Skip to main content

Turkish Turmoil Continues to See Flows into Safe Haven Currencies

Turkish Turmoil Continues to See Flows into Safe Haven Currencies            

  • The Turkish Lira (TRY) remains the epicenter of market conversations overnight with investors eyeing European banking sector concerns (Italy) from the fallout and which continues to undermine the euro while adding to the safety bids into CHF, JPY and USD. The result is more EM concentrated pressure and limited ranges for G10. Turkish government actions to curb TRY volatility in early Europe include – (1) limiting FX swap operations to not exceed 50% of banks' capital; (2) provision of additional liquidity by the central bank by cutting reserve requirement ratios (250bps on all maturity brackets). (3) central bank to closely monitor market depth and price formations, and take all necessary measures to maintain financial stability, if deemed necessary. 


  • The measures announced by Turkey however are not seen to go far enough compared to what investors want to see and which include – (1) for Turkish authorities to rein in credit and tighten fiscal policy; (2) Raise interest rates sharply to deter TRY shorts; (3) Turn to the IMF for help in prioritizing economic goals; and (4) Try to reach a compromise with the US on the release of a Pastor the US has been demanding so President Trump can ease tariff pressure on Turkey.



USD: A safe haven beneficiary from the current Turkish turmoil

  • In the interim, USD remains one of 3 key beneficiaries arising out of safe haven flows from EUR (undermined by exposure of Italian banks to Turkey), EM (undermined by uncertainty about who may be next) and commodity bloc (undermined by EM contagion and continued RM weakness). 



Commodity bloc: Fears of contagion within EM and current RMB weakness to impact commodity FX for now

  • Despite a more positive domestic story (and increased NAFTA optimism in the case for CAD), fears of contagion within EM from Turkey and continued renminbi weakness are likely to impact commodity bloc FX for now.



Asia EM: Chinese data - no negative surprises

  • As expected, China’s money supply as measured by M2 bounce back in July to 8.5% vs 8.2% consensus forecasts and 8.0% in June. This makes sense given the injections of liquidity by the PBoC in July, when China concerns were weighing on markets. Turning to credit data, both measures show a month-on-month decline. Aggregate financing falls to CNY1040bn vs 1100bn consensus forecasts. Citi analysts highlight that new yuan loans are generally weaker in July vs June. Similarly, new yuan loans print CNY1450bn in July vs 1275bn consensus and 1840 prior.


  • Price action in CNY/CNH is likely to become more choppy as the Turkish turmoil continues for now. The 20% risk reserve requirement on FX forward purchases marks a start for the PBoC but it could also step up with intervention as spot nears previous highs.



This is an extract from the Daily Currency Update, dated 14th August 2018. Please approach a Citigold Relationship Manager if you would like more information.

Leave a Reply

Enter the characters shown in the image.