Turkey Surprises Markets with a Rate Increase

Daily Analysis - 25/11/2016

Central Bank Raises Rates for the First Time in Year as Lira Plunges


The combination of a stronger US dollar, weaker domestic conditions, and deteriorating relations with Europe have all conspired to drive the USDTRY pair to its lowest point on record. In spite of a rate hike that shocked financial markets, action on the monetary policy front was not enough to stem the slide.

Lira Hits New Record Low

The Lira touched a new low versus the US dollar on Friday as confidence in the country’s outlook continues to worsen.  Besides struggling with the impact of weaker tourism revenues and softer investment due to political conditions, Turkey’s continued purge of civil servants has drawn stern condemnation from the European Union.  In a stunning move, the European Parliament opted to put a hold on talks of Turkey’s EU membership.  More concerning is rising inflation while unemployment remains high.  The Turkish Central Bank raised rates for the first time in years, bringing the key rate up to 8.00%.  However, this contrasts sharply with Erdogan’s goals of lowering rates to ease business conditions, putting the Central Bank on a collision course with the President.  The reaction is likely to be further losses in the Lira as Central Bank faces an own uphill battle.


Silver Enters a Bear Market

After falling nearly -15.00% since the American election results were confirmed, silver prices are back in a bear market following a tumultuous year in terms of prices.  While prices spiked higher in the wake of the British referendum, silver has now dropped over -20.00% since the decision to leave the European Union was confirmed.  The key driver of recent weakness in precious metals, and specifically silver, has been the momentum higher in the US dollar.  With the certainty of a December rate hike at nearly 100.00% according to market participants, most investors are preparing for the arrival of higher rates and further increases.  As a result, the value of holding haven assets has been reduced, especially considering rising yields in other asset classes.  Considering that silver is a non-yielding asset, further monetary tightening and dollar gains will likely cause silver to fall back below $16.000.


Japanese Inflation Shows Improvement

In a development that surely caught markets off guard, the Japanese economy received some positive news in the form of consumer inflation.  Headline consumer prices rose by 0.10% year over year through the end of October, marking the first increase 8-months.  The gains were driven primarily by higher food prices.  However, the core figure, which excludes more volatile prices like food and energy, fell by -0.40%, highlighting the ongoing struggle to raise consumer prices back into positive territory despite highly accommodative policies.  Nevertheless, despite the continued impact of deflation, the recent upturn in inflation and modest improvements show that progress is being made towards reaching the Central Bank’s target. After reaching the highest point since March overnight, USDJPY is back on the retreat, nearly 100 pips off of intraday highs.


New Zealand Trade Deficit Narrows

After widening significantly over the last few months, the New Zealand trade gap managed to show improvement during the month of October, falling 6.40% year over year.  The deficit, which means that imports exceeded exports, fell to NZD 846 million in October compared to the NZD 1.394 billion deficit in September.  It was the best figure since July, and bolstered in part by exports which rose by 2.20% year over year, namely due to better dairy prices and sales.  China and Japan were the primary drivers of the gains, with New Zealand exports climbing 7.90% and 12.00% respectively to each country during the last year.  However, trade with other major partners slipped, with EU imports from New Zealand falling -9.70%, followed by the -6.50% contraction in Australian imports.  After climbing back above 0.7000 earlier in the session, NZDUSD remains higher on the session as the US dollar momentum takes a pause.


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