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Contagion fears as Lira hits historic low

By OFX

Last week saw the Turkish Lira continue its plunge against the US Dollar, as the Lira remained the major headline for the majority of the week. At one stage, a drop of more than 7% occurred and the USD/TRY breached 7 Lira per dollar for the first time in its history of trading.

European markets were also subdued seeing the Stoxx and Dax both falling 0.5%, contagion gripping the markets as some of the largest banks in Europe look at their exposures to Turkey, and the effects of a potential fallout to emerging markets globally.

On the data front, the Philly Fed Manufacturing Index fell in August to its lowest reading in 21 months, missing expectations of 22 and posting an 11.9. The Director of real-time economics at Moody’s Analytics, Ryan Sweet, advised this was due to rising trade tensions and tightening financial conditions - all of which has been weighing on sentiment. Despite the low reading, indicators remain positive as firms remain optimistic about the future of the local economy. US Housing starts rose 0.9% to a seasonally adjusted rate of 1.1680 million units in July, along with building permits in line with expectations of 1.31M for July. Market expectations could expect a slowdown in the housing industry as interest rates start to rise. The week closed out with improved market sentiment, as equity markets saw gains across the board and talks of negotiations to calm current trade wars between China and the United States.

The initial shock of the Turkish collapse notwithstanding, investors focus returned to stronger macroeconomic indicators in Canadian markets last week, with an increased likelihood the Bank of Canada will raise rates again this year.

Elsewhere, NAFTA negotiations continue to plague any upside in the loonie against the greenback and a deal appears nearer following an administration change in Mexico and a broad-based assurance Mexico will seek a Tri-lateral agreement. A primary marker driving short-term direction, medium and longer-term outlooks remain grossly dependent on these negotiations. Comments from US Trade Representative Robert Lighthizer leaned hope to calls in a revitalized NAFTA agreement could be reached. While NAFTA talks continue, the CAD can expect to continue to trade within mostly restricted bounds.

Closing out the week, Friday's CPI print was well above expectations and posted a 3.0% YoY. This is the highest inflation reading since September 2011. Foreign Security Purchase also released better than the previous of 3.1B, but in line with economist predictions of 11.8B, purchases were 11.55B.

Last week began with a continued euro sell-off, as ongoing concerns over EZ bank loans to Turkey rattled investor confidence. EUR/USD has touched its lowest level since June last year, around 1.1316; considering EUR/USD was recently trading around the 1.16 handle, the sharp drop highlights how rapidly events on the EZ’s eastern fringes have developed. EUR/CHF has been affected, as has EUR/JPY.

On the data front last week, the second estimate of Eurozone GDP for the second quarter was revised higher to 0.4% from an initial reading of 0.3%. At the same time the German ZEW Economic Sentiment survey printed -13.7 far better than the -20.1 priced in and streets ahead of last month’s -24.7. Despite this strong pair of numbers the, the reaction was fairly muted as market focus remains stuck on Turkey and the exposure EZ banks have to the beleaguered country. An announcement of tariffs being raised on US imports of cars, alcoholic drinks and leaf tobacco will do little to quell the situation however it appears the euro is the one suffering the most pain as a result.

The end of the week saw the euro sell-off seen on the back of the turmoil in Turkey slow; however, it’s going to be a headwind for some time for the shared currency. As well as concerns re: Turkey, the tragic events seen in Italy this week when a bridge collapsed is also weighing heavily on the minds of many.

GBP/USD began the week under pressure after Fridays fall on the back of the erupting crisis in Turkey that saw investors dump the Lira and shun risk assets. Throughout the Asian session investors again sold off the Lira and sought out the usual safe havens of the yen, swissy and gold.

USD/TRY briefly spiked above 7.0 in the weekls earlier sessions after trading as low as 5.55 during Fridays Asian session; this represents a drop of around 21% in 24 hours of trading, a bigger move than the pound felt in the aftermath of the Brexit vote. The ongoing row between President Erdogan and President Trump has hit investor confidence in the country that bridges the gap between Europe and Asia with fears over the situation hitting other currencies such as the South African Rand and Mexican Peso as well. Stock markets around the world have also been trading lower again, highlighting the flight to safety.

Away from Turkey, last week also saw some top-tier data releases in the UK. The Average Earnings Index which includes bonus payments saw a 2.4% rise 3m/y when a hold at the previous months 2.5% was expected. The data (which in theory fuels overall inflation) is closely watched by the Bank of England so the shortfall will have been noted by members of the Banks Monetary Policy Committee.

UK CPI rose slightly to 2.5% y/y. The uptick was predicted by the markets and sterling barely moved on the back of the release. The report cited rising prices for computer games and transport fares as adding the main upward pressure to the basket of goods CPI is calculated against. At the same time PPI was released showing goods and raw materials purchased by manufacturers rose 0.5% m/m higher than the 0.1% expected. This pipeline pressure could add some support to inflation in the medium term if it is passed on to consumers.

Last week saw equities market fall to fresh multi-month low amid the unstoppable decline of the Turkish Lira, and with it, the Australian Dollar was dragged to yearly lows against its US counterpart. Investors demand for haven assets as of late has increased, amid ongoing concerns surrounding the state of the Turkish Lira. The fear is that a collapse will have a run on effect across emerging markets and European Banks exposed to the embattled Turkish economy.

On the data front, China released its Industrial Production and Retail Sales numbers, both for July. Industrial Production came in 0.3% shy of expectations, posting at 6.0% with Retail Sales posting at 8.8% vs an expected 9.2%. Investors keenly keep an eye on Chinese data releases; it can have a broad impact on the markets due to China's influence on the global economy. While locally we saw the release of the July NAB's Business Confidence and Business Conditions indexes, seen unchanged at 6 and 15 respectively.

Closing out the week, the Australia dollar found some needed support, following a stronger than expected labour market print and bounce in value of the Chinese Yuan. The AUD jumped off intraday lows at 0.7225 following reports the unemployment rate fell unexpectedly to 5.3%, while year to date job’s growth remained positive as the pace of full time employment growth outstripped part-time work. The AUD jumped to 0.7271 on the back of the largely upbeat read as the print lends itself to a tale of gradual improvement, suggesting the next move in interest rates will be up.

The New Zealand Dollar continues to consolidate in the general "risk-off" environment spreading throughout the markets. The Turkish Lira again dominated headlines with their surprising appreciation against a rampant USD. The Lira strengthened by about 5% after Qatar committed to a $15b direct investment package for Turkey.

Regulators in Turkey also highlighted further limits on FX swaps which helped ease concerns for the Lira. Although a positive step forward, the rhetoric stepped up a notch with President Erdogan announcing tariffs on a variety of US goods. Despite the appreciation in the Lira, emerging markets continued their broad sell-off, pointing to other underlying issues with the sector.

Overall, the New Zealand Dollar has been caught in the cross-winds as broad weakness in emerging markets, falling commodity prices, US monetary Policy, Chinese growth and trade wars all begin to take its toll. As a currency that benefits from risk-taking, this environment does not help the Kiwi’s fortunes. The New Zealand Dollar now looks to hold its ground with attention firmly affixed to off-shore events. NZD/USD closed the week a touch above the 0.6630.