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  • GBP/USD is trading back to the downside as Turkey appears to be ticking time bomb for the European and US banking sector.
  • The TRY has thrown out a short fuse to the financial markets in summing up a recent report on JPMorgan’s findings, the bank concludes that “in terms of foreign bank exposures it appears that Spanish, French and Italian banks, as well as US and UK banks through contingent exposures, are most exposed to Turkey.”

The risk for the pond is a scramble to the greenback in the face of another Asian crisis should investors pull out of emerging markets which would ripple through the global financial system. GBP/USD is currently trading at 1.12753, having made a high of 1.2791 and a low of 1.2729.  

  • Black Swan Friday (that we should have seen coming) as it happened – Turkey risk and the tide of US dollar funding

TRY moments away from another supernova

All eyes are on Berat Albayrak, Turkey’s finance minister and his action plan. What we know at the moment is that there will be no rate hike for now which seemed like an easy and rapid solution – (However, the risks there would be one much like when Soros and traders took the BoE to the cleaners during Black Wednesday and instead of buying back cable and GBP/DEM when the BoE raised rates significantly into the teens, they continued to sell the pound which ultimately led to the pound falling out of the ERM when it became clear that it was losing billions trying to buoy its currency artificially). Instead, the CBRT, (Central Bank of the Republic of Turkey), have cut the reserve requirements ratio for banks – (looking to Turkey’s banks to provide cheap credit to drive growth). However, as a result, dealers have been unimpressed and credit default swaps have spiked to multi-year highs. FX option prices have even exceeded the peaks seen around the global financial crisis and USD/TRY remains on its knees on the 7.00 handle – moments away from another supernova which could have massive repercussions for global markets.

Turkey’s central bank has announced it was taking all necessary measures to ensure financial stability after the collapse of the lira, promising to provide “all the liquidity the banks need”. Which is fine when the economy isn’t already overheating and when there is little risk of hyperinflation. The real risk here lies in emerging markets though and a run on their currencies, banks and a sell-off in what would then become toxic EM assets due to capital controls –   If EM  governments get the same idea as Turkey on such capital control measures – its game over and that is where the real possibility for contagion lies.

GBP/USD levels  

Implications for GBP/USD are quite simple, thrown in with the Brexit risk, the downside is open all the way through to 1.2350 initially and then 1.2100 before 1.1980 in the near term. GBP shorts have already been continuing to grow as fears over the chances of a hard Brexit tightened their grip and with Brexit talks commencing again this week, then throw in a massive flight to the greenback with the Fed hiking, Trump’s administration’s recent tax measures and then as investors pull out of EMs but can’t find the liquidity in offshore dollars where borrowers are unable to service their debts to their creditors – (the world created new dollar-denominated debt faster than the Fed created money so there is a miss-match between all the dollar-denominated debt and the investment flows needed to service them), then the greenback has to go up.

On the approach to the June 2017 low at 1.2590 and through 1.2350 and then 1.2100 before 1.1980, 1.1938 could be the trigger to 1.1400 or 1.1200. “Our central view is that GBP/USD will be trading around the 1.29 area on a 12 mth view.  On a hard Brexit, we see risk of a move to 1.12,” analysts at Rabobank argued.