Dollar correction to follow Turkish recovery?

The potential for a meltdown in emerging markets following the virtual collapse of the Turkish Lira was averted yesterday as Qatar stepped in with a series of loans and investments that will shore up the economy.

However, this potential end to a financial crisis brings political concerns given the relationship between Qatar and Iran. This could push NATO member Turkey into closer links with Russia which has significant interest in the area already.

The dollar, which had been setting new highs recently as the U.S orchestrated the financial situation could become embroiled in a far more serious geopolitical row which it cannot control so easily.

Turkish President Erdogan immediately announced tariffs on several Turkish imports from the U.S. including vehicles and announced a boycott of American electrical products.

The immediate reaction from the market has seen a correction for the dollar and buying of (safe haven currencies) Swiss Francs and Japanese Yen. The political dimension to what started as a diplomatic row that the U.S believed it could dominate now has the potential for serious repercussions.

Yesterday, the dollar had continued the rally with the index reaching 96.99 before an abrupt turnaround saw it close little changed at 96.72. Overnight it has fallen to a low (0530 BST) of 96.45.

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Sterling slide to abate with dollar correction?

The pound fell again yesterday against the dollar and euro despite a small uptick in inflation which meant that the Central Bank’s policy of (very) gradual hikes in interest rates will stay in place, despite fears over the economy post-Brexit. CPI in July rose to 2.5% from 2.4% in June and is now running pretty much neck and neck with wage inflation.

In a continued illiquid vacation driven market, the news had little effect on the pound which continued to drift lower reaching a low of 1.2661 versus the dollar until the dollar retreated on the back of the Turkey/Qatar news reaching 1.2728 so far this morning. The pound’s recent fall has been attributed to both the concerns over a hard Brexit and a bout of dollar strength. Since the Brexit news fades, and the dollar itself corrects, Sterling could recover a little poise and move back towards 1.2780/1.2820 where there remains selling interest.

Versus the euro, the pound fell back through 1.1200 as the single currency showed a greater potential for recovery versus a weakening dollar.

The rise in inflation seen in July could partially be attributed to the weakness of the pound but today’s retail sales data will provide a guide to the performance of the consumer during an uncommonly hot British Summer.

It is expected that retail sales will have risen by 3% in July, up from 2.9% in June bringing a little relief to the High Streets that have been suffering recently

Euro calm as contagion fears subside

The fear of another financial crisis engulfing the Eurozone has largely dissipated with the seeming solution to the potential of the Turkish lira crisis. The worries over contagion due to the exposure of banks from several Eurozone countries may herald further regulation but for now the risk has been averted.

German Chancellor Angela Merkel took a different view of any potential crisis over the contagion, extolling the virtues of a common currency as a defence against speculation that has been seen in Turkey. Her view, while encouraging for the ECB, is concerning and synonymous with the view that bigger is better. This is true as long as all the eggs don’t find their way into a single basket.

It should serve as a wake-up call to the ECB just how quickly such issues can arise with banks who are free to take on exposure to an individual country without reference to the exposure of other Eurozone financial institutions. Such an issue will most likely be looked at seriously by the ECB with limits being adopted across the entire region.

With the potential fall towards long term support averted for now, the single currency will return to being reactive to the dollar.

The rally following the news regarding Turkey has so far reached 1.1391 following yesterday’s low of 1.1301. It is difficult to say that a medium-term low is in place given the current volatility but there is potential for this correction to reach 1.1540.