TRYing Times: The Slide and Fall of the Turkish Lira

Forex

Summary:

Turkey's lira took a 7% nosedive on Wednesday as the country's newly re-elected government appeared to be abandoning its costly 18-month strategy of keeping the currency on a tight leash by any means necessary.

Ankara has seen decades of financial market difficulties and the charts below show the challenges the lira's weakness poses for the country's new economic decision makers.

1/let it go?

A combination of a sizeable budget hole, an inflation problem and thanks to a couple of years of highly questionable policies, a puny pile of FX reserves, means that there are plenty of reasons for the lira to keep falling.

If, or where, it stops nobody really knows. Analysts at Wall Street giants like JPMorgan and Goldman Sachs and FX forwards markets all think 25 or even 30 to the dollar might be possible, which is another big lurch down even from Tuesday's record low levels.

Much will depend on whether the central bank now jacks up interest rates in the big way it has done during other bouts of turmoil, or even introduces capital controls - something the authorities in Turkey have long insisted is not on the table.

The central bank is however widely expected to get a new head in the coming days. That would almost certainly be followed almost immediately by a super-sized hike, to somewhere in the region of 25%-30% from the current 8.5%, JPMorgan predicts.

Ulrich Leuchtmann, head of FX research at Commerzbank in Frankfurt added: "This is what happens when you get an exponential move - for a long time you think nothing happens, and then all of a sudden all hell breaks loose".

2/No Gain, No Pain

A potential sharp interest rate hike could easily grind the Turkish economy to a standstill again, or even worse tip it into recession, as consumers tighten their belts and companies watch borrowing costs explode.

Some of the pain could be offset by the weaker lira spurring exports potentially adding to boost of the upcoming tourism season and the reconstruction spending in the wake of February's devastating earthquake.

"GDP in local currency terms is more at risk from a course correction on interest rates, where rate hikes rein in rampant credit growth, rather than devaluation per se," said Hasnain Malik at Tellimer.

Turkey's economy is no stranger to boom-and-bust cycles, oscillating between double-digit growth and contraction rates in recent years. In its latest spring forecast, the International Monetary Fund projected a 2.7% expansion for 2023.

3/Inflation Palpitations

A tumbling lira will fan fears over a fresh spike in inflation in the country which only last year saw it top 80%.

Data on Monday showed headline inflation dipped to below 40% although that was partly down to Erdogan providing Turks with free natural gas in the run up to the elections.

Analysts were already expecting it to climb back towards 50% before the latest currency drop and Tellimer's Malik said it might now even snap back to the peak levels of last year as both the free gas ends and the FX moves work through the system.

"It's just so inevitable," Abrdn's head of local currency emerging market debt, Kieren Curtis, said referring to the lira's slump this week.

"There is just going to be more inflation so it's difficult to say what's going to turn that without a huge hike in interest rates."

4/Accounting Problems

One of the costs Turkey now faces is covering the special lira depreciation-protected bank accounts the government and central bank set up in late 2021 to convince Turks not to convert all their money into dollars or gold.

Frank Gill, a top sovereign debt analyst at credit rating agency S&P Global, estimates that if the lira drops to around 26.5 per dollar - 20% lower than where it was after President Tayyip Erdogan's re-election on Sunday - the compensation cost would be just under 3% of GDP.

He did add however that the compensation would be paid to depositors in lira rather than dollars or euros and that bill would be split between the Treasury and Central Bank.

5/Debt Dilemma

The other big problem is that $100 billion worth debt borrowed by Turkey's governments, companies and households is in dollars or euros - loans which are now getting ever more expensive to service unless you're a company whose goods are also sold in dollars anyway.

If the debt can't be repaid, the banks that gave the loans have a problem too as their balance sheets will start sprouting holes unless they have hedged themselves accordingly.

It could have wider ramifications too. Fund managers at NinetyOne estimate that when default-threatened CCC-rated countries are excluded, Turkey accounts for approximately 60% of all "high yield" emerging market sovereign debt payments due for each of the next four years.

Source: Reuters

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Alex

Central Bank

The Bank of Canada's decision to resume raising interest rates shook global bond markets and underscored the difficult task faced by central banks as they try to slow economic activity and tamp down inflation.

Policymakers led by Governor Tiff Macklem increased the benchmark overnight rate to 4.75%, ending a pause they declared in January after Canada's economy proved surprisingly strong despite much higher borrowing costs.

The central bank said the economy is running too hot to bring inflation back to its 2% target, citing robust consumer demand for goods and services and a pickup in housing activity. But Canada's situation isn't unique — and it may be the case that other central banks, including the Federal Reserve, will have to push rates deeper into restrictive territory this time around.

"Usually what happens in Canada, nobody in the U.S. cares," Fidelity Investments portfolio manager David Wolf, a former adviser to the Bank of Canada, said on BNN Bloomberg Television. "But in this case, I think people are taking the message that maybe all of these central banks aren't as close to done as people would have thought."

The yield on 2-year U.S. Treasuries jumped as high 4.6%, while comparable Canadian government bonds now boast the highest yield since 2007. Traders briefly fully priced in a Fed hike by July.

The Bank of Canada's decision didn't include much forward-looking language, suggesting officials have jumped back into hiking mode without any certainty about where borrowing costs will ultimately end up.

And while some economists have given Macklem kudos for a quick restart, the rate move is also a tacit acknowledgment that policymakers paused prematurely. Rates are likely headed higher in Canada than previously thought necessary by most observers — and by the bank itself.

It's a vindication for economists such as Citigroup Inc.'s Veronica Clark, the first analyst in a Bloomberg survey to predict a rate hike this week. "The Bank of Canada did pause. They waited to see how the data were coming in. They were expecting activity and inflation to slow and it didn't," she said Wednesday by phone.

But by moving to the sidelines, the central bank also helped Canada's housing market find a floor and start to rebound, she said. "It's a bit of a cautionary tale for the Fed to be pausing too."

Other analysts see lessons for investors as they gauge what a potential pause in the U.S. tightening cycle might mean. Fed Chair Jerome Powell and his officials, who are now in a blackout period ahead of next week's decision, seem intent on skipping a rate increase, while explaining to the public that they're not done yet.

"We have seen two central bank surprises this week in Australia and Canada. Canaries in the coal mine?" Earl Davis, head of fixed income and money markets at BMO Global Asset Management, said by email. "The U.S. market is coming to the realization that the Fed may surprise as well."

Source: Bloomberg

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FastBull Featured

Remarks of Officials

The U.S. economy is strong amid robust consumer spending, but some areas are slowing down, U.S. Treasury Secretary Janet Yellen said in an interview with CNBC on June 7. She expected continued progress in bringing inflation down over the next two years.

While banks may struggle with commercial real estate and face some consolidation, the financial system has ample liquidity, and, overall, banks should be able to withstand any stress.

Yellen said that inflation can subside while maintaining a strong labor market, with unemployment in the 4% range.

Yellen said that legislation to lift the debt ceiling and reduce U.S. deficits by more than $1 trillion over a decade would support the Federal Reserve's efforts to bring down inflation. Yellen evaluated the recent legislation to suspend the federal debt ceiling as a "victory" for the American people. She stressed that the current "priority" is to bring inflation down, and the government continues to support the Federal Reserve's efforts in this regard.

Yellen warned that there is a risk of a recession and a financial crisis if the inflation problem is not solved.

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Warren Takunda

Traders' Opinions

Central Bank

In a surprising move, the Bank of Canada (BoC) announced an unexpected interest rate hike, raising its target for the overnight rate by 25 basis points to 4.75%. This decision comes after two consecutive meetings where the central bank had paused its tightening campaign. The unexpected rate hike has generated significant market reactions, impacting various sectors of the Canadian economy.

Interest Rate Hike Reflects Concerns over Inflation and Demand-Supply Balance

The BoC's decision to raise interest rates indicates growing concerns about inflationary pressures and the need to bring supply and demand back into balance. With annual Consumer Price Index (CPI) reaching 4.4% in April, the first increase in ten months, and core inflation measures consistently in the 3.5-4% range, fears of inflation remaining persistently above the 2% target have intensified. The central bank aims to restore price stability for Canadians by taking a more restrictive monetary policy stance.

TSX Composite Index Experiences Volatility

The announcement of the surprise rate hike caused the S&P/TSX Composite index to pare early gains and hover slightly above the flatline at the 20,100 level. Investors were caught off guard by the central bank's decision, which marks a resumption of its tightening campaign. However, positive signals from the Canadian economy, including expanding exports in April and strong trade volumes, helped offset some of the negative sentiment. Energy producers, particularly Suncor Energy, experienced a 1.6% rise, and miners also traded sharply in the green.

Canadian Dollar Strengthens to Two-Month High

Following the BoC's surprise interest rate hike, the Canadian dollar experienced a significant boost, strengthening to 1.335 per USD, its highest level in two months. This upward movement came as a surprise to market participants who expected rates to remain steady or potentially decline. The rate hike suggests that borrowing costs in the Canadian economy were not as restrictive as previously thought. Despite the strong Canadian dollar, the BoC maintained its forecast that headline inflation would slow to 3% by the summer.

Canadian Government Bond Yields Spike

The announcement of the unexpected interest rate hike led to a surge in yields on Canadian 10-year government bonds. The yield jumped over 12 basis points, nearing a three-month high of 3.4%. The central bank's indication that it may further increase rates if necessary contributed to the rise in bond yields. The BoC expressed concerns over the persistently high levels of excess demand in the economy and the possibility of inflation remaining materially above the 2% target. The Canadian economy's stronger-than-expected Q1 performance and tight labor market further supported the case for the rate hike.

The Bank of Canada's decision to raise interest rates caught markets by surprise and triggered a range of reactions across different sectors. With inflationary pressures and excess demand persisting, the central bank aims to restore price stability and ensure a balance between supply and demand. While the rate hike caused volatility in the stock market, positive economic indicators, such as expanding exports and strong trade volumes, helped mitigate the impact. The Canadian dollar strengthened to a two-month high, and government bond yields spiked in response to the unexpected rate hike. Investors and market participants will closely monitor future developments and the central bank's approach to maintaining price stability in the Canadian economy.

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FastBull Featured

Daily News

[Quick Facts]

1. Bank of Canada unexpectedly raises interest rates due to the overheated economy.

2. Yellen: Inflation is easing as some sectors slow and the labor market remains strong.

3. The U.S. trade deficit widens to the largest in six months.

4. The market has fully digested the expectation of a July Fed rate hike.

5. U.S. natural gas futures prices have risen for a fourth straight session.

6. Bank of England faces huge pressure to raise rates as the U.K. inflation rate will top the developed countries this year.

[News Details]

Bank of Canada unexpectedly raises interest rates due to the overheated economy

The Bank of Canada went against market expectations and restarted interest rate tightening measures, saying the economy is too hot. The Bank of Canada has raised interest rates to 4.75%, the highest level since 2001. According to the bank's rate statement, the excessive demand in the economy overall appears to be more persistent than expected. The statement, however, was not accompanied by a new set of forecasts. Since the conditional pause in rate hikes was announced in January, policymakers have warned that further rate hikes may be necessary. While some Canadians are feeling the pinch of rising borrowing costs, the central bank's move suggests that officials are concerned that economic growth will not slow enough without another rate hike.

Bank of Canada Governor Tiff Macklem and other officials pointed to elevated three-month moving measures of underlying price pressures as a key reason for their move. There were no forward-looking comments in the statement, suggesting that policymakers were not yet sure whether the rate hike would ultimately be a tweak or the start of a new round of hikes.

Yellen: Inflation is easing as some sectors slow and the labor market remains strong

The U.S. economy is strong amid robust consumer spending but some areas are slowing down, U.S. Treasury Secretary Janet Yellen said on Wednesday. She expects continued progress in bringing inflation down over the next two years.

While banks may struggle with commercial real estate and face some consolidation, the financial system has ample liquidity, and, overall, banks should be able to withstand any stress.

Yellen also said that inflation can subside while maintaining a strong labor market, with unemployment in the 4% range.

The U.S. trade deficit widens to the largest in six months

The U.S. trade deficit widened in April to the largest in six months as imports rose and exports fell. The goods and services trade deficit widened 23% in April from a month earlier to $74.6 billion, compared with an estimated deficit of $75.8 billion, according to data released by the U.S. Department of Commerce on Wednesday. The data were not adjusted for inflation. Imports of goods and services rose 1.5% to $323.6 billion, while exports fell 3.6% to $249 billion. Imports of automobiles and parts, industrial supplies, cell phones, and other household goods increased, while exports of oil and jewelry decreased. The widening trade deficit means trade will be a drag on second-quarter GDP.

The market has fully digested the expectation of a July Fed rate hike

The U.S. Treasury bond market has fully priced in that the Federal Reserve will make its last rate hike in July 2023. The interest rate on swaps associated with the July meeting climbed to 5.33% on Wednesday, 25 basis points higher than the current effective federal funds rate of 5.08%.

The June swap shows 10 basis points left for tightening before next week's Fed meeting, suggesting most traders think the Fed will "pause to raise rates" in June. The December swap rate is about 25 basis points lower than July's, meaning the Fed will cut rates by 25 basis points by the end of the year.

Next week, all eyes will be on CPI data, and inflation is still well above the Fed's target. Therefore, they may choose to "pause interest rate hikes." But there is no doubt that it isn't a guarantee of not raising rates in the future.

U.S. natural gas futures prices have risen for a fourth straight session

U.S. natural gas futures prices have risen for a fourth straight session. Bulls appear to be returning to the natural gas market as they anticipate a hot summer and the hurricane weather will give support to natural gas demand. U.S. natural gas prices have fallen nearly 50% so far this year, but the U.S. Energy Information Administration (EIA) said in its monthly outlook report released yesterday that the natural gas market could rebound over the summer as production declines slightly, power plants begin using more natural gas, and consumers and businesses start using air conditioners. Lower natural gas prices are also leading power plants to use more natural gas and less coal.

Bank of England faces huge pressure to raise rates as the U.K. inflation rate will top the developed countries this year

According to the Organization for Economic Co-operation and Development (OECD), the U.K. inflation rate will top the developed countries this year, with its headline inflation rate projected at 6.9% in 2023, above the 6.6% average. In the latest OECD Economic Outlook, Only Argentina and Turkey are expected to have a higher headline rate than the U.K. this year. This underscores the pressure on the Bank of England, which raised interest rates by another 25 basis points in May, bringing the benchmark rate to 4.5%. At the time, the Bank recognized that inflation in the first quarter of the year was "higher than expected." mainly due to rising food prices.

There is growing evidence that price pressures are being generated within the U.K., which has risen interest rate expectations. The market expects that interest rates will rise further and peak at 5.25%, 75 basis points higher than the previously projected 4.50%. Interest rates will not start to fall until the second half of next year.

[Focus of the Day]

UTC+8 20:30 U.S. Initial Jobless Claims

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Kevin Du

Cryptocurrency

It's been a frantic week in crypto, with the U.S. securities regulator suing both Binance and Coinbase for allegedly violating U.S. laws. Bitcoin took a hit in turn, falling to its lowest level since March. Here's what you need to know:

This week's most read

· US sues Binance and founder Zhao over 'web of deception'

· US tightens crackdown on crypto with lawsuits against Coinbase, Binance

· Binance, US affiliate hit by net outflows of $1.43b since SEC lawsuit, data shows

The U.S. Securities and Exchange Commission this week brought long-awaited cases against Binance and Coinbase, alleging that the platforms violated U.S. securities laws.

The regulator sued Binance, the world's largest cryptocurrency exchange, and its CEO Changpeng Zhao on Monday, alleging the exchange artificially inflated its trading volumes, diverted customer funds, failed to restrict U.S. customers from its platform and misled investors about its market surveillance controls.

The SEC also claimed that Binance and Zhao, its billionaire founder and one of the crypto industry's highest-profile moguls, secretly controlled customers' assets, allowing them to commingle and divert investor funds "as they please."

The exchange created separate U.S. entities "as part of an elaborate scheme to evade U.S. federal securities laws," the SEC also alleged, citing a number of practices first reported by Reuters in a series of investigations into the exchange published this year and in 2022.

In a statement, Binance said it had "actively cooperated" with the SEC "from the start," and intends to defend its platform "vigorously."

Investors pulled around $1.43 billion from Binance and its U.S. affiliate as of 11 a.m. ET (15:00 GMT) on Tuesday, data firm Nansen said.

The SEC also sued Coinbase on Tuesday, accusing the largest U.S. cryptocurrency exchange of operating illegally without having first registered with the agency. In a complaint filed in Manhattan federal court, the SEC said Coinbase has since at least 2019 made billions of dollars by handling cryptocurrency transactions, while evading the disclosure requirements meant to protect investors.

The lawsuit addressed several aspects of Coinbase's business, including Coinbase Prime, which routes orders; Coinbase Wallet, which lets investors access liquidity; and the Coinbase Earn staking service.

Coinbase's chief legal officer Paul Grewal said in response to the lawsuit that the "SEC's reliance on an enforcement-only approach" is harming American competitiveness as well as companies like Coinbase.

Crypto essentials

· Crypto shares tumble: Bitcoin, the world's largest cryptocurrency, and crypto-related stocks plunged after the SEC sued Binance in the regulator's latest crackdown on the digital asset ecosystem. Experts say that this week's latest move could prompt companies to increase compliance, spike products and expand overseas.

· Musk and Dogecoin: Investors are accusing Elon Musk of manipulating the price of the cryptocurrency Dogecoin in a lawsuit filed May 31 in Manhattan federal court. They say Musk used Twitter posts and paid online influencers to profitably trade Dogecoin via wallets that he or his company Tesla controlled.

· Cboe gets CFTC nod: Exchange operator Cboe Global Markets on Monday received regulatory approval from the U.S. Commodity Futures Trading Commission to offer leveraged derivatives products on its digital trading platform, including physically and financially settled bitcoin and ether margined futures contracts.

Crypto Wire: The SEC Comes for Binance and Coinbase_1

Bitcoin has been uncommonly quiet over the past four weeks, despite major market-moving news such as the end of the U.S. debt ceiling saga.

Bitcoin's volatility index is near 64, well below the 2023 peak of 116.5 touched in January, according to CryptoCompare.

Overall daily cryptocurrency spot trading volumes - above $20 billion for most of the year - have languished at around $10.6-$12 billion in the last two weeks, data from The Block shows.

What I'm reading

· Hong Kong 's central bank plans to test the use of its digital currency under a pilot project in its $229 billion mortgage market. Here's how they're aiming to use e-HKD to slash the month-long loan approval process by half.

· Breakingviews: Reuters opinion columnist Anita Ramaswamy says there are bigger risks to Binance than the SEC's lawsuit, including the fact that cryptocurrency users are increasingly spurning corporate-owned exchanges. Part of the problem may also be that retail traders have lost loads of money, she says.

· Apple on Monday unveiled a costly augmented-reality headset called the Vision Pro, barging into a market dominated by Meta. Here's how Apple says its vision for the $3,499 Vision Pro differs from Meta's headset.

Source: Reuters

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Damon

Economic

An interest rate decision from India and revised Japanese GDP will be the big local drivers for Asian markets on Thursday, with wider sentiment soured by a profit-taking slump in U.S. tech stocks and a surprising rate hike in Canada.

After rallying more than 25% this year, and more than 20% from the U.S. banking shock low in March, the Nasdaq had its worst day since April, sliding 1.3%.

The index of Mega Tech stocks that has driven this year's U.S. equity rally almost single-handedly - up more than 60% this year - slumped almost 3% for its biggest fall since February.

The Bank of Canada's decision to raise rates to a 22-year high of 4.75% was not widely expected. This followed an equally surprising rate hike from Australia the day before, a one-two hawkish punch from policymakers that investors had probably not braced for.

Throw in a 1% rise in oil prices, a slump in Chinese trade activity, and the yuan hitting a fresh 6-month low, and the backdrop for Asian markets in the second half of the week looks a bit darker than the first half. Indian Rates, Japan GDP in the Spotlight_1

Indian Rates, Japan GDP in the Spotlight_1

Indian Rates, Japan GDP in the Spotlight_2

The Reserve Bank of India is expected to leave its key interest rate unchanged at 6.50% and for the rest of 2023, according to a Reuters poll of economists. Although inflation hit an 18-month low of 4.70% in April, it is not seen falling to the RBI's 4% medium-term target for at least another two years.

If inflation is that sticky, investors can perhaps expect a 'hawkish pause' rather than a 'dovish pause' from the RBI, especially in light of the hawkish surprises from Australia and Canada this week.

Japanese first quarter growth, meanwhile, is expected to be revised up one tenth of a percent to 0.5% on a quarterly basis, and three tenths of a percent to 1.9% on an annualized basis, thanks to solid investment from manufacturers.

The U.S. dollar is back above 140.00 yen and a soft GDP print could push it closer to the year-to-date high just below 141.00 yen. A narrower-than-expected current account surplus in April, figures for which are also out on Thursday, could do the trick too.

The Australian dollar, which hit a one-month high on Wednesday following the RBA's rate hike, could get a nudge from Australian trade data on Thursday. The consensus forecast is for the surplus to narrow slightly from March to A$14 billion.

Here are three key developments that could provide more direction to markets on Thursday:

- India interest rate decision

- Japan GDP (Q1, revised)

- Australia trade (April)