Emerging market currencies recover from Turkey’s attempted coup

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19 July 2016

Matthew Ryan

Senior Market Analyst at Ebury. Providing expert currency analysis so small and mid-sized businesses can effectively navigate international markets.

Investors unwound safe-haven trades on Monday, with a sense of calm returning to the markets following events in Turkey over the weekend.

L
ast week’s news of an attempted coup caused a flight away from riskier currencies and into those deemed safer. But now, with the Turkish government reported to have full control over the country and its economy, emerging market currencies around the world rallied while the safe-haven Japanese Yen and Swiss Franc both fell against the US Dollar.

Sterling also received some modest support on Monday following comments from Bank of England rate-setter Martin Weale, who claimed he was unsure whether he would back an interest rate cut at next month’s monetary policy meeting. Weale, a notoriously hawkish member of the MPC, claimed he did not sense any panic among consumers or businesses following last month’s vote to leave the European Union.

However, financial markets have now almost fully priced in the possibility that rates could be cut to a fresh record low next month. Market implied probability for an August cut is now at around 88%. We think the possibility of a cut next month will depend heavily on this Friday’s crucial business sentiment PMI’s, the first to be released since last month’s Brexit vote.

The prospect of lower rates in the UK provides an opportunity for businesses trading Sterling to hedge their currency exposure in order to mitigate the risks associated with a weaker Pound.

In other news, the Chinese Yuan (CNY) hit its weakest position against the US Dollar in more than five years on the back of withering state support for the currency. The Yuan has traded mostly in line with our forecasts so far this year, with the People’s Bank of China aiming to keep the Yuan stable against its trade-weighted basket of currencies.

This morning’s inflation figures in the UK surprised to the upside at 0.5% YoY. Bank of England policymaker Ben Broadbent will be speaking at 15:00 UK time, with investors hoping to gain an insight into his views on monetary policy.

Major currencies in detail:

GBP

Yesterday’s comments from Martin Weale helped the Pound to end the London session 0.4% higher against the US Dollar.

The Pound brushed aside some damning comments over the weekend on the outlook for the UK economy post-Brexit. Ernst & Young warned that the UK may face a ‘severe loss of momentum’ after the vote to leave, cutting its growth forecast for 2016 to just 1.9% from 2.3% and its 2017 forecast down to a meagre 0.4% from 2.6%.

We now wait for the July PMI’s on Friday morning as the first significant indicators as to how well the UK economy is performing post-Brexit vote.

EUR

A late rally in the Euro caused the single currency to end the London session 0.2% higher against the US Dollar on Monday.

Germany’s central bank, the Bundesbank, claimed that Europe’s largest economy should continue to grow in the third quarter despite Britain’s decision to vote in favour of leaving the European Union. The central bank claimed that loose monetary policy settings from the ECB should compensate for the adverse effects stemming from the Brexit. We think the ECB is almost certain to increase its stimulus measures in the coming months.

The European Central Bank will likely take the headlines in the Eurozone this week. The central bank will meet on Thursday for the first time since last month’s Brexit. In the meantime, the ZEW economic confidence indices this morning will take on added importance given last month’s Brexit vote and are expected to slow.

USD

The US Dollar was little changed against its major peers on Monday following a relatively quiet trading session in the US economy.

Yesterday’s NAHB Housing Market index was a slight disappointment, ticking downwards in July to 59 from 60. The index continues to suggest a fairly strong performance in the US housing market and should provide good support for the argument for higher rates in the US.

Expectations for the next Fed hike continued to be brought forward on Monday, with financial markets beginning to price in the possibility of an interest rate increase in the US in December.

The economic calendar in the US this week is relatively light with housing data this afternoon unlikely to rock the boat.

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