AUD better bid amid PBoC comments
The Australian dollar added more than 0.50% on Tuesday after the PBoC announced it would keep the yuan stable at an equilibrium level. The announcement was made a few hours after the RBA’s monetary policy decision; however, the latter was a non-event as the central bank left interest rate unchanged and made some minor changes to the statement.
Just like Chinese equities, the Australian dollar bore the brunt of the sell-off over the last few weeks as trade tensions escalated. Earlier this morning, the Chinese yuan fell to an 11-month low against the US dollar with USD/CNY hitting 6.7214. Nevertheless, the currency strengthened quickly after the central bank’s comment as USD/CNY eased to 6.6850.
The People’s Bank of China has sent a strong signal. However, it is hard to say whether investors will fight the central bank and push the yuan lower or take note stop short selling the yuan. One has to keep in mind that the PBoC is used to deal with short-sellers and it usually win. For example in January 2017, offshore overnight deposit rates rose to prohibited levels, which squeezed short sellers as funding costs exploded. We are not there yet but now traders know that the PBoC is watching them.
This currency is a Turkey
Want volatility? Look no further than the Turkish lira. As European markets opened, TRY took off on a roller-coaster worthy of Brighton Beach Cyclone, because investors are struggling with the meaning of President Erdogan’s re-election. Although his AKP party lost its parliamentary majority, with his ally MHP he can control parliament. USD/TRY rose to 4.6836 in seconds: TRY remains highly volatile. Don’t try to catch this falling sword.
Turkey large external debt makes it vulnerable to the USA’s rising interest rates. In theory Turkey should tighten its monetary policy, but this is uncertain. Erdogan has indicated that he should control monetary policy, and his bias is towards growth. Manufacturing purchasing remains weak, yet there is strong inflation. Data released today say consumer prices surged 2.61% monthly and 15.39% annually. Producer prices rose 23.71% annually. So the Central Bank is caught between this inflation and the pressure to ease rates. So, we are not hopeful that solid structural reforms will materialize.
