Turkish Contagion Sinks Euro

The U.S. dollar is stronger across the G-10 board this morning as fears of Turkish contagion have rocked European currencies and global equity markets.

Overview

The Turkish lira has fallen a 17% between overnight and early trading, adding its 30+% loss from this year. Turkish bonds fell and sent yields to all-time highs as investor confidence in Turkish officials is all but non-existent. There is a belief that Turkey will face further sanctions if the Turkish government does not release an American pastor that is currently being held in the country. President Edrogan is scheduled to address the country later today.

On the domestic front, the economic docket showed that consumer prices continue to rise. The core measure of CPI, which excludes food and fuel, rose 2.4% on a yearly basis. The jump shows the biggest advance since 2008. The higher price pressures will increase the chances that the Fed will raise rates twice more this year to try to keep inflation near its target of 2.0%. The print also shows concerns for the real economy as inflation-adjusted wages are not keeping up with inflation meaning the purchasing power of paychecks are taking a blow. Nevertheless, the increased chances of a fourth rate hike this calendar year will help the greenback extend gains.

 

EUR

The word “contagion” is all over headlines (and this report) this morning. Worries that the negative effects of record bond yields, falling lira and political instability in Turkey is putting downward pressure on the Euro this morning. Indeed, the common currency has fallen to its weakest level in 13 months against the U.S. dollar. A report broke that the European banks have exposure to Turkey but the situation was not yet “critical.” Expect volatile trading today.

 

GBP

The British pound remains at a one-year low against the U.S. dollar even as their economic docket was mostly better than expected. Second quarter GDP rose 0.4% on a quarterly basis and 1.3% on a yearly basis, meeting expectations. The trade deficit came in narrower than expected and industrial production impressed. Still, Brexit concerns continue to weigh on the embattled currency that is set for its seventh daily decline against the greenback.