Turkey crisis' contagion to Mexico and Brazil seems all too likely
|Outlook:
The inflation data on Friday came in exactly in line with expectations, with headline CPI at 2.9% and core CPI at 2.4%, the most since September 2008 but still no match for the Fed’s preferred measure at 1.9%. All the same, the data reinforces the universal belief that the Fed is on track to hike again in September. Why this would be dollar-positive at this point is somewhat mysterious. We could just as easily have seen the dollar drop on the inflation announcement as a “sell on the news” event. Instead the Fed-affirming inflation story reinforced the flight-to-quality story.
Cause and effect in FX can be hard to untangle and sometimes the only way to get a guess is to imagine the effect of X if Y were in the opposite condition. If the Fed were not on rate-hiking program, would the Turkish crisis be spreading? If the US were not squabbling with Turkey—as NATO ally, let’s not forget—would the Turkish crisis be less dire? The squabble was a trigger, to be sure, but plenty of other triggers can be imagined. In other words, some situations are so dire that crisis is inevitable. Which of many possible triggers actually does the job doesn’t really matter all that much.
Turkey is not over by a long shot. Contagion to the other prime targets like Mexico and Brazil seems all too likely. The deduction is an ever-rising dollar (and ever falling yield) until Something Else comes along to shake things up. Even if European banks manage to hide or correct their exposure, the euro is a victim of contagion, too.
This is an excerpt from “The Rockefeller Morning Briefing,” which is far larger (about 10 pages). The Briefing has been published every day for over 25 years and represents experienced analysis and insight. The report offers deep background and is not intended to guide FX trading. Rockefeller produces other reports (in spot and futures) for trading purposes. To see the full report and the traders’ advisories, sign up for a free trial now!
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers.