USD jumps on solid jobs data, lira falls

The US dollar rallied and the 10-year yield jumped to 2.0390%, as the solid US jobs report released the dovish pressure on the Federal Reserve (Fed) on Friday. Data showed that the US economy added 224’000 nonfarm jobs in June, well above the 160’000 expected by analysts. The unemployment rate rose from 3.6% to 3.7% and the average earnings growth remained unchanged at 3.1% y-o-y, yet the participation rate improved from 62.8% to 62.9%.

The solid US labour data will certainly bring investors to review their Fed expectations in favour of a less dovish monetary policy. Hence, all eyes are on Fed Governor Jerome Powell, who will deliver his semiannual testimony before the Congress on Wednesday. The FOMC meeting minutes will also be released on the same day. Both the FOMC minutes and Governor Powell’s testimony should remind investors that the US may need a gentle monetary support to prevent the US – China trade war from interfering with the US economic growth, but a significant policy easing is probably not necessary just yet.

Hence, the US markets could be expected to rectify their recent risk rally. The S&P500 (-0.18%), the Dow Jones (-0.16%) and Nasdaq’s composite index (-0.10%) closed a touch lower on Friday and the US equity futures remained offered in Asia.

US sovereign bonds sold off, although the probability of a 25-basis-point Fed rate cut in July remained priced at 100%. However, the expectation of a 50-basis-point cut waned.

Asian equities kicked off the week on a negative note. Shanghai’s Composite dropped as much as 3% and Hang Seng erased 1.88% on the back of escalating protests in Hong Kong. Australia’s ASX slipped 1.07%. Nikkei and Topix fell 0.95% and 0.73% respectively. Even a cheaper yen couldn’t increase investors’ appetite in Japanese stocks.

Gold tumbled below the $1400 mark an ounce. There is potential for a deeper downside correction if the Fed expectations were to become less dovish. The key support to the May – July positive trend is seen at $1375, the major 38.2% Fibonacci retracement.

The FTSE (-0.10%) and DAX (-0.33%) futures hint at a negative start in Europe as well.

The FTSE is expected to open 8 point lower at 7545p.

Cable slipped below the 1.25 mark on Friday following the US jobs report.

Inside the UK, polls continue hinting at a comfortable victory for Boris Johnson in the final round of Conservatives’ vote. Some 160’000 Tories will receive their postal ballots this week and decide who, between Boris Johnson and Jeremy Hunt, should take the reins of the party and the country before July 21.

The pound is better bid in Asia after Rory Stewart, a Tory MP, suggested an ‘alternative parliament’ to block a no-deal Brexit in an effort to tame worries that Boris Johnson would even suspend parliament to push through a no-deal exit by October 31st. Still, the political uncertainties, combined to a stronger US dollar, will likely continue weighing on the pound sterling moving forward. Sellers remain on top of the game and the pound-bears will likely continue challenging the 1.25-support.

Lira hammered as Erdogan ousts the central bank president

Turkey wakes up yet to another hectic day.

Turkish President Recep Tayyip Erdogan ousted the central bank president Murat Cetinkaya, as he has not supported his view that higher interest rates cause higher inflation. Hence, the interest rates under Cetinkaya’s lead were pushed and maintained at levels that Erdogan explicitly disliked.

As a result, Cetinkaya’s exit hints that a rate cut in Turkey may be imminent. But more importantly, the Central Bank of Turkey (CBT) may be preparing to lower the interest rates at an unsuitably faster speed compared to what could be absorbed by the market.

In this respect, even though the CBT was expected to start waning past year’s 625-basis-point tightening due to the taming inflation and significantly dovish Fed expectations, the sudden ousting of Cetinkaya may in fact frustrate investors and limit their tolerance for lower lira rates due to increased policy risks.

The lira sold off heavily against the US dollar (-2.19%) and the euro (-2.17%) in the Asian session and the sell-off could gain momentum as Europe steps in.

Although the Cetinkaya incident is not a shocker for those who follow the challenging relationship between Erdogan and the central bankers in Turkey, it will certainly destroy what was left of the independence of the CBT.

Even more if the bank lowers the interest rates in the coming meeting.

Opening calls

FTSE to open 8 points lower at 7545        

DAX to open 43 points lower at 12525