Dont take your eyes off US data
American economic developments are as critical as US-Turkey relations. Today’s report on retail sales is expected to show a 0.4% monthly rise in July. Consumer fundamentals continue to improve, while businesses are driving on domestic demand. Amazon’s Prime Day sale lasted six-additional hours, boosting upside expectations. Spending on food services has risen steadily, industrial production is expected to rise 0.3% monthly in July, manufacturing output excluding autos should improve after a 0.3% rise in the prior month. While President Trump’s erratic trade policy has weighed on manufacturers, demand has firmed, suggesting growth will improve. Net-net: we expect further monetary tightening, which will follow through into treasury yields.
Markets are stable today: sentiment remains cautions, but for now TRY can breathe relief. USD/TRY fell sharply to 5.88, suggesting a coordinated action. The probability of a broader contagion, specifically into Europe, has fallen as financial institutions have time to clean their balance sheets and trade out of worrisome positions. Turkey might have been squarely in international markets, but with rising inflation and rate hikes ahead, USD strength is seeking unresponsive currencies. Central banks with weak foundations and policies unwilling to accept realties will come under pressure. It’s clear which direction the US economy and rates are heading, making USD carry and easy trade.
Euro struggles vs dollar
Trading sideways against the greenback since June in the 1.16 range, EUR fell most during last week’s Turkish lira collapse. Despite growth and improving sentiment indicators, the single currency continues to weaken against the USD while USD/TRY trend goes in the opposite direction. Fact: the euro does not constitute a safe haven. Currently trading at 1.1327, EUR/USD is expected to decline further, approaching the 1.1300 range
Supported by stronger than expected German Q2 GDP and inflation at 2%, the EU economy is doing well. Given at 0.40% and 2.20% on quarterly and yearly basis, GDP remains strong, a reassuring sign for the European Central Bank, whose normalization schedule remains: next rate hike expected in Q3 2019. However, as Italian debt continues to grow and concerns over Italy’s Prime Minister Giuseppe Conte’s plan to increase tax cuts and benefit spending are rising, the EU will probably face headwinds in coming months. Due in October, Italy’s budget, if increased, could raise Italy’s costs and cause a domino effect on EU banks holding Italian debt. Although economic vital signs favour a rate rise in 2019, the ECB will stay cautious in the coming months, as further uncertainties would delay a rate hike, a non-EUR-positive argument for the single economy.
