Investors need to watch Lira closely

8 May, 2019

Recent history is repeating itself for the Turkish Lira, and the reaction in the currency following the decision from the election board to re-run the Istanbul mayoral election means that we can’t rule out the possibility that the momentum that led to the August 2018 historic crash will happen once again.

International investors are alarmed by this incredible move, and selling the Lira like hotcakes as a result. Re-running the Istanbul race simply raises the stakes of an extended period of further political and economic turmoil in an emerging market that has caught the eye of investors for all the wrong reasons over the previous 18 months or so, and the only answer to the equation that points to additional problems for Turkey is to sell the Lira. International investors have clearly lost a great deal of confidence in investing in Turkey as a result of endless concerns that are not only limited to an ongoing recession as a result of currency chaos, repeated fears over central bank independence and relentless political risk that I can only see further sustained selling momentum for the Turkish Lira on the road ahead.

What has transpired in the headlines around Turkey in recent days has yet to carry the contagion impact that stole the attention of global markets in August 2018, but another brutal short squeeze in the Turkish Lira would stand as a deep threat to that occurring.

 

EM currency outlooks hangs in balance of US-China trade talks – Traders stock up on Yen

The third trading day of the week is continuing the theme of anxiety across global markets as a result of investor nerves over what twist the US-China trade headlines will take next. Investors are clearly buying the Japanese Yen on fears that President Trump will carry through with his weekend Twitter threat to impose further tariffs on Chinese goods at the end of the current week, and the Yen is once again acting as the destination of safety for investors.

Some hope does however remain that a resolution will be found with yet another round of US-China trade negotiations underway, but those hopes are becoming faint. Another round of tariffs from President Trump has not been priced in, and confirmation of the weekend threat will carry heavy implications for risk appetite, and particularly emerging market currencies.

Market panic would represent bad news for the likes of the Chinese Yuan, Malaysian Ringgit and Indonesian Rupiah to name just a few of the currency exposed, while stock markets including those in areas like Singapore, Japan and South Korea will not be exempted from the expected period of risk-off that would be upon us, if additional tariffs on Chinese goods are imposed.

One might even want to add that the future outlook of emerging market currencies for not only the remainder of Q2, but likely also the second half of the year does rest on the outcome from the trade talks between the United States and China over the coming days. An additional round of tariffs from the United States on China does mean the USDCNY can return to levels of at least 6.80 and above, but one should not discount that broad weakness in the Yuan will also drag its emerging market counterparts by the same direction.

In other words, the road that the Yuan turns next will take emerging market sentiment along with it.

An escalation in the long-standing trade tensions will also mean that the recent highs seen in stock markets will become attractive selling targets for investors. Safe haven flows would lead to an extended run of gains for the Japanese Yen, while the path to a potential 100 in the Dollar Index would be opened up if further tariffs by the end of this week are imposed. 


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