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  • Forex today was dominated by risk-off play in the aftermath of the TRY’s massive 30% decline over the last few days.
  • The usual safe havens were bid in NY trade, (offered in early European trade on profit taking), although Gold was offered with heightened demand for the greenback and investors were highly disappointed with the lack of response by the CBRT over what has a contagion liability of potentially catastrophic proportions for global markets that ring bells of the 1997 Asia crisis.  

Dealers were not content with the Finance Minister’s and CBRT’s plan of action to merely cut the reserve requirements ratio for banks – (looking to Turkey’s banks to provide cheap credit to drive growth- Turkey’s central bank to provide lira liquidity at 19.25% if needed).  

Credit default swaps have spiked to multi-year highs and FX option prices have even exceeded the peaks seen around the global financial crisis – USD/TRY remains on its knees and spent most of the session on the 7.00 handle – moments away from another supernova which could have massive repercussions for global markets. “Much more drastic measures are required to stabilize the lira, before its plunge turns into a much bigger problem for macro-financial stability in Turkey,” analysts at TD Securities argued – “Moreover, some of the announced measures may help in the short run, but will lead to faster FX reserve depletion going forward.”

However, DM currencies such as the Aussie started to stabilise while emerging markets such as South Africa, (ZAR) and Argentina (ARS) continued to struggle which was forcing the central bank, BCRA, to raise rates again.  

In late US trade, some nerves were starting to settle as well, with fleeting reports that Turkey would release the detained American pastor. “This was denied by the US embassy in Turkey but in late NY trade, the White House at least confirmed that the Turkish ambassador had met with US national security advisor Bolton,” analysts at Westpac noted.  

Currency and rates action

Meanwhile, the US dollar was mixed, although the DXY rallied to new highs. US 10yr treasury yields also managed to stabilise and they moved sideways between 2.85% and 2.88% after hitting a four-week low there at 2.85%. The 2yr yields bounced off 2.58%, another four-week low and hit 2.61% while the Fed fund futures yields continue to price in around 1.5 more hikes for 2018.  

As for the yen, (safe-haven), it was moving in tandem with the reports over the pastor being released but USD/JPY was capped in the 110.90s and traded back to 110.60 for a close of 110.70 as US stocks slide – (DJIA, -0.50% lost 125.44 points, or 0.5%, to 25,187.70. The S&P 500 dropped 11.35 points, or 0.4%, to 2,821.93, while the NASDAQ chopped in and out of negative territory closing down by a modest 19.40 points, or 0.3%, to 7,819.71).  EUR/JPY is one to monitor as well which rebounded to the 38.2% & 100-W MA/50-hr SMA by 126.80.  

EUR/USD was ending flat for the day after a corrective bounce in the NY session on the unauthentic headlines regarding US pastor sees a  lift near 1.1435 for the high. EUR/USD closed at 1.1409 after renewed demand for USD/TRY on the US embassy’s denial of the Pastor headlines. There will be some data to look out for in European trade with German and EZ Q2 GDP as well as EZ June industrial production.  

GBP/USD was a non-player in trade overnight, licking its wounds from a heavy sell-off from the start of this month on the no-deal Brexit angst.  Cable ended NY at 1.2760 and down a modest 0.05%, supported by 1.2731 just above Friday’s 1.2724 low.  As for the cross, EUR/GBP was ending NY around 0.8930 and lower by 0.06% from within a range of between 0.8945-0.8907 weighed by the potential ramifications for the euro zone’s banks and creditors of Turkey and indeed lower prospects of an ECB rate hike.  Elsewhere, the high-beta and commodity complex looked fragile despite some stability in the Aussie  – 0.7256 was a fresh low and the CRB pierced the neckline support with a strong greenback weakening the commodity’s framework – if gold prices are anything to go by, the appetite for the dollar going forward has just got bigger.  gold dumped to $1,191 spot – (Gold futures busted below the psychological $1,200 an ounce for the first time since late January/  December delivery settled down $20.10, or by 1.6%, to $1,198.90/oz).

Key notes from US session:

Wall Street pares early gains to close in red

Key events to take place in Asia:

Analysts at Westpac noted the key events coming up as follows:  

  • Australia’s busy data weeks kicks off at  11:30am  Syd/9:30am Sing/HK with July NAB business confidence. The conditions index which is usually the best guide to GDP growth has been running well above long term averages – June was +15 versus a 25 year average of +5.7. The confidence index however has slipped back in recent months, to +6 in June, a low since Oct 2016 and back in line with the 25 year average. The RBA often cites this survey.
  • China’s July activity data is due at  12pm  Syd/10am local time. Industrial production disappointed in June, slipping to 6.0%yr, equal-slowest since 2015. Consensus is 6.3% for July. Retail sales growth is seen holding around 9.0% or a touch stronger, still well below the 2016-2017 pace but with changes to the survey making annual comparisons difficult. Fixed asset investment continued a multi-year slowdown in June, to 6.0%yr, consistent with the economy rebalancing.”