Pre-Market: Turkish Crisis Escalates
Emerging market assets are under heavy pressure yet again, with the Turkish Lira being in the epicenter of the troubles. The USD/TRY pair blasted higher after a chaotic Friday session, with the Turkish currency hitting significant all-time lows against the Dollar and the Euro alike. With the USD/TRY hitting 7, the Lira is down by 40% just this month, and in only one year, the Dollar more than doubled in Lira terms.
USD/TRY, Daily Chart Analysis
Emerging market currencies are definitely feeling the contagion effects, with the Argentinean Peso the Brazilian Real, and the Russian Ruble all being down big time in the last few days. So far, the Turkish leadership failed to calm the market, rather they fueled the fire with the aggressive rhetoric, and the seeming ignorance of the basic macroeconomic rules. Coupled with the political tensions between the US and Turkey, the background for the currency crisis is bleak.
Also, given the self-fulfilling properties of the Turkish situation (as the falling Lira deepens the fundamental problems, causing a vicious cycle of trust), a quick change is needed to prevent a complete currency meltdown. As investors are well aware of the prior emerging market crisis, which usually led to wide-spread capital flight out of the most vulnerable countries, the current environment has the potential to turn into a deeper correction across markets and asset classes.
Nasdaq 100 Futures, Daily Chart Analysis
The relative strength of the US indices continues to impress, as after the pre-market weakness, the major benchmarks opened mixed and flat, still being just slightly off their all-time highs, despite Friday’s clear risk-off shift. That said, as the other key markets are much weaker compared to their Wall Street peers, and a deep emerging market crisis could further curb global growth, and coupled with the monetary tightening cycle, developed markets won’t remain safe forever.
Dollar Edges Lower Against Majors After Strong Rally
DXY, 4-Hour Chart Analysis
While emerging market currencies are volatile and mostly bearish today, the Dollar is actually slightly lower compared to the Euro, the Pound, and the Yen, and it is notable off its overnight highs. The lack of broad contagion is positive news for bulls, and Chinese markets held up well today after being weak for months.
Gold, 4-Hour Chart Analysis
On another risk-positive note, gold is not showing signs of financial distress, as the precious metal is actually lower today, testing its 15-month lows near $1200. Commodities are mostly flat elsewhere and the recently vulnerable commodity-related currencies are also stable, thanks to the weakness in the Dollar. Copper is still closely following Chinese assets, holding up above its long-term support zone near $2.70, while WTI crude is trading near the $67 per barrel level consolidating after last week’s volatile price action.
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