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Turkey Gets A Reprieve Pre-U.S. Thanksgiving, But Capital Strike May Not Be Over

By Marc ChandlerForexNov 24, 2021 06:27AM ET
Turkey Gets A Reprieve Pre-U.S. Thanksgiving, But Capital Strike May Not Be Over
By Marc Chandler   |  Nov 24, 2021 06:27AM ET
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The dramatic collapse of the Turkish lira was like an accident one could not help look at, but it was not an accident, but the result of a disregard for the exchange rate and compromised institutions. The lira was off around 15% at its worst yesterday, before settling 11.2% lower. After falling for 11 sessions, it steadied today (~2.7%), but the capital strike may not be over.

On the other hand, the Reserve Bank of New Zealand delivered the 25 bp rate hike and seemed to give hawkish guidance, and yet the New Zealand dollar was sold and the worst-performing of the major currencies, off 0.65% through the European morning.

The tech losses on Wall Street yesterday weighed on Asia Pacific equities today, where the large markets fell but in China. Europe's Stoxx 600 was less tech sensitive and was trying to snap a four-day air pocket, but early gains were reversed. The US futures pointed to around a 0.5% lower opening.

The greenback had a firmer bias ahead of the full economic calendar ahead of tomorrow's holiday. The yen was the notable exception. The greenback rose to a new multi-year high near JPY115.25 but came back offered and was straddling the JPY115 level in late morning turnover in Europe. Emerging market currencies were mixed, though the JP Morgan Emerging Market Currency Index was firmer after six consecutive down sessions.

Gold was steadying after a four-day drop that took it from around $1870 to about $1782. Oil extended yesterday's recovery after the concerted agreement to release strategic reserves from six countries, but was struggling to sustain the upside momentum. The market was unimpressed with the new supply and had it (and more?) discounted.

European (Dutch) gas rose 8% yesterday and remained firm today. Iron ore prices were higher for the fourth session, during which time it rose by around 20%. Copper was also firmer for the second session. It was up about 4.5% from the middle of last week's low.

Asia Pacific

The Reserve Bank of New Zealand hiked its cash rate 25 bp to 0.75%. It was widely expected, and many had leaned to a 50 bp move. The forward guidance saw the cash rate at 2.0% at the end of next year. The swaps market had this nearly priced in as well. This might help explain the profit-taking on the New Zealand dollar. The 2-year yield fell 14 bp, and the 10-year yield eased by 5.5 bp. New Zealand stocks defied the regional pressure and rose by about 0.6%.

Japan's economy has been recovering. The economy contracted by 0.8% in Q3, but after a slow start, the vaccination program has been successful. It has allowed a re-opening of the economy. This was evident in the flash PMI report. The manufacturing PMI rose to 54.2 from 53.2, and the services PMI improved to 52.1 from 50.7. The composite stands at 52.5 (from 50.7) and represents a new cyclical high. Recall that it bottomed in August at 45.5. The fiscal support being offered by the supplemental budget was pro-cyclical; it will accelerate the recovery.

The break of JPY115.00 saw limited follow-through dollar buying. It peaked near JPY115.25 in Asia and fell to around JPY114.80, where it found a bid in European dealing. The nearly $950 mln option that expires today at JPY115 was likely neutralized (hedged/offset), and the one at JPY115.50 for $1.2 bln may be too far away to be impactful. Our idea of a JPY113.-JPY115 range was being tested, but recall that earlier this month, the dollar slipped to almost JPY112.70. The range was not carved in stone, and some fraying was inevitable. Still, a move above JPY115.50 would suggest that this consolidation since mid-October was over, and a new and higher range was likely. Next:  JPY118-JPY120, maybe.

The Australian dollar leaked lower and briefly dipped below $0.7200 for the first time since Oct. 1. There is an option that is expiring today there for about A$355 mln. It steadied after early Asia Pacific trading and approached the nearby cap near $0.7230. A move above here would help the technical tone.

Officials appeared to have broken the one-way trading in the yuan. It was alternating between gains and losses this week, but the movement was small, and the yuan was virtually unchanged this week. The reference rate was set at CNY6.3903, slightly more than the market expected (Bloomberg) of CNY6.3898. Lastly, we note that South Korea was widely expected to hike the seven-day repo by 25 bp tomorrow, following a similar hike in August.


It has taken the better part of the two months, but the new German coalition appeared to have been agreed upon. However, what the soon-to-be Chancellor Scholz was inheriting is a mess. The Bundesbank warned recently that the economy may be stagnating this quarter (though the flash PMI yesterday did not confirm this), and inflation may be approaching 6%. Moreover, the COVID infection rate has reportedly doubled in the past two days. The US CDC put Germany (and Denmark) on a heightened travel advisory.

As one would expect, this was taking a toll on sentiment. The IFO investor survey showed this. The current assessment fell to 99.0 from 100.2. The expectations component eased to 94.2 from 95.4. The assessment of the overall business climate stood at 96.5, down from 97.7. After falling for the fifth consecutive month, it was at the lowest level since April.

The euro's losses were extended to almost $1.12. The weakness seemed most pronounced in Europe, which lent credence to ideas that European financial firms were key sellers, which some related to year-end adjustments. However, the three-month cross-currency basis swap steadied since Monday, and pressure on the euro remains.

We note that the two-year US-German interest rate differential rose for the fourth consecutive session yesterday to reach 135 bp, the most since last March, but is steadying today. Since the convincing break of $1.13, we do not see strong chart support until closer to $1.10.

Sterling made a margin new low for the year yesterday near $1.3345. It remained stuck near there in quiet turnover. The $1.3400 area offered nearby resistance. Here we saw little technical support until around $1.3165. 


The US holiday tomorrow was forcing a heavy data release schedule today. Not all the data of equal importance. Of the first set of reports, the weekly jobless claims will command attention. They have fallen for the past seven weeks and were at their lowest level since the pandemic (268k).

The November national employment report will be due at the end of next week, and another 500k jobs were thought to have been filled. The October trade balance and durable goods orders will be notable. Nearly all the October data has been reported better than expected. Growth differentials warned of the risk of a wider trade shortfall. The revisions to Q3 GDP (likely higher) will be unlikely to capture much attention as it was too backward-looking.

The second batch of data may see a bigger market reaction, especially in the debt market. The US will be expected to report a jump in personal spending (consumption needs to accelerate if the economy strengthens this quarter). Income will be likely to recover a bit from the 1.0% drop reported in September.

The market may be most sensitive to the deflators. Here inflation will be set to accelerate. The headline is projected to rise above 5%, while the core should peak above 4%. Lastly, new homes sales surged 14% in September and maybe lucky to sustain those higher levels in October.

Late in the session, when many in the US may be winding down ahead of the holiday, the FOMC minutes from this month's meeting will be released. The current focus is on the possibility that the Fed accelerates its tapering next month, and anything that sheds light on this could shape the market's reaction.

The US dollar reversed lower yesterday after reaching CAD1.2745. It settled near its lows (~CAD1.2670), but there was no follow-through selling, and the five-day moving average, which it has not closed below since Nov. 15, held (~CAD1.2660). Initial resistance was seen around CAD1.2700-CAD1.2720. We note that Canadian bonds were under some pressure, and the 10-year yield is above 1.80%, the highest level since April 2019.

The dollar rose to MXN21.30 yesterday and remained firm, even if off the high today. News that Mexico's President pulled the nomination of Herrera, the former finance minister, as the next central bank governor, injected some volatility into the peso.

Reports suggested that Herrera's nomination was retracted a few months ago but was kept confidential. It was not clear what happens next. Some suspect Herrera may still get the nomination. It does not appear that any official statement or clarification was provided.

The median seemed to be playing up the likelihood of some announcement in the coming days. Meanwhile, Mexico reports its bi-weekly CPI figures, and inflation is still accelerating. Tomorrow's final Q3 GDP is expected to confirm that the economy contracted. The dollar recorded the high for the year against the peso in March near MXN21.6360.

Turkey Gets A Reprieve Pre-U.S. Thanksgiving, But Capital Strike May Not Be Over

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Turkey Gets A Reprieve Pre-U.S. Thanksgiving, But Capital Strike May Not Be Over

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Comments (1)
Selçuk Emre Ünal
Selçuk Emre Ünal Nov 24, 2021 2:17PM ET
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I hope the Turkish lira does not continue to depreciate :(
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