Pre-Market: Turkish Lira Cracks, Sparking Global Selloff

Stocks and other risk assets are under pressure today before the US open, with the focus being on emerging market currencies, especially the Turkish Lira. We have been following the slide of the Lira in recent weeks and months and in the last couple of days, the process accelerated, with the technical break-out above the $5 level in the USD/TRY triggering a full-blown currency crisis.

USD/TRY, Daily Chart Analysis

Currently, an emergency rate hike seems inevitable, with the currency being down by more 35% year-to-date, and 20% just this month. While a rate hike won’t solve the underlying problems, and capital controls are likely to be introduced at this point, calming the market would be essential. The US Dollar is on the rise not just against emerging market currencies, as the Dollar index just broke out to a new 13-month high and the EUR/USD violated its June low, trading with a 1.14 handle for the first time in a year.

DXY (Dollar Index), 4-Hour Chart Analysis

The rising yield/strong Dollar/global divergences environment continues to dominate the major financial markets as expected, and despite the summer-like volumes, especially currency markets are on the move. Equities have been little changed since last week, with the stark difference between the US and the other parts of the world still being apparent. While the main US indices have been flirting with their all-time highs, most of Europe is stuck in declining trends, China is in a bear market, while the other main Asian markets are also lagging behind.

DAX, Daily Chart Analysis

Today, the key benchmarks are falling in a concerted fashion, but while in the US, technicals are suggesting a simple correction, elsewhere, the patterns resemble larger scale tops. While we don’t know how these divergences will finally be resolved, we remain defensive towards risk assets.

Commodities Stable Despite Dollar Strength

Copper, 4-Hour Chart Analysis

Chinese markets have been relatively quiet amid the broader emerging market rout, and copper, which has been closely correlated with the country’s assets, is also holding up above the strong long-term support zone that we have been monitoring near the $2.70 level. The other major commodities are stable, especially given the Dollar’s break-out, with crude oil trading slightly higher, while gold sporting a small loss amid the risk-off shift.

NZD/USD, Daily Chart Analysis

The main China- and commodity-linked currencies, on the other hand, are among the weakest global assets, with the Australian Dollar trading at the lowest level since early 2017, and the New Zealand Dollar hitting a more than two-year low yesterday.

All in all, as the markets are approaching the worst part of the year from a seasonality perspective, the signs of a deeper risk-off shift are already present, with the Fed’s tightening cycle likely being the main catalyst behind the restructuring.

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Trader and financial analyst, with 10 years of experience in the field. An expert in technical analysis and risk management, but also an avid practitioner of value investment and passive strategies, with a passion towards anything that is connected to the market.