FX Weekly Insights — 29/11/21

Key Events

Monday                                                                        Consensus/Previous

08:30 (JP) – BoJ Kuroda’s Speech

13:00 (DE) – Harmonised Index Consumer Prices                5.40%        4.60%

                                    (YoY, Nov, Flash)

19:00 (CA) – BoC’s Governor Macklem Speech

20:05 (US) – Fed’s Chair Powell Speech

Tuesday

01:00 (CN) – NBS Manufacturing PMI (Nov)                       49.6%        49.2%

01:00 (CN) – NBS Non-Manufacturing PMI (Nov)               53.0%        52.4%

09:30 (EU) – CPI Core Index (YoY, Nov)                            1.90%        2.00%

15:00 (US) – Fed’s Chair Powell testifies

Wednesday

00:30 (AU) – GDP (QoQ, Q3)                                             -2.70%      0.70%

07:00 (DE) – Retail Sales (YoY, Oct)                                    -2.00%      -0.90%

12:00 (UK) – BoE’s Governor Bailey Speech

13:15 (US) – ADP Employment Change (Nov)                    525k          571k

15:00 (US) – ISM Manufacturing PMI (Nov)                         61.0           60.8

Thursday

          (SA) – OPEC-JMMC Meetings

00:30 (AU) – Trade Balance (MoM, Oct)                               11m           12,343m

Friday

10:00 (EU) – Retail Sales (YoY, Oct)                                     1.5%          2.5%

13:30 (US) – Non-Farm Payroll (Nov)                                                  531k

13:30 (CA) – Unemployment Rate (Nov)                                          6.7%

13:30 (CA) – Net Change in Employment (Nov)                    31.2%

15:00 (US) – ISM Services PMI (Nov)                                  65.5           66.7

Further Points:

Will US jobs numbers increase the pressure on Powell to raise rates? Recent data now point to signs of a tightening labour market, with new applications for US unemployment benefits falling to their lowest level since 1969.

Will eurozone inflation reach its highest point since the common currency was introduced in 1999?

RUB on the Ground

Today, the Market has decided the new covid strain is not dangerous, hence the relief rally in most of the risk assets. RUB is not an exception:  0.7% stronger vs Fridays close of 75.40. 

Our partners think we should hold above 75.00 at the end of the day until (if) we see de-escalation at the Ukrainian border, 75.50 first top side resistance.

-Biden to call Putin on Ukraine soon (IFX)

The Collapse of the Turkish Lira and the Rapid Rise of Inflation

Turkish President Erdogan is continuously defending interest rates cuts, which has sent the lira falling to an all-time low. Since 2019, Erdogan has sacked three Central Bank governors, and has positioned himself as a clear opponent to high interest rates as he believes they are counter to economic growth. However, he is ignoring the severe consequences on the currency, the financial system, and the economy as a whole, with investors wondering until when he is going to let the lira slide. After the announcement of more interest rate cuts - the third time since September - the lira has plunged 28 per cent against the dollar since the start of November, hitting 13 per dollar, and Turkey is facing a severe case of hyperinflation if Erdogan doesn’t abandon his stance on low interest rates. Indeed, Turkey’s consumer price index has risen 19.9 per cent (YoY) in October, and is expected to increase even further in the coming months. These numbers are reminiscent of Turkey’s 2018 currency crisis. The Central Bank is attempting to reassure the financial system by saying it can handle this volatility, but the tumble of the lira has increased the lack of confidence that investors and the population have in the currency, and in Erdogan’s government. Low interest rates and inflation have caused holdings in dollar in Turkish banks to rise in the past years. If these holdings rise further, pressures on the lira will be accentuated, and could lead people to withdraw their money in masses.

Politically, Erdogan’s actions will most certainly accentuate the discontent of the Turkish population, who will see prices of basic commodities rise even further, and the severe deterioration of their livelihoods. Food price inflation has reached 27 per cent, and Turkey’s heavy reliance on imports, especially of raw materials and energy, means a collapse in the lira makes the country particularly sensitive to rapid price hikes. Opposition parties are calling for elections as soon as possible, and are representing an increasingly cohesive front against Erdogan’s government. Erdogan has therefore called for UAE’s financial help, with the UAE promising $10bn in investments following the visit of the UAE’s Crown Prince, Sheikh Mohammed bin Zayed Al-Nahyan — the first visit in almost a decade. With Western capital declining, this provided a much needed 10 per cent rebound to the lira as it boosted market’s confidence.

Chart of the Week - GBP/USD

Resistance: 1.3413

Support: 1.3133