Market Commentary: Dollar at four week high, TL slumps

The U.S. dollar rose across the board to hit a near four-week high against a basket of currencies on Friday, as economic data showing the COVID-19 pandemic’s continuing toll on the economy boosted demand for the safe-haven currency.  Turkey’s lira led losses across emerging-market currencies on Friday as a survey showed 2021 inflation remaining elevated, while BIST-100 stock index fell 1.43%.  Erdogan’s statements denouncing high interest rates and confirming negotiations with Russia regarding a second order of S-400 anti missiles rockets may have soured off investors.

 

Data on Friday showed U.S. retail sales fell for a third straight month in December amid job losses and renewed measures to slow the spread of COVID-19, further evidence that the economy lost speed at the end of 2020.

 

The weak data dragged U.S. Treasury yields lower and U.S. stocks fell as investors turned more risk-averse on Friday.

 

“I feel that after all the optimism regarding vaccines, we are now living the reality of a very slow rollout, which is weighing heavily on business activity,” said Juan Perez, senior currency trader at Tempus Inc in Washington.

 

“Until we have more guarantees on the medical front, markets will not continue to flourish despite whatever financial aid may be on the way,” Perez said.

 

President-elect Joe Biden on Thursday revealed a nearly $2 trillion proposal to address the economic harm from the COVID-19 pandemic that included $20 billion for vaccine distribution and $50 billion for testing. It builds on the $982 billion COVID relief bill passed in December, more than tripling the funding allocated to state and local governments for vaccine distribution.

 

The U.S. Dollar Currency Index was 0.50% higher at 90.721, on pace to finish the week up 0.7%, its best weekly showing in 11 weeks.

Rising coronavirus infections also curbed risk appetite, as daily cases in China hit their highest in more than 10 months.

France will tighten its COVID-19 border controls and bring its curfew forward by two hours, while German Chancellor Angela Merkel said she wanted “very fast action” to counter the spread of virus variants after Germany had a record number of deaths.

The dollar’s rebound from three-year lows, which began last week, may have some more room to run if the state of the economy worsened, but the currency’s longer-term outlook remained weak, analysts said.

“While short-term, the U.S. dollar could extend further, the big-picture backdrop for the dollar remains negative,” MUFG currency strategist Derek Halpenny wrote in a note to clients.

The deteriorating global risk backdrop sent sterling 0.7% lower though data showing Britain’s November lockdown was less damaging for the economy than expected kept a floor under the currency.

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The lira dropped as much as 0.7%, underperforming its peers in Europe, the Middle East and Africa (EMEA), after a central bank survey saw end-2021 inflation at about 11.15%, compared with more than 14% in December.  Erdogan bashed high interest rates, ahead of the Central Bank MPC the coming week, but he is unlikely to interfere with governor Naci Agbal at this juncture. Nevertheless, poverty and unemployment re rising rapidly in Turkey, with business community clamoring for more state support and lower rates.

Erdogan also defied US and NATO by defending Turkey’s decision to buy S-400s, adding that he plans to order more batteries of the Russian weapon.  Turkey’s 5-year CDS prices, which briefly dipped below 300 basis points, rose to 320 pips range on Friday.

 

Despite still EM-high yields, the Treasury is expected to announce a new Eurobond issue, claims financial press.  IIF chief economist Robin Brooks tweeted:

“There’s a “Wall of Money” to EM since the COVID-19 vaccine news in November. Big winner by far is Turkey, where foreign flows into stocks and bonds now exceed anything seen in recent years and are the strongest since 2012. Foreign investors are taking note of the new policy team!”

With most experts predicting only temporary dollar strength and Turkey’s new economic policy team taking small but steady steps to return to orthodoxy, foreign financial flows are indeed expected to favor the country.  However, the prospects of further TL strength are probably misplaced, as state banks and energy SEEs are actively buying FX, while CBRT is on the prowl to increase its FX reserves in case of further dollar weakness.

 

Reuters, ParaAnaliz, Turkish press

 

Published By: Atilla Yeşilada

GlobalSource Partners’ Turkey Country Analyst Atilla Yesilada is the country’s leading political analyst and commentator. He is known throughout the finance and political science world for his thorough and outspoken coverage of Turkey’s political and financial developments. In addition to his extensive writing schedule, he is often called upon to provide his political expertise on major radio and television channels. Based in Istanbul, Atilla is co-founder of the information platform Istanbul Analytics and is one of GlobalSource’s local partners in Turkey. In addition to his consulting work and speaking engagements throughout the US, Europe and the Middle East, he writes regular columns for Turkey’s leading financial websites VATAN and www.paraanaliz.com and has contributed to the financial daily Referans and the liberal daily Radikal.