurozone. Initially, the positive news brought some very moderate support to the euro, however, markets remained skeptical over the claims, given Italy’s debt to GDP ratio is around 130%.

Furthermore, in an interview with Bloomberg, Deputy Prime Minister, Luigi Di Maio also indicated he was willing to play hardball with EU policymakers in an effort to get his coalition government’s proposed budget pushed through. The new administration is hoping to implement a lower, flat tax rate and is hoping some flexibility will be granted by the EU with regards to a loosening of rules re: deficits to get the proposals enacted.

Moving away from Italy, the close of the week saw the euro dumped as investors weigh up the likelihood of European lenders struggling to reclaim Turkish loans in the face of the Liras collapse.

The greenback had a strong start to last week with EUR/USD dropping below 1.1550 for the first time since late June. The dollar benefitted from ongoing concerns re-trade tensions and the big geopolitical event yesterday was the re-introduction of US sanctions against Iran which came into effect overnight.

The penalties include the Iranian government’s purchase of US bank notes and dollar related transactions as well as targeting the investments of precious metals and commercial planes amongst other measures to target Iranian industry. Further sanctions targeting Iran’s oil sector are due to come into effect in November. We are likely to see a deterioration of relations akin to the tit for tat insults that US President, Donald Trump and North Korean Leader, Kim Jong-un traded throughout last year. However, Trump has stated he would be willing to meet with the Iranian leader, Hassan Rounhani for face to face discussions. Many will be hoping a Trump/Kim Singapore-style summit will resolve matters at some point in the future however this seems lightyears off at present.

Elsewhere, tensions between the US and Turkey rise as Turkey continues to import oil from Iran going against Trump's demands. As a result of this President Donald J. Trump has doubled tariffs on steel and aluminum on Turkey, 20% on Aluminum and 50% on steel. Trump’s tweet caused the US 10 yr to decline to 2.893. TRY also fell sharply as a result of this news. USD/TRY currently up 15%. Currencies with exposure to Turkey have also dipped causing USD to strengthen across most of it’s peers amid a broad-based risk aversion.

Last week's opening sessions were mostly benign with little market action to drive momentum for the Aussie and pundits mainly taking a ‘wait and see’ approach. The tight trading range reflected this as Traders looked forward to Tuesday’s rate statement from the RBA as a catalyst. While the RBA is widely expected not to hike cash rates until the later quarters of 2019, Investors look to the rate statement for clues on the Banks thinking and bias and after last month's statement an interest rate cut was not necessarily off the table. However as expected, the RBA failed to surprise markets keeping rates on hold for the time being.

Elsewhere, Asian equity markets saw modest gains; the catalyst for the price action seemed to be a sharp rebound in Chinese equities and reports emanating out of China that the PBOC would be taking an active approach to prevent its local currency falling below the 7.00 level against the USD. This saw the onshore and offshore Yuan rally towards the back end of the Sydney session and extend it’s gains in the London and NY sessions respectively. Given the Aussie dollar’s tight correlation with the CNY, the AUD was dragged higher with the moves compounded by a softer USD as global risk sentiment improved.

Capping off the week, the Aussie not only managed to hold above the 0.74 handle but break to the upside to briefly flirt with the 0.7450 resistance level. However, this was quickly unwound as traders took profit on their positions, making an about-face and going USD positive. There was no single, primary market catalyst that drove the market shift but the move was certainly exacerbated by bullish comments by the Federal Reserves’ Evans. Evans was indeed particularly bullish on the US economy noting that fundamentals are “extremely strong”.

Beginning the week and in the absence of headline data sets, the Loonie edged downward touching intraday lows as US-China Trade tensions continue to simmer adding support to traditional haven plays and bolstering the Greenback.

China’s proposition of retaliatory tariffs on $60bn of US exports helped fuel demand for the world base currency as, much to the ire of President Trump, many analysts see duties as dollar positive. The ongoing threat to trade continues to weigh on the Canadian dollar as amended NAFTA agreements remain unsigned. The possibility of more US sanctions due for November targeting Iranian oil sales are likely to act as a support for WTI crude oil prices which should in theory support CAD as we near Christmas however overall risk aversion may nullify these gains. We will find out later in the year.

The loonie also came under selling pressure last week, when Amnesty International learned the Saudi government had arrested several female human rights activists, and Canadian Foreign Affairs Minister, Chrystia Freeland called for the immediate release of women rights activist Samar Badawi. A diplomatic dispute between Canadian and Saudi ensued and escalated to where the Saudi Sovereign Wealth Fund (under orders) sold down Canadian assets and froze all new business deals. The initial shock of the Saudi stance has now only had a limited impact on the loonie, especially as oil prices were also softening, indicating to market participants the aggressive actions by the Saudi's will have limited impact on the Canadian economy.

The New Zealand dollar began last week sticking to a very tight trading range ahead of key central bank meetings both in New Zealand (Thursday) and in Australia (Tuesday ).

Data-wise, the opening sessions saw the ANZ Commodity Price Index slide a further 3.2% in July following a 0.9% dip in June, but is still 3.1% above late-2017 levels and broadly flat on a year ago. Of the 17 commodities in the index, 12 fell, three were unchanged and two lifted. Last week also saw the Reserve Bank of New Zealand (RBNZ) keep the official cash rate steady at 1.75 percent. The RBNZ mentioned that while recent economic growth has moderated, they expect it to pick up pace over the rest of this year and be maintained through 2019. As a result of the bearish comments, NZD/USD pair fell almost half a U.S. cent. We now expect the RBNZ to keep rates at this level through 2019 and into Q4 2020, longer than initially projected.

In other news, the ongoing trade war between China and the US is still a major risk being watched by the Reserve Bank of New Zealand and has weighed heavily on risk-sensitive currencies such as the kiwi in recent months. Although the US has not directly targeted New Zealand, the island nation is likely to be affected as global supply chains shift.