The Uncomfortable Ergonomics of Erdonomics

By Jeffrey Halley, Senior Market Analyst, Asia Pacific, OANDA

The Turkish Lire suffered a massive fall in the twilight zone of early Monday morning after President Erdogan removed central bank head Naci Agbal from his post on Saturday. The Lire (TRL) fell approximately 17.0% to 8.4900 this morning before USD/TRL stabilised around 8.1000, a 12.0% loss for the session so far.

The base premise of Erdonomics is that higher interest rates cause higher inflation, a theory that flies in the face of conventional economic theory everywhere. Mr Agbal was widely respected for his attempts to stabilise inflation with around 900 basis points of tightening over his short tenure. His demise appears to have been triggered by last week’s 2.0% rate hike, as Russia and Brazil also quietly lifted rates to rein in inflation.

Mr Agbal’s replacement, Sahap Kavcioglu, is a little-known business school professor who shares President Erdogan’s economics theories and is, unsurprisingly, associated with the ruling party. Turkey will be an interesting example of what EM can expect if inflation fears rise markedly. With markets nervous about inflation in developed countries and punishing asset classes accordingly.

Mr Kavioglu has since stated that no immediate change in policy is planned, which seems to have stopped the rot for now, but the new governor is in a tight spot. Cut rates and see foreign investors flee, inflation spike the currency crumple, hike rates and get fired. I would be doing nothing right now as well.

Meanwhile, we can expect some severe burning of foreign reserves to defend the Lira. It is unlikely to stave off the inevitable, though, and I expect Turkish equities and foreign currency bonds to be thrashed this afternoon and for downside pressures to resume on the Lira.

Bank of Japan Governor Kuroda is also in damage control mode this morning after the BOJ widened its JGB trading band and announced it would only by TOPIX-linked ETF’s going forward at its policy meeting on Friday. The Nikkei 225 reacted negatively on Friday and continues doing so today, down nearly 2.0%. He stated that monetary easing would continue for a long time ahead (in BOJ-speak, that could be a very long time) and that the BOJ had no intention of selling any of its ETF holdings. Unfortunately, those words have counted for little. My Nikkei 225 chart shows the index breaking 6-month support and threatening a much larger downside correction.

China has left its one and five-year Loan Prime Rates unchanged this morning. The decision was as expected, and I expect the PBOC only to consider moving them higher in Q4, being content to tighten policy via the repo market quietly. That said, the PBOC attempted to calm tightening nerves over the weekend. PBOC Governor Yi Gang saying that China has room to pump liquidity into the economy. China markets are gently higher today, with Mr Yi’s remarks assuaging local investors’ nerves with the Financial Times reporting international bondholders are attempting to freeze overseas assets of Tsinghua Unigroup, China’s most prominent semiconductor company.

The data calendar is quiet in Asia this week, dominated by Thailand’s trade balance, Singapore CPI and Taiwan Industrial Output, along with rate decisions from Thailand and the Philippines, which should both remain unchanged.

Data in developed markets is weighted towards the end of the week. US Durable Goods and Q4 GDP Final will be secondary to the February Personal Income and PCE released on Friday. The data will likely be negatively affected by the big freeze and is pre-stimulus. Markets will dismiss it as a mere flesh wound.

Pan-Europe PMI and UK CPI data Wednesday will garner more attention. UK CPI is expected to rise, perhaps putting more pressure on gilt yields. European data will likely show manufacturing remains robust while services are muted as lockdowns past and present weigh on European economies. The Euro and Sterling are in danger of breaking lower this week, not just because of the strong US Dollar but also a brewing vaccine conflict. The EU is threatening to withhold exports of European-made AstraZeneca Covid-19 vaccines to the UK to get its own vaccination programme back on schedule.

Given that the Nordic nations are ignoring EU directives that the vaccine is safe, and suspending its use anyway, the EU’s position is somewhat ironic, especially so as imports of alternative products are expected to ramp up massively in Q2. If the EU threats imperil the UK vaccination programme, as they shoot themselves in the foot on several fronts, neither the Euro nor Sterling are likely to benefit this week.

It’s taken me a while to get there, but vaccine nationalism, erratic EM national leaders, and economic data aside, markets will likely remain slaves to moves in US bond yields this week. Stock market rallies and US yield retreats seem to be getting shorter and shorter in duration. Inflation concerns are proving more obstinate than my kitten’s insistence on trying to sit on my laptop keyboard while I work today. Twinkle’s paws have revealed functions I did not know my laptop had, and that I cannot recreate. Moving the offending feline results in an attempted return in another direction. That sums up the inflation story now as well. Today may be a lull, but the inflation kitten is coming for your keyboard.

Asian equities mostly higher

Friday’s New York session was an odd one, with banks under pressure as the Federal Reserve signalled it would let the Supplementary Leverage Ratio (SLR) lapse at the end of the month. Price action was mixed as US 30-year yields eased somewhat, with Friday’s quadruple “witching hour” of futures and options expiries pushing volumes far higher than usual but leading to distorted price action. The S&P 500 finished just 0.06% lower, but the Nasdaq rose 0.76%, and the Dow Jones fell 0.71%.

S&P 500 and Dow Jones futures have headed South in Asia, by Nasdaq futures are slightly higher, in a rerun of Friday. Asia has ignored that for the most part and has started the week modestly higher, perhaps in part because US 10-year bond futures have rallied today.

The exception is the Nikkei 225, which has plummeted by 2.0% today as investors digest the implications of the BOJ’s intention to cease buying Nikkei 225 related ETF’s, concentrating on TOPIX-linked ones. The Nikkei 225 carved through its 5-month support line at 30,100.00 on Friday and has moved deeper into correction territory today, targeting its 100-day moving average at 27.750.00.

Elsewhere in the Asia-Pacific, though, the picture is positive if modestly so in a no news is good news sort of way. Mainland China’s CSI 300 is 0.35% higher, with the Shanghai Composite 0.20% higher. Today’s small rally still leaves the CSI 300 precariously perched on its multi-month support line. At the same time, the Shanghai Composite crushed the same on the 8th of March and remains ensconced in downside correction territory. The Hang Seng is just 0.25% lower in directionless trading, as China’s tech clampdown weighs on Hong Kong-listed giants.

The Kospi is flat, with Singapore and Taiwan are 0.35% higher, with Manilla unchanged and Kuala Lumpur 0.15% lower. News that a trans-Tasman travel bubble is back on both governments’ agenda and a strong finish by the Nasdaq has lifted Australian markets. The ASX 200 climbing 0.75%, and the All Ordinaries rising 0.70%.

Overall, the picture for Asia is one of marking time while awaiting fresh inputs, likely to be delivered by the US and Europe. European and UK equities may have a more challenging time this afternoon, with the UK-Europe vaccine spat, and Eurozone lockdowns weighing on markets.

The US Dollar rises in Asia

Despite the noise in equity and bond markets, currency markets seem content to consolidate the US Dollar gains spurred by the spike in US yields last week. The dollar index finished almost unchanged at 91.91 on Friday, rising to 91.97 this morning.

Amongst the majors, Sterling appears most under pressure, falling 0.50% on Friday to 1.5860, before edging lower to 1.5850 today. If the EU goes ahead with its threats to ban AstraZeneca vaccine exports to the UK, pressure on the Sterling will increase. Much of the recent premium in the UK asset market is attributable to its success thus far in vaccination numbers. GBP/USD has edged back through its multi-month support line today at 1.3880, threatening a fall to 1.3600 initially.

Europe’s gunboat diplomacy will not leave it immune. EUR/USD has been in correction territory since the start of the month, and it has traced out a quadruple top just ahead of 1.2000. EUR/USD has fallen to 1.1870 today, with significant support at its March lows and its 200-DMA, lying at 1.1835. Further failure through 1.1800 threatens a deeper correction to 1.1600.

Amongst the commodity currencies, the USD/CAD came very close to tracing a bullish outside reversal day late last week, and USD/CAD continues to grind higher, trading at 1.2500 today. Similarly, both the AUD/USD and NZD/USD recoveries petered out at their downside breakout lines last week and have since retraced all of those gains. Both appear particularly susceptible to US Dollar strength. Failure of support at 0.7600 and 0.7100, respectively, will herald deeper downside losses.

Asian regional currencies have retreated modestly versus the greenback today. The tribulations in the Turkish Lira this morning perhaps weighing on EM generally. While the Chinese Yuan remains steady on each side of 6.5000 though, the downside pressure in wider Asia EM will be limited. The path of US yield will continue to dictate sentiment in Asian FX markets.

Oil consolidates as consumption fears persist

Friday saw a partial unwinding of Thursday’s price rout, with both Brent crude and WTI finishing higher. Brent crude rose 2.60% to 64.50 a barrel, with WTI climbing 3.25% to $61.40 a barrel. Both contracts have eased by 30 cents a barrel in Asia as Germany’s lockdown extension and the partial lockdown in France continues to weigh on EU consumption sentiment.

With Europe’s problems not likely to disappear overnight, Asia physical buyers are content not to chase the market higher. A light data calendar in the first half of the week means that short-term moves in the US Dollar are likely to drive short-term movements in oil prices as well.

Brent crude has support at $62.00 and $61.30 a barrel, with resistance at $65.00 and $66.50 a barrel. WTI has support at $59.00 and $58.00 a barrel, and resistance at $62.00 and $63.20 a barrel.

Gold’s consolidation continues

Gold prices roses on Friday as long yields eased, but overall, gold’s limited price action was a continuation of the bullish consolidation of prices seen over the week. Gold rising 0.50% to $1745.00 an ounce. In Asia, gold has eased back to $1741.00 an ounce in directionless trading, having spiked lower on the open, which I suspect was related to Turkish Lira position stop-losses.

Gold’s overall price action remains construction, though, and the yellow metal is attempting to form a longer-term base, between its 61.80% and 50.0% Fibonacci retracements, setting the scene for a move back above US$1800.00 an ounce if all goes to plan.

Gold has support at $1720.00 and $1700.00 an ounce, followed by the 61.80% retracement in the $1685.00 area. It has initial resistance at $1755.00 an ounce, followed by the 50.0% retracement at $1760.00 an ounce. I expect gold to trade in a $1735.00 to$1750.00 an ounce range ahead of the New York session.