Risk aversion was the name of the game during the Asian session, as a lack of fresh catalysts led traders to price in contagion risks from the Turkish lira’s dramatic decline.
- New Zealand’s food price index up by 0.7% vs. 0.5% growth in June
- Turkish lira extends drop, inspires contagion fears
Contagion fears dominate risk sentiment
Instead of a quiet, data-light trading session, Asian session traders woke up to risk aversion across the board.
We don’t have far to look for answers. The Turkish lira (TRY), which had been falling for weeks, REALLY saw bearish pressure on Friday after U.S. President Trump announced the doubling of steel and aluminum tariffs to a total of 20% and 50% respectively.
The move came after TRY had already fallen by around 20% after the U.S. sanctioned Turkish officials over a range of issues including the ongoing detention of a U.S. pastor who is facing terror and espionage charges in Turkey.
Turkish President Erdogan was combative over the weekend, calling the situation an “economic war” and encouraging citizens to convert their dollar and gold holdings into the local currency.
Turkish President Erdogan’s Communications Director, Fahrettin Altun, didn’t help much either. Altun disproved speculations that Ankara will seize dollar-denominated accounts to convert into liras. He also hinted at “necessary measures” with Turkish banks and bank watchdog but failed to give details.
TRY’s sharp decline weighed on other emerging market assets and even made some European investors jittery.
- Nikkei is down by 1.85% to 21,886.5
- A SX 200 is down by 0.55% to 6,239.4
- Shanghai index is down by 1.73% to 2,746.897
- Hang Seng is down by 1.83% to 27,847.3
Commodities also joined the fray, with gold failing to take advantage of risk aversion on the back of strong dollar demand.
- Gold is down by 0.21% to $1,207.68
- Brent crude oil is down by 0.48% to $72.58
- U.S. WTI is down by 0.22% to $67.55
Major Market Mover(s):
JPY and CHF
Low-yielders like the yen and franc took home the most pips amidst the risk-averse trading environment.
USD/JPY is down by 63 pips (-0.57%) to 110.19; GBP/JPY is down by 100 pips (-0.70%) to 140.61; CAD/JPY is down by 57 pips (-0.67%) to 83.77, and CHF/JPY is down by 42 pips (-0.38%) to 110.94.
USD/CHF is down by 17 pips (-0.17%) to .9933; GBP/CHF is down by 28 pips (-0.22%) to 1.2674; AUD/CHF down by 35 pips (-0.48%) to .7231, and CAD/CHF is down by 21 pips (-0.28%) to .7551.
Contagion risks weighed on the common currency, especially after some analysts pointed out that Spanish, French, and Italian banks are exposed to Turkish foreign currency debt.
EUR/USD is down by 28 pips (-0.25%) to 1.1383; EUR/CHF is down by 48 pips (-0.42%) to 1.1306; EUR/JPY is down by 100 pips (-0.79%) to 125.43, and EUR/GBP is down by 12 pips (-0.13%) to .8920.
The high-yielding comdoll took hits on a risk-averse trading environment. Interestingly, the Kiwi’s losses were more muted. Is it because the bears have done enough damage last week?
AUD/USD is down by 18 pips (-0.25%) to .7280; AUD/JPY is down by 70 pips (-0.86%) to 80.22, and AUD/NZD is down by 36 pips (-0.32%) to 1.1056.
Watch Out For:
- No major economic releases during the London session. Take note of the other catalysts that might pop up this week though!