Turkish lira plunges on shocking Erdogan’s decision

Summary:

• Lira declines heavily against the US dollar after Erdogan dismissed the incumbent governor of CBRT
• China threatens to blacklist foreign companies as a bargaining chip before a new round of trade talks with the US
• US dollar being slightly offered, Asian equities down, US bond yields correct some of their post-NFP gains

Erdogan sends lira lower

The Turkish lira is falling hard this morning against the US dollar in response to a decision taken by President Recep Erdogan to dismiss the incumbent governor of the country’s central bank Murat Cetinkaya, whose term in office was due to run until the next year. Erdogan appointed Cetinkaya’s deputy Murat Uysal as a new governor, the decision that undermined once again independence of the Turkish central bank. President Erdogan was quoted by local media outlets as saying “We told him repeatedly in economy meetings that he should cut rates. We told him that the rate cut would help inflation to fall. He didn’t do what was necessary,”. This is a shocking explanation of his decision confirming that Erdogan has yet to abandon his unorthodox notion that lower rates should help inflation decline. Now, it looks like all woes surrounding over the Turkish currency has come back, therefore one needs to be prepared for extended depreciation over the coming days as investors might want to withdraw their money. On top of that, one may conclude that the Erdogan’s decision is regrettable as it has confirmed not only that he is in practice in charge of monetary policy but also undermined democratic foundations there. Let us note that the lira was appreciating against the US dollar since May until the last week after improved sentiment following a rerun of elections in Istanbul and still high rates kept by the central bank. However, a lot has changed after the past weekend and with increased market expectations that rates could be lowered investors might sell the lira. By and large, the outlook for the Turkish currency has aggravated and the odds of another currency crisis have risen. It may have also serious reverberations for the real economy.

The USDTRY jumped on Sunday right after the FX market opening. However, the pair has managed to stay below the bearish trend line so far, it may give some hope for TRY bulls. Source: xStation5

US-China trade negotiations 

Leaders from the United States and China are to have a phone call this week which could be an official onset of another round of trade talks. Meanwhile, Beijing seems to be well prepared before the start of those negotiations and thereby it is considering to name foreign companies as a risk to national security, a decision which could be a bargaining chip for China - the news brought by South China Morning Post. The article also says that foreign companies that are deemed to hurt Chinese legitimate interests or pose a risk to national security are to be listed as “unreliable entities”. Equity markets in Asia are down today with the Shanghai Composite falling as much as 2.5% and the Hang Seng declining 1.7%. Elsewhere, the US dollar is being slightly offered while the US 10Y bond yield is losing almost 2 bps after a spike it saw after the June employment report.

The Hang Seng is declining ahead of another round of trade negotiations between the US and China. Source: xStation5

In the other news:

• Japanese core machinery orders for May fell 7.8% MoM, falling short of the median estimate of a 3.8% MoM decrease

• Centre-right New Democracy leader Mitsotakis will take over Monday as a new prime minister of Greece following the snap elections which took place over the weekend; he will replace Tsipras; after winning New Democracy will have a clear parliamentary majority of 158 lawmakers in the 300-seat chamber