Turkey Turmoil Drives Trade in FX

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Market Drivers for January 29, 2014
G-10 follows EM moves as TRY rate hike dominates trade
All eyes on FOMC
Nikkei 2.70% Europe 0.64%
Oil $97/bbl
Gold $1254/oz.

Europe and Asia:
EUR GE GFK Consumer climate 8.2 vs. 7.8
GBP Nationwide HPI 0.7% vs. 0.7%

North America:

The major currencies followed every swerve and wiggle in the Turkish lira today as markets reacted to the interest rate hike by the Turkish central bank earlier in the day. The central bank of Turkey surprised traders by hiking rates 425 basis points to 12% versus consensus forecasts of 200 basis point hikes.

Initially the news ripped risk FX higher with USD/JPY soaring to 103.45 and Aussie rising to 88.27 in thin pre-Asia open trade. However, as the rally in the TRY began to falter risk FX currencies drifted lower with USD/JPY trading at 102.85 and AUD/USD at 87.70 by mid morning London dealing.

Although the Turkish central bank was hoping to arrest the turmoil in the forex exchange markets once and for all by using “shock and awe” tactics of a much larger than expected rate hike, clearly there is still plenty of skepticism amongst traders as to whether to current policy will stop the side in the lira. Meanwhile concern has spread to other emerging market pairs with South African rand coming under particularly intense pressure tonight as USD/ZAR spiked from 10.9000 to 11.1600 in overnight trade.

The persistent pressure from EM weakness is now clearly driving the trade in G-10 FX as traders continue to worry about spillover effects, but focus will change later today when the FOMC will announce its latest plans to taper QE. The key question concerning the market is whether the Fed will make note of the recent weakness in US data and address the brewing problems in EM economies.

Any hint of caution from US monetary authorities is likely to push USD/JPY back below 102.00 as markets react to more dovish Fed posture. However if the FOMC sticks to its schedule of 10 Billion monthly taper and maintains a generally upbeat tone in its communique the pair could shrug off its early morning jitters and push to fresh session highs as markets take solace from Fed’s optimism.

Boris Schlossberg
Managing Director

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