Black Swan Friday (that we should have seen coming) as it happened - Turkey risk and the tide of US dollar funding


  • The markets open today risk-off, of course, following last Friday's dramas over the TRY.
  • However, before looking into the ins-and-outs of the TRY, there is something far more concerning that markets are bringing back to the fore.

While one might assume that the risk here lies with the contagion within the European banks over the Lira's massive 75% decline YTD, (where 27% of that was all done in just last week's business), the real matter at hand is what the BIS had warned of back in 2015 - and that is the global shortfall in the greenback. Those nation's currencies that have heavy debt exposure to the dollar got whacked during Friday's mayhem and it should not be ignored.  

The ZAR, MXN/, BRL and RUB all took a hammering

While Washington's antagonistic proposals over trade and punitive sanctions were a trigger to Friday's dramas, they were not the root cause. The price for the world’s banks for accessing US dollar liquidity is on the rise and this matters, a lot, because the smooth running of the world's financial ecosystem depends on the world’s bank's liquidity of a pool of affordable greenbacks to sustain their operations and in order to service their debt.

RISK OFF! 

When we then mix in what the ECB is so alarmed about, and that is the exposure that some nations have to the Lira that has dropped like a stone on rocket fuel this year, then you get a very ugly looking outcome which investors are bound to be alarmed about as this week will unravel as traders return to desks looking to protect wealth, opening the case for the downside in the euro, (Turkish lira weakness drifts toward the eurozone), EUR+USD/CHF, (due to safe haven status in the CHF), USD/JPY & EUR/JPY and indeed high-betas such as the antipodeans, (+ RBA's dovish SOMP on concerns about U.S.-China trade risks that are increasing and dovish RBNZ).

So what happened on Friday? 

As a result, Friday's closing session in European trade and the US was one of those type's of Black Swan events, but one that we actually should have known was coming - it was only a matter of time that the banking sector crisis risks reared their ugly heads again - (shares of Deutsche Bank AG DB tumbled over 5% after a downgrade to underweight by analysts at Morgan Stanley).

Nevertheless, the unexpected escalation of events that took place in the Europen trade resulted in the EuroStoxx-50 losing -1.9% - It sent the dollar on a strong rally through the 96 handle and the euro to trade below 1.1480, breaking the neckline support before then going onto trade below 1.14 the figure in NY for the first time since mid-2017. This dramatic collapse in TRY sent USD/TRY to an intraday high of 6.87 before settling at 6.39, up 15.2% on the day. This all began when Trump doubled tariffs on US imports of Turkish steel and aluminum, escalating the feud by imposing higher metals tariffs in a tactic that would hopefully force the NATO member nation to release the US citizen and Pastor Andrew Brunson after courts had rejected appeals to release him - (The espionage charges he’s facing mean he could spend the rest of his life in prison). 

Friday's fall out as it happened

"A massive pile of corporate debt denominated in foreign currencies but a rapidly sliding currency – and inflation that’s threatening to go exponential – is a toxic combination", analysts at ANZ explained:

"The ECB has sounded the warning bell with banks in Spain (EUR83.3bn), France (EUR38.4bn) and Italy (17bn) heavily exposed to the country...The euro fell around 1%. Midway through Erdogan’s speech Trump in a tweet announced doubled tariffs on Turkish steel and aluminium “as their currency, the Turkish Lira, slides rapidly downward against our very strong Dollar!” This sent the lira down a further 5%. Erdogan upped the ante further in weekend speeches, all but writing off the US strategic partnership, saying interest rate increases won’t happen “as long as I’m alive”, and saying those who urge an international bailout are seeking to steal Turkey’s political independence – the opposite on all three fronts to what crisis experts would recommend. Argentina and South Africa are copping collateral damage."

EUR/USD below the neckline

The ECB's concerns over bank exposures to Turkey and Italian budget woes sent EUR/USD to fresh lows and even 1.1448, the 50% Fibo retracement level since the end-2016 lows, was broken. A low of 1.1387 was traded after the release of US core CPI rose to 2.4%, the fastest YoY rate since 2008 while US headline inflation is within a whisker of 3%, (coming in at  2.9495% YoY on the headline measure). 

Now, when we are considering US wages that are grinding higher and indeed Trump's trade war on China that will only go onto contribute higher retail prices due to the US import tariffs that will eventually feed through to retail outlets  - then throw the US Q2 growth of 4.2% into the mix, then the Fed's path of rate hikes brings us back to the US dollar liquidity crisis  - which is perhaps an old/new paradigm for markets now which should keep the greenback underpinned for the foreseeable future. 

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