News & Analysis

Although the US election remains contested by Donald Trump, this week’s main news was the release of positive data from Pfizer’s Covid-19 trials. Price action in G10 and EM FX has been indecisive, with the US dollar mounting a modest rally against several currencies that has come under threat of reversing on Friday. Looking ahead, vaccine news will remain solidly in focus this week, as will survey data and rate announcements from China.


Monday 16th

China industrial production and retail sales data for October are released at 02:00 GMT along with the 1-year marginal lending facility rate. China’s interest rate corridor has been unchanged since the post-pandemic adjustments back in March and we expect this to continue as policy remains supportive of the recovery. The domestic recovery is beginning to slow, which is only natural given the fast pace of the recovery to date, but the slip in the official October PMI release shouldn’t be over-read. Firstly, the slowdown in the official PMI wasn’t mirrored in the Caixin PMI reading that is known for being subject to a more rigorous seasonal adjustment. Additionally, the pullback in the manufacturing industry as highlighted by the official PMI reading is likely due to manufacturers drawing down on elevated inventory levels. Pantheon macroeconomics’ standardised variation of the finished goods sub-index suggests this shift towards inventory drawdowns began in October, with a drop in the reading from 0.7 in September to -1.3 last month. With this in mind, we don’t expect too much additional information from the IP data, while we expect the PBoC to continue holding rates this week as caveats to the slowing data points are plentiful. This means the emphasis will be on the release of retail sales data for October. With the economic recovery now reliant on domestic consumption as the global growth outlook remains mired with lockdown measures in other major economies, an expected 5.0% print in October’s retail sales data will provide a welcome reassurance for investors that China’s economic recovery remains robust. However, the likely rise in retail sales from 3.3% in September must be taken with a pinch of salt as the data is skewed by the inclusion of a longer than usual golden week holiday. This has had an elevated effect on consumption data, as evident in the services PMIs for October. The Monday session also includes a speech from RBA Governor Lowe at 08:40 GMT, which is entitled “Covid, Our Changing Economy and Monetary Policy”. The speech will bring greater than usual attention as it marks the first speech by the RBA Governor since the central bank cut rates and increased its QE purchases only last week. A summary can be found in last week’s Week Ahead.

Tuesday 17th

After Governor Lowe’s speech on Monday, the latest meeting minutes from the RBA are released at 00:30 GMT. With markets desperate for further details on the latest policy moves, namely the future path of the RBA’s QE programme, the minutes are set to be scoured in an attempt to measure how long the dovish stance by the central bank will be in play for. The focus then shifts to Norway where the Q3 GDP reading is released at 07:00 GMT.  We note that we wrote about the Norwegian GDP release in last week’s edition, however, the release of the data point was moved back by 5 days to be released on the 17th.

The mainland economy is expected to have rebounded by 5.2% QoQ in Q3 after contracting by 6.3% in Q2.

The central bank labelled the Q3 rebound as “surprisingly fast” back when it released its September monetary policy report, meaning markets are likely to be numb to a strong reading after previously pricing in the news. The economic calendar becomes relatively sparse for the rest of the day with just an appearance from the BoE Governor Andrew Bailey at 14:00 GMT. Speaking at the CityUK’s national conference, Bailey isn’t expected to divulge much additional information from what was already presented to markets in his speech at the ECB forum last week. However, with Brexit still ongoing, the UK economy under a state of national lockdown, and the BoE recently increasing its QE programme, eyes will be firmly fixated on any hints of negative rates.

Wednesday 18th

UK CPI data for October is released at 07:00 GMT, just prior to the Bank of England Chief Economist Andy Haldane’s speech at 10:30 GMT. Inflation data is out of scope for market participants at the moment given the current economic climate and limited implications for monetary policy, however, October’s CPI release is likely to see an uptick in inflation from 0.5% to 0.6% YoY. This change is expected to be driven by higher restaurant and hotel prices, which fell in October 2019. The focus will therefore be on Andy Haldane’s commentary at the CityUK’s national conference just a day after Governor Bailey’s. Haldane hasn’t been shy to voice his optimism over the UK’s economic recovery to date, with his comments last week on Tuesday about the Pfizer vaccine results being a “game changer” prompting a repricing of negative rate expectations in fixed income markets and a substantial sterling rally. Given this, Haldane’s comments may come under closer scrutiny than those of more conservative colleagues. South African retail sales data for September is released at 11:00 GMT and is expected to continue showing signs of improvement as the economy starts to recover as lockdown measures are eased. The median expectation from economists sees the data point printing at -2.6% YoY, up from August’s -4.2%. The day’s data calendar is then rounded off with the release of Canadian CPI data for October at 13:30 GMT. Again, the inflation data isn’t expected to be too crucial for market pricing, especially considering the deflationary forces in play and, therefore, the limited spillover to policy rate expectations.

Thursday 19th

Australian labour market data at 00:30 GMT will likely show a softening in the labour market recovery as the lifting of Melbourne’s lockdown measures won’t be visible in the data as it was recorded in the first two weeks of the month. Expectations suggest that the employment change will be around -20,000 for October, resulting in a 0.1 percentage point rise in the unemployment rate to 6.9%. The focus on labour markets will continue as Sweden’s labour market data for October is released at 08:30 GMT. While weekly jobless claims remain high, the recovery is still visible in Sweden’s labour market, which is likely to continue in October. The data calendar then shifts to central banks with the Central Bank of the Republic of Turkey at 11:00 GMT and the South Africa Reserve Bank in the afternoon. Following the recent replacement of the CBRT governor and Turkish Finance Minister, eyes will be firmly on the CBRT’s next meeting and whether the recent rally in the lira is a case of market participants setting themselves up for disappointment. In South Africa, the monetary policy committee has delivered close decisions for some time now, opting to hold rates by 3 votes to 2 at the last two meetings. Incoming data has proven positive in South Africa and will likely allow the SARB to maintain rates at 3.5%. However, with the domestic recovery proving slower than other EM peers and the external environment slowing due to the imposition of lockdown measures in major economies, the SARB may surprise markets by cutting rates by 25bps.

Friday 20th

The announcements of China’s 1-year and 5-year loan prime rates kickstart the Friday session at 01:30 GMT. Credit growth remains supportive in China and the economic recovery has proven to be robust, meaning the PBoC are unlikely to alter rates on Friday. The focus then shifts to the UK where retail sales data for October is released at 07:00 GMT. The collection of data between October 4th and October 30th is not likely to show the surge in spending at non-essential shops prior to the national lockdown was implemented on November 5th. Instead, the tightening of more localised measures likely led to October’s retail sales volumes contracting, with expectations sitting at -0.2%. The day is then rounded off with Canadian retail sales data for September at 13:30 GMT. The growth in retail sales volumes eased to 0.4% in August and will likely slow further in September as the broad economic recovery slowed and virus cases started to tick up towards the end of the month. However, the imposition of the 28-day lockdown measures in Quebec and Ontario won’t be captured in September’s data. Instead, pre-lockdown spending may have surged, overinflating the true level of consumer sentiment during that phase of the recovery.



This past week, markets have been cheered up with unexpectedly positive news on vaccine development. Pfizer and BioNTech SE reported on Monday 9th November that their jointly developed vaccine is over 90% effective, according to preliminary results of a broad study. Adding to these “extraordinary” results, the Eli Lilly & Co. antibody therapy was granted emergency-use authorization in the US. Later in the week, news indicating that the Russian flagship vaccine against Covid-19 showed a 92% efficacy rate followed suit, despite scientists and pharmaceutical companies previously claiming that more testing was necessary to validate the safety and effectiveness of the drug. Positive news contrasted with reports that the frontrunner Chinese vaccine faced a setback in its final-stage trial, with testing being halted in Brazil due to a serious adverse event. Markets are gearing up for another round of optimism next week, when results from the Moderna Inc. vaccine are due. Experts also indicate that positive results from the candidate vaccine of Oxford University and AstraZeneca are not far away.

The market’s response to the good news has mirrored investor’s improved expectations for the global economic recovery, despite significant uncertainties laying ahead.

Vaccine headlines prompted a massive equity rally worldwide, with the MSCI World Index reaching a fresh record high on the news. Fixed income markets also felt the brunt of the positive sentiment, with back-end bond yields pushing higher across the globe. US Treasury 10-year yields saw a nearly 23% rally on the news to their highest level since March. Dollar narratives have been mixed across G10 and EM spaces, since the vaccine stories have been competing with the aftermath of a contested US election, while infections in Europe and the US continue to spread. Beyond idiosyncratic factors, broad dollar trends do seem to remain negative, although weaker performance has been seen in other heaven currencies like JPY and CHF. Once the novelty of vaccine headlines pass, narratives on USD will likely turn to the speed and efficacy at which vaccination is actually carried out worldwide. As Central Banks also welcome the positive scientific results, Fed, ECB and BoE chiefs indicated this week that current economic projections and expected paths for monetary policy had already considered the immunization calendar hinted at this week.


US Treasury 10-year yields received an 8-month boost after the “extraordinary” vaccine preliminary data


The initial euphoria on the Pfizer vaccine news has been tempered with the non-trivial hurdles laying beyond the treatment approval. Logistic issues related to production, distribution and application of the vaccine add to questions about the effectiveness of the shot itself. As opposed to the more conventional protein-based vaccines that can be delivered through existing health care networks, the novel messenger RNA technology deployed in Pfizer´s shot presents several challenges. mRNA technology-based vaccines, which haven’t been implemented successfully to date, must be stored at -70˚C and injected within five days after defrost. This entails a huge effort in terms of deep-freezing infrastructure, storage and transportation networks, which is likely only feasible in advanced urban populations at best. Even without the sub-zero obstacle, the mass paramedical training required to administer the two-doses shot is a mammoth task to fulfill in a short period of time. Timing is particularly critical in areas with widespread vaccination centers, where previous vaccination campaigns have shown that many patients never return for the second shot.

With limited production capacity in the short run, questions arise regarding which countries are placed on top of the supply chain. Pfizer and BioNTech announced that they should be able to produce 1.3 billion doses of their shot by the end of 2021, enough to vaccinate 650 million people. About 50 million doses are expected to be available in 2020, half of which are reportedly being shipped to the US for 12.5 million subjects. The countries that have already placed orders with Pfizer and BioNTech SE enjoy a relative advantage since the unexpectedly positive preliminary data were released. Other countries that have also settled supply agreements with Moderna Inc. – whose vaccine employs the same mRNA technology as Pfizer- are poised to get a boost in the race against the pandemic, as the company is expected to release positive preliminary data as soon as next week.

Governments have been scrambling to get ahead in the race for vaccine supply.

This past week, the EU closed a 300 million doses deal of the Pfizer vaccine, the largest initial order the company has received to date. Germany´s Health Minister, Jens Spahn, signaled that the country would seek to secure 100 million doses from this accord, enough to cover 60% of the population. Spahn projected that 55% to 65% of the population needs to be inoculated for the vaccine to have a widespread effect. His Spanish peer, Salvador Illa, announced plans for vaccination of 10 million people by the end of 2020, which represents over one fifth of the national population. The U.S. and Japan follow the EU in the list of most total orders for both mRNA vaccines, with 200 million and 170 million doses contracted with Pfizer and Moderna respectively. The UK, which has a 40 million doses order with Pfizer comprising 30% of its overall population, is heavily reliant on the alternative vaccine by Oxford University and AstraZeneca (100 million doses pre-ordered). The protein-based technology used by this vaccine grants the UK a relative advantage in terms of easier logistical deployment (10 times cheaper according to a Telegraph source), although its potential efficacy remains unknown. However, many experts think Oxford´s vaccine is not too far behind, with results scheduled in a few weeks time.


Governments are braising the storm of vaccine supply, with advanced economies leading the race


Source: Bloomberg and Financial Times


The positive news on the costly Pfizer vaccine doesn’t bode necessarily promising for developing countries in comparison…

The complexities embedded by mRNA-vaccines increase the risks of major supply disparities across countries, placing the poorer countries in the worst position. This means that most of these economies could be forced into waiting for slower more conventional vaccines that can be delivered through the existing health care infrastructure. Pfizer already has demand from some developing countries like Peru, Ecuador and Costa Rica, although their small orders suggest limited deployment in those areas. The Covax facility, backed by the World Health Organization, aims to shorten this gap by raising $18 billion to purchase 2 billion vaccines for low and middle-income countries by the end of 2021. With some orders already placed by Covax, the fund is far short of its initial target, with only $1,8 billion raised so far.

Finally, questions remain around the potential hurdle relating people´s resistance to getting vaccinated, undermining the scientific efforts to fight the pandemic. Safety concerns are likely to be stressed further by the record speed at which the coronavirus vaccines have been created, tested and produced. A CNN poll conducted by SSRS in the US[1] suggests that only about half of Americans are willing to get the shot once it´s available. Moreover, the percentage of respondents prone to receive the treatment appears to have consistently dropped since May, when at least 66% of surveyed subjects would try a Covid-19 vaccine. Demographics matter in trusting the vaccines, with above-65 years old, male, white and non-Trump supporters more willing to take the vaccine compared to opposite groups. Health experts have warned that if enough people choose not to get a Covid-19 vaccine, it may prevent the US from herd immunity against the coronavirus. This pattern has gained fuel in some parts of Europe as well.


[1] The CNN Poll was conducted by SSRS from October 1 through 4, among a random national sample of 1,205 adults reached on landlines or cell phones by a live interviewer. Results for the full sample have a margin of sampling error of plus or minus 3.3 percentage points.




Non-existent FX reserves, sky-high inflation and a record-low lira is where Turkey’s economy currently stands After the lira plunged to record lows against the euro US dollar in the first week of November, hitting 10.2 against the euro and 8.58 against the dollar respectively, Turkey’s President Recep Tayyip Erdogan fired CBRT governor Murat Uysal, who was just 16 months in, and replaced him with the former finance minister, Naci Ağbal. In addition to this shift, Erdogan’s son-in-law also resigned as Finance Minister and was replaced with Lutfi Elvan.

Markets took the news favourably and the lira enjoyed its biggest one-day rally in two years on the hope that the replacement would be accompanied by massive policy changes.

Uysal withstood criticism from investors for refraining from hiking interest rates while the currency had lost more than a third of its value against USD this year and over 45% vs the euro. His attempt to avoid interest rate hikes was widely seen as a concession to President Erdogan, who is known for his controversial belief that high interest rates are a cause of inflation rather than a brake on it. Erdogan has persistently prioritised low rates to spur fast economic growth, despite double-digit inflation figures, however the cost of doing so is reflected in lira weakness, which in itself is politically sensitive for the President. This has often resulted in periods of dramatic hiking cycles to retain the currency’s value and bring the inflationary channel down despite Erdogan’s beliefs and the impact on growth. With Erdogan’s influence over monetary policy undermining the central bank’s independence and credibility, investors are right in remaining sceptical in what the new Governor can really do differently to his predecessors. However, recent comments from the President had markets believe that there may be an end to Turkey’s unorthodox policies, for now at least.

In a speech to members of the parliament from his ruling AKP party earlier this week, Erdogan stated that Turkey would “swallow a bitter pill” if needed to help the economy get back on track, and promised a better environment for local and foreign investors. Additionally, he said that he will be “more focused on earning trust and credibility in our economic policies, and we will bring down the country’s risk premium”.

One thing is clear from his comments: Erdogan is keen on gaining credibility in Turkey’s financial system. To do so, the first step is to contain inflation, which currently stands at 12%. The CBRT would need to hike rates by at least 275 bps to lift the one-week repo rate into positive real territory, where it needs to sit to control domestic inflationary pressures. But in order to gain credibility in markets, that is likely not going to be enough. With lira depreciation another main source of inflation, the CBRT’s initial rate hike needs to be substantial enough to signal to market participants that the hiking cycle is credible. By doing so, the pressure on the lira is likely to continue easing. This would help lower the inflationary channel and allow the hiking cycle to be eased and reversed more prematurely than under a more progressive hiking cycle. Bloomberg’s forecasted median foresees a 475 bps hike to the one-week repo rate to be symbolically significant for the new policy maker to gain markets’ confidence. While this will raise real rates into positive territory, it will only have a limited effect on the effective lending rate domestic banks are already subject to. Under Governor Uysal, interest rates were hike by forcing domestic banks to borrow at higher yielding windows by altering liquidity provisions in markets, however, this hasn’t boded favourably for FX markets. By raising rates by 475bps, the CBRT are likely to reset the interest rate corridor at a higher level and see a return of what occurred back in 2018 during the last lira crisis – a clear monetary policy system with the one-week repo rate acting as the de facto policy rate.

Along with a substantive boost in the one-week repo rate, the signalling in next week’s central bank meeting will be of utmost importance. If new Governor Naci Ağbal shows commitment that after the big initial hike, smaller ones will follow, markets will take this as a sign that the central bank plans to return to positive real rates. With Erdogan being a big advocate of low rates, however, the question will be for how long he would allow a more mainstream approach to economic policy. This is only a concern after the events of 2019, which saw the demise of the former CBRT governor Centikaya. This wasn’t because of the unfavourable amount of interest rate hikes that Centikaya implemented back in 2018, with the one-week repo rate hitting a terminal rate of 24%, but instead his reluctance to lower rates aggressively enough to win the support of the President. With the lira recovering to 7.7 against the dollar at the time of writing, the central bank’s decision will need to be substantial enough to signal a commitment to higher rates in the medium-run, otherwise markets can expect a big reversal in the recent lira rally.


Turkish lira rallies on the back of change in policy makers before next central bank meeting


Ranko Berich, Head of Market Analysis
Simon Harvey, FX Market Analyst
Olivia Alvarez Mendez, FX Market Analyst
Ima Sammani, FX Market Analyst



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