Another wave of selling hit emerging markets with the TRY (Turkish Lira) literally free-falling. For a fiat currency that’s supposed to build trust in the economy, the TRY is in bad shape, with USD/TRY trading as high as 5.43.
With people’s economies evaporating overnight, many thought refuge in safe-haven assets like gold or the USD. Despite Erdogan calling for calm and asking people to exchange their stashed USD into the Turkish lira, the population knows the burden falls on its shoulders and won’t go away that easy.
Such an environment makes central banks’ decisions less important. At this point, the interest rate level won’t matter anymore as there’s no safety in buying an asset that losses value virtually overnight.
The US/Turkey talks over the U.S. pastor ended with no resolution, and the TRY meltdown accelerates on prospects of the United States extending its sanctions.
The entire emerging market suffers similar reactions, with the USD squeezing higher. The Russian Ruble is down almost one percent today on fresh new economic sanctions to be imposed August 22nd. Shares of Russian companies declined on the Moscow Stock Exchange, with Aeroflot leading the way with an almost 9% free-fall.
Summer trading conditions give the impression that the currency market doesn’t move. If looking at major pairs like the EUR/USD or USD/JPY, the ranges are so small that one wonders where the flows are.
However, it looks like the calm before the storm. The GBP/USD dipped decisively below the 1.30 mark, sending the EUR/GBP cross well over 0.90.
The flows pouring out of the GBP and into the common currency (Euro) had the effect of supporting the EUR/USD on every dip so far.
But 1.15 looms large. A clear break and close below the all-important 1.15 is just what the USD needs to start another leg higher, taking emerging markets currencies in a tailspin.
If the CPI tomorrow in the United States ticks higher than expectations (especially the Core release) look for investors to pile into the USD even more.
With the RUB and TRY at multi-year lows, it’ll be the nail in the coffin for emerging markets investors.