Week ahead: EM currency crisis and key UK data

Another week has flown by and what a disastrous one it has been for the likes of the Turkish lira and to a lesser degree the British pound, but once again it has been a good for the US dollar. Next week should be equally exciting as there are a few important data releases to look forward to, while the ongoing situation in Turkey could bring about further volatility – not just for the lira but the stock markets too.

Turkish currency crisis hits sentiment

To say it has been a bad week for the Turkish lira is an understatement. The beleaguered currency kept plunging throughout the week and on Friday it dropped another 10% or so after US President Trump decided to double the tariffs on Turkish steel and aluminium imports. Turkey is suffering a currency crisis at the moment with the lira repeatedly falling to new record lows, as my colleague Matt Weller wrote about HERE. As well as the lira, other emerging market (EM) currencies have also come under intense pressure this week, including the Argentinian peso, South African rand and Brazilian real. The Russian ruble also took a tumble after the imposition of fresh economic sanctions from the US government.

Stocks fell towards the end of the week as contagion from the EM currencies crisis spread to the wider markets. This helped to underpin perceived safe haven currencies such as the Japanese yen and Swiss franc. As a result, both the EUR/JPY and EUR/CHF broke down sharply. However, gold and silver were again undermined by the dollar, even if bond yields fell back sharply.

Pound’s woeful week

Meanwhile the pound also endured a tough time. Against the dollar it fell by a good 285 pips or 2.2% from its high of about 1.3000 to a low so far of 1.2725. While part of the pound’s weakness was due to the dollar – with the Dollar Index rising about 1 percent – the vast majority of the GBP/USD’s losses was in fact due to the weakness in pound itself. Indeed, against the Japanese yen, sterling lost 374 pips or just under 2.6% from its high to the most recent low. Meanwhile against the euro, the pound was sharply lower for most of the week, too. However, a breakdown in the EUR/USD saw the single currency tank over the last two days of the week which saw the EUR/GBP also reverse. The euro’s reversal was partly because of concerns about European banks’ exposure to Turkey.

Turkey to remain in focus next week

Going into the new week and the situation in Turkey will remain in focus. If the situation there gets from bad to worse, we could see an even more pronounced sell-off in the stock markets in early next week. The yen and franc could be the major beneficiaries again in the FX markets. The opposite is also true if the situation were to hopefully calm down.

UK wages and inflation should move pound

Elsewhere, the pound will again garner some attention after its big falls over the past couple of weeks. It has become evident that the market is really concerned about the prospects of a no-deal Brexit; so much so that not even a rate hike from the Bank of England was enough to lift the currency last week. Indeed, the pounded could not even rise on the back of decent domestic economic numbers released on Friday, which showed GDP expanding by 0.4% quarter-over-quarter in Q2 and construction output surging 1.4% month-over-month in June. Let’s see if it will respond more positively to the upcoming wages and inflation figures. The UK Average Earnings Index, due for release on Tuesday, is again expected to have risen 2.5% in the three months to June compared to the same period a year ago.  The Consumer Price Index (CPI) measure of inflation, due in on Wednesday, is expected to have accelerated to 2.5% year-over-year in July, up from 2.4% in June. If inflation turns out to be more robust than expected, then this will fuel speculation over further rate hikes from the Bank of England. Inflation may rise more sharply in the coming months as the weakness in the exchange rate will likely push up import costs. If the pound’s weakness persistence then in the long-term this should help to boost exports, assuming Britain will strike a good deal with the EU. So whichever way you look at it, sterling will probably make a good comeback in the longer term outlook. But speculators are obviously short sighted as they seek to take advantage of momentum. So for the time being, the pressure remains and it could be a while before it bottoms out. But we think it will happen soon.

Other data highlights

Among the other notable data points on the economic calendar next week are Chinese industrial production as well as German and Eurozone GDP estimates on Tuesday; US retail sales and industrial production on Wednesday; Aussie employment figure and US hosing market data (building permits and housing starts) on Thursday, and Canadian CPI on Friday.