Asian markets are positioned to open higher, suggested by future indices, as fears over Turkey’s currency crisis faded.
Turkish Lira stopped bleeding and retraced to 6.90 area after hitting recent high of 7.12 on Monday morning. The country’s large bank index, however, tumbled 10% overnight as risk premium continued to be priced in.
Japan’s Nikkei 225 rebounded 1.2% this morning, with 10 out of 11 major sectors in the positive territory. Yen pared some of Monday’s gain as risk appetite improved, and dollar continued to climb higher. Market participants tend to believe that Turkey’s currency rout is largely contained within the country’s bank system and may have some spillover effect to several European banks who have significant exposure to the country. For the rest of the world, however, the impact to real economy is largely manageable.
What market concerned most is the contagion effect to other emerging market currencies, namely Indonesian rupiah, Argentine peso, Brazilian real and Iranian rial, etc. All these countries shared similar background as Turkey with negative current account balance and fiscal deficit, and thus more susceptible to capital outflow and currency crisis in a rate hike cycle.
Turkish lira’s freefall last and this week led to widespread panic selling on emerging market currencies and equities in particular. Risk sentiment swung back on Monday after Turkey’s financial minister pledged to take necessary actions to calm the markets soon. Market participants are also trying to price in the adverse impact over Turkey’s banking system, both domestically and across Europe, as well as the spill over to several European banks who have significant exposure to the country.
Deteriorating in its current account and fiscal deficit, reliance on foreign loans and escalating trade disputes with the Trump Administration remained the key dragging factors behind lira’s weakness. Weaker currency further worsened bank’s asset quality and capital ratios, which led to lower credit supply and dampened economic growth outlook. Deterioration in economic growth and trades will then result in weaker currency. This forms a negative feedback loop, which if not well controlled, could snowball into a bigger financial crisis.
USD/TRY reached as high as 7.12 on Monday morning before falling back to 6.80 area at the end of the day. In its hourly chart, momentum indicator DMI has showed early sign of trend-reverse, suggesting that the bull trend has overrun and is due for a correction. Its immediate resistance remains at the psychological level of 7.0.
By Margaret Yang in Singapore
CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. CMC Markets is regulated by the Monetary Authority of Singapore.