Yesterday’s modest relief for developed and emerging markets currencies and equity market has proved short-lived, despite the further recovery in the Turkish Lira. EUR/USD, which had stabilised yesterday thanks in part to upwardly revised Eurozone GDP data for Q2, at one stage threatened to fall below 1.13. The Euro is also being weighed down by concerns about the prospects for Italian fiscal policy and a widening of Italian government bond spreads.
Sterling was also under pressure, with GBP/USD down to 1.268 at time of writing – its lowest level since mid-June 2017 – despite UK CPI-inflation rising to 2.5% yoy in July. The Turkish Lira’s collapse, which has spread towards other high-yielding emerging market currencies – in particular the Russian Rouble and South African Rand – and prompted FX flows towards safe-haven currencies, including the Japanese Yen, Swiss Franc and US Dollar, has reversed in the past two trading sessions thanks to a number of central bank and governor measures.
Nevertheless, the Dollar – the highest yielding developed currency – has continued to appreciate and in trade-weighted-terms is now at its highest level since 30 January 2017. Only the Japanese Yen has managed to outperform the Dollar in the past week. While other Asian currencies have on the whole held up much better than most emerging market currencies, contagion from the collapsed Lira has seemingly spread to the Indian Rupee which is down 2.5% versus the Dollar in the past week.
