Lira Rallies on Cut in Swaps, Fails to Dent Broadbased Dollar Demand

  • The Turkish lira is extending yesterday’s recovery today on the back of actions by officials that are aimed at limiting foreign access to the lira to short
  • If the lira’s dramatic plunge hit other markets, its recovery appears to have gone largely unnoticed
  • After a quiet couple of days, the US economic calendar is chock full today
  • Bank Indonesia delivered a hawkish surprise
  • Argentina July CPI is expected to rise 31.2% y/y

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Brief Respite but Little Relief

  • Corrective pressures grip the capital markets today, helped by the easing of the selling pressure on Turkey
  • Favorable European economic data was insufficient for the euro to hold on to even modest upticks
  • Nor was the UK data enough to deter selling into sterling’s gains
  • Disappointing Chinese data could not send the yuan lower, though Chinese equities are a different story
  • Turkey may not be a systemic shock to the EU, but it is still a new headwind
  • Argentina‚Äôs central bank hiked rates 500 bp to 45% yesterday; Poland, Czech Republic, and Hungary reported Q2 GDP

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Drivers for the Week Ahead

  • One of the key questions facing investors is whether Turkey is the canary in the coal mine the way Thailand was in the 1997-1998 Asian Financial Crisis
  • While our outlook for the dollar remains constructive, it is over-extended
  • The US retail sales report Wednesday may be the most important data release this week
  • The UK reports employment, inflation, and retail sales in the coming days
  • Minor measures were announced by Turkey as pain threshold has not been crossed yet
  • EM FX is coming under greater pressure as the situation in Turkey deteriorates

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Sterling Remains Under Pressure, Greenback Firms Broadly

  • The RBNZ pushed out by a year to Q3 2020 when it expects a rate hike may be appropriate
  • CAD staged an impressive recovery yesterday from a sell-off spurred by an escalation of the diplomatic dispute with Saudi Arabia
  • The economic calendar in North America picks up today as the US reports weekly initial jobless claims, PPI, and wholesale trade and inventories
  • EM FX remains broadly under pressure, with noteworthy underperformance by RUB and TRY
  • Philippines central bank hiked 50 bp to 4.0%, as expected
  • Mexico July CPI is expected to rise 4.79% y/y; Peru central bank is expected to keep rates steady at 2.75%

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Sterling Sold While Dollar and Yen Catch a Bid

  • Fears that the UK could leave the EU in a little over six months without an agreement continue to drag sterling lower
  • The US announced that the 25% tariff on $16 bln of Chinese goods will go into effect August 23
  • China reported its July trade figures today
  • RBNZ is widely anticipated to remain on hold today; BOT kept rates steady at 1.5%, as expected
  • Brazil IPCA consumer inflation is expected to rise 4.41% y/y

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Turn Around Tuesday for the Greenback

  • The US dollar is pulling back today after yesterday’s advance
  • Reserve Bank of Australia kept rates on hold as widely expected
  • Japan reported two data series
  • China unexpectedly reported that its reserves rose by about $5.8 bln in July to $3.118 trln
  • Philippines July CPI rose 5.7% y/y; Taiwan July CPI rose 1.75% y/y; Brazil COPOM releases its minutes

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Drivers for the Week Ahead

  • With most of the major central bank meetings and important economic data out of the way, the dog days of August are upon us
  • US July CPI data on Friday will warrant some attention
  • Japan reports Q2 GDP at the end of the week ahead
  • The UK reports June trade and IP data Friday, along with the first estimate of Q2 GDP
  • The Reserve Bank of Australia and the Reserve Bank of New Zealand hold policy-making meetings
  • China has an active economic schedule in the coming days; EM FX has come under pressure again

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Greenback Remains Firm Ahead of Jobs as Italian Debt Moves into Spotlight

  • With the US threatening to escalate the trade conflict with China, many observers are trying to link it to the dollar’s strength
  • Today’s US employment is a useful exercise in taking the economy’s pulse, but the policy significance is nearly nil
  • UK data disappointed a day after the BOE delivered a rate hike that many private sector economists think is a mistake
  • Australia reported slightly better than expected June retail sales (0.4% instead of 0.3%)
  • Turkey July CPI rose 15.9% y/y while PPI jumped 25% y/y

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BOJ Surprises, BOE on Tap, Trade Worries Weigh on Stocks and EM

  • The BOJ surprised today by buying 5-10-year bonds even though the 10-year yield was well within the target band
  • As both the US and China dig in with regards to tariffs, EM is coming under pressure again
  • Nearly everyone expects the BOE to hike rates today
  • The US imposed sanctions on two Turkish officials over the continued detention of American pastor Andrew Brunson
  • Late last night, Brazil COPOM kept rates steady at 6.5%, as expected
  • Czech National Bank is expected to hike rates 25 bp to 1.25%; Banco de Mexico is expected to keep rates steady at 7.75%

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