Morning Report: 13 August 2018

13th August 2018

GBP. Sterling has traded downwards for the last 7 days but is holding its open this morning. Last week’s Gross Domestic Product release for Q2 did little to stem sterling’s slide, as, despite the quarterly reading being on target at 0.4%, June’s month-on-month reading slipped slightly below the 0.2% forecast, at 0.1%. The key for sterling to reverse its current downtrend may be in this week’s data. Labour market data is released tomorrow at 09:30 BST, with the Consumer Price Index measure of inflation Wednesday, and Retail sales wrap up the data-heavy week on Friday.

EUR. Concerns over how the rapid depreciation of the Turkish lira may negatively impact certain European banks sent the single currency decisively through an important technical support level on Friday against the dollar, leading EURUSD to its lowest point in a year. The European Central Bank shared its worries on Friday that Turkish borrowers may not have properly hedged against the sharp depreciation of the lira, which could lead to widespread defaults on these loans. This week we see the second reading for Q2 Eurozone GDP on Tuesday and the Final reading of July’s CPI on Friday, while further clarity on how the Turkish situation may impact European banks is expected to be a driver for the single currency as well.

USD. In a week of currency despair, as emerging markets started to slide, the dollar came out the sole currency gainer. The DXY composite dollar index broke the range it had been trading in since tariffs were implemented on July 16th as the dollar broadly rallied against G10 counterparts too. A doubling of Steel and Aluminium tariffs on Turkey compounded the safe haven injection that caused the dollar to rally on Friday, eventually leaving the greenback 0.75% up on its opening price. With little top-tier data released this week, emerging market “contagion” and its effect on the euro along with other G10 currencies will be the likely dollar mover for the week.

CAD. The loonie fared the best out of the G10 currencies last week when discounting the “safe haven” currencies CHF and JPY. With strong fundamentals and unemployment falling even further to 5.8% in July, the loonie stemmed losses against the dollar as investor sentiment still remains positive around the Canadian currency. This is as expected due to the Bank of Canada the most likely to match the Federal Reserve’s tightening cycle. This week’s data releases are loaded to the back end with the Consumer Price Index measure of inflation released on Friday.

FX Elsewhere. The big drop in the Turkish lira is sending ripples through the FX pond and has sent USDZAR to a two year high and EURCHF to a one-year low. The Turkish lira itself traded above the USDTRY 7.00 level this morning in the Asian session after President Recep Erdogan failed to comfort global financial markets on Friday and instead chose to aim his speech mostly to his domestic audience. Erdogan telling the audience to gather the gold, dollars and euros from under their pillows doesn’t seem constructive in the current Turkish environment, where the biggest concerns are the soaring inflation and the independence of the central bank to freely reply to this that is highly questioned. The failure of Turkish politics to adequately respond to this situation summons the impression that the situation in Turkey will deteriorate even further in the short run.