EURO Breaks Key Support On Turkish Sovereign Risk

What started out as a lazy, summer Friday has turned into a chaotic "risk off" session thanks to a meltdown in the Turkish Lira (TRY).

The news hit the wires just as Asian dealers were packing up for the weekend and before many Forex traders in London were able to finish their morning tea.

The TRY has been under pressure from both economic and political fronts over the last several months and it appears that the European Central Bank (ECB) is now showing concern about the exposure that some Euro-zone banks have to Turkey's sovereign debt market.  

With the TRY now over 30% lower versus the USD this year, some of the leveraged margin accounts related to Turkish bonds would be feeling plenty of heat. Early reports have suggested that UniCredit and BNP Paribas are two of the banking names with large TRY sovereign exposure.

Ordinarily, default risk will take a few months to acutely manifest into a market crisis. However, with Turkey's political rift with the USA widening after this week's meetings in Washington, there is a real and present concern that contagion risks could pile up rapidly.

On balance, we consider the Target 2 risk to represent a greater longer-term risk to the Euro-zone banking sector, the EUR currency and will look to position accordingly.

One of the news reports mentioned a series of EUR/USD options worth about $4 billion struck around 1.1500. These options are live until late next week. With the EUR/USD trading as low as 1.1460 earlier, we would expect to see choppy trade until some of the "gamma" exposure is hedged out of the trade.

Bank of England

The Bank of England raised UK rates a week ago. Since then the GBP/USD has dropped seven trading session in a row. With Turkish events grabbing the headlines, today's UK GDP numbers may be pushed to the back burner.

However, we believe a number in the .3% could offer the Sterling a stable platform to find some bids into the weekend. Our long GBP/USD position from 1.2910 was stopped out at 1.2840.


The USD/JPY has traded in a narrow, 50-point band between 110.70 and 111.20. If the risk-off trade continues to weigh on the pair, we will likely see the range broken to the downside. The next key level is 110.20.


With no help on the interest rate front from the RBA, the AUD/USD has dropped to a new low for the year at .7265.

Foreign exchange and derivatives trading carry a high level of risk. Before you decide to trade foreign exchange, we encourage you to consider your investment objectives, your risk tolerance and trading experience. It is possible to lose more than your initial investment, so do not invest money you cannot afford to lose. Seek advice from an independent financial or tax advisor if you have any questions. The FSG and PDS are available upon request. If there is any advice on this site, it is general advice only and has been prepared by Synergy Financial Markets Pty Ltd AFSL 403863. Synergy Financial Markets Pty Ltd has made every reasonable effort to ensure the information provided is correct, but Synergy Financial Markets Pty Ltd makes no representation nor any warranty as to whether the information is accurate, complete or up to date. To the extent permitted by law, Synergy Financial Markets Pty Ltd accepts no responsibility for any errors or misstatements, negligent or otherwise. The information provided may be based on assumptions or market conditions and may change without notice. Synergy Financial Markets Pty Ltd, its associates, officers or employees may also have interests in the financial products referred to in this information by acting in various roles. They may buy or sell the financial products as principal or agent and as such may effect transactions which are not consistent with any recommendations (if any in this information). Synergy Financial Markets Pty Ltd or its associates may also receive fees or brokerage for acting in the above capacities.