Heavy unwind on ruble and lira, UK inflation falls to 1%

Forex News and Events

The FX and commodities are volatile today as WTI crude approaches 3% loss on the session. The UK inflation dips to 1.0% on year to November, while the USD/RUB extends gains at all-time-highs despite the surprise CBR rate hike from 10.50% to 17%. Elsewhere, the carry reversal combined to political risks push USD/TRY to fresh record highs, the appetite in EUR-TRY rate spread is fully offset by the spike in implied vols.

Aggressive rate action from the CBR

In a wildly surprising move, the Russia Central Bank stated that it would increase its key interest rate to 17.0% from 10.50%, effective immediately. On the surface the decision was aimed at slowing the RUB collapse and lowering inflation risk. Yet, the massive unexpected adjustment reeks of panic and desperation. This hike come on the heels of the largest one-day drop in the ruble and largest single interest rate increase since 1998 prior to Russia default. However, despite the enticingly high yield, there is increasing probably that Russia will dip into recession due to the sliding oil prices making any long Russia trading extremely risky. In addition, with high-yield credit spreads making significant changes there is a material macro move to rotate from risky assets. And right now Russia is deemed one of the most risky assets on the market. It is uncertain that today’s hike, despite its size, will halt Ruble selling. Besides the geopolitical tensions, the oil exports stand for more than 50% of Russian income and with crude contracts trading below $55, we see the selling pressures on RUB hardly easing.

UK inflation drops to 1%

The UK inflation dropped by 0.3% on month to November (vs. 0.0% exp. & 0.1% last), pulling the yearly inflation down to 1.0%, significantly slower than 1.2% expected (& 1.3% last). The most of the CPI softness being already priced in, GBP/USD rebounded quickly after selling off to 1.5612.

At his speech on Financial Stability Report, the BoE Carney commented on housing markets, inflation and oil prices. Carney said that the housing market lost momentum, that the fundamental problem in UK housing is the “supply shortage”, while stamp duty change and low rates may revive the housing sector. He highlighted that the drop in oil is positive as it could support the economic growth, although it carries stability risk. “The CPI expectations could further be depressed” he added, as oil rallies to fresh lows. Combined to the strict stance on the fiscal leg (consolidation), the BoE has little room for surprisingly hawkish move, we keep our GBP-bias on the downside.

EUR/TRY implied vol spikes above 13%

After hitting our upper target at 2.75, EUR/TRY reversed direction sharply. The key unwind signal being the hike in volatilities, the spike from 8-9% to above 13% in one-month implied vols automatically cleared our bearish call on EUR/TRY on Monday. We expect the carry outflows to increase EUR/TRY-positive pressures after breaking the 200-dma (2.8790) on the upside. EUR/TRY tests resistance at 2.9488/3.00 (Fib 38.2% on January-November ease/psychological level). The 3-month cross currency basis rebounds alongside with the FX volatilities, confirming that the appetite in rate spread is now being fully offset by TRY-negative vols.

USD/TRY hits 2.3944, new record high. The pre-Fed USD appetite should help pushing the pair through 2.40-offers over the next trading sessions. Regardless of ECB, Fed news, the TRY is set to go through renewed wave of sell-off following global risk-off move, which in addition is amplified by rising political tensions recently. The average interbank repo rate hits the CBT overnight rate corridor upper end (11.25%). We stand ready for CBT intervention to cool-off the lira selling.

EUR/TRY volatility spikes above 13%