Just two days ago, Market Insights said that “traders hankering for volatility may want to keep an eye on currencies and crude oil.” Both of those events are now playing out.
Oil came first, tumbling to a three-week low hours after the post. This morning, foeign-exchange currencies followed as the Turkish lira cratered to a new record low against the U.S. dollar. It dragged the euro (@EC) and several other currencies lower.
Rather than getting bogged down in details, it’s important for clients to understand all the news events are part of one single bigger story. Let’s quickly review all the catalysts pushing that trend of a stronger U.S. dollar:
- The U.S. economy is doing well as other countries slow. That’s positive for U.S. dollar and thereby bearish for foreign currencies.
- The U.S. Federal Reserve is lifting interest rates. That’s also positive for U.S. dollar and thereby bearish for foreign currencies.
- Turkey’s hard-currency reserves are dwindling as debt repayments draw near. That’s bearish for foreign currencies and thereby bullish for the U.S. dollar.
- Turkey’s political developments have worsened the situation. It more or less ostracized itself from Europe by concentrating more power under President Erdogan in June. More recently, it’s clashed with U.S. President Trump over an imprisoned evangelical pastor.
In other words, Ankara has alienated Brussels and Washington at the very same time it needs their help financially. That’s bearish for foreign currencies and thereby bullish for the U.S. dollar.
- European banks have exposure to Turkish debt. Will they now face a contagion? That’s also bearish for foreign currencies and bullish for the U.S. dollar.
- Don’t forget about Russia. Did you know Trump’s sanctions against Moscow have pushed the ruble to its lowest levels in about a year? That’s also indirectly negative for the euro and thereby bullish for the U.S. dollar.
Ok, those are the main causes of the situation. Here are some effects traders should know about:
- First and foremost, global stocks are getting hammered. On Wednesday, we observed the potentially bearish setup in the iShares MSCI Emerging Market ETF (EEM). Today it’s following indicated to follow that trend lower.
- Second, U.S. Treasuries (@US) are rising in price and falling in yield. They’re still a safety play, even with the government issuing large amounts of debt. The big question now is whether people will look for Jerome Powell’s Fed to hike rates only three times this year instead of four.
- Next, banks and financials have a double risk from lower bond yields squeezing their margins and sovereign debt fears. Did you know Deutsche Bank (DB) is down 5 percent in the pre-market?
- Aside from the U.S. dollar (@DX) pushing higher, the Japanese yen (@JY) is another safe-haven that’s been rising against most other currencies. The Australian dollar (@AD), on the other hand, is bellwether of global economic sentiment. Not surprisingly it’s breaking to a new 52-week low this morning as well.
Oil (@CL) remains the main wildcard right now, with both bullish and bearish arguments. Global economic weakness is a negative, but there’s also political risk and limited supply. Just this morning, for instance, the International Energy Agency cautioned of potential shortages.
In conclusion, this isn’t a trade recommendation and everyone needs to do their own homework. We just wanted to provide clients with a clear summary of what’s going on.