Very bad? ! A complete collapse of the Turkish lira sparks flight to safety. Gold did not rise but fell. Powell hits!

European stocks were mixed during trading on Monday as fears of a third wave of contagion and containment continued to grip markets. The Turkish Lila storm hit the currency market, the safe-haven yen was favored, and further pullback in U.S. bond yields weighed on the dollar’s gains. Spot gold is now trading around 1730, with an eye on today’s Fed Chairman Colin Powell’s speech.

Spot gold continued its decline in European trading on Monday, hovering around $1,730 after briefly losing that level, down nearly $20 or so from the session’s high of 1,747.

Gold fell on the day as the hawkish head of Turkey’s central bank was ousted and replaced by a critic of high interest rates, sparking financial uncertainty and sending investors rushing to the dollar and other safe-haven assets such as bonds.

According to Reuters technical analyst Tao Wang, gold could retest support at $1,716 and fall to a range of $1,669-1,691 if it breaks that support.

“We could have seen gold benefiting along with the dollar and yen when the Turkish lira sold off this morning, but that certainly wasn’t the case,” said Michael McCarthy, chief market strategist at CMC Markets. “The stronger dollar seems to be the main driver of gold at the moment… It looks as if the dollar and yen are still favourites.”

Turkish President Recep Tayyip Erdogan fired central bank governor Naci Agbal on Tuesday night, raising concerns that the move could throw the country into further economic turmoil.

Since he took office in November, Turkey’s central bank has cut its benchmark interest rate to 19 per cent from 10.25 per cent. Last week’s bigger-than-expected 200 basis point increase was the trigger for Mr Aghbar’s dismissal.

As a result, the lira initially fell as much as 17 percent against the dollar to near a record low. It fell as low as 8.4850 from 7.2185 on Friday, near the intraday record low of 8.58 set in early November.

Analysts say the latest reshuffle could reverse the hawkish and orthodox approach taken by former central bank governor Naci Agbal and push Turkey inching towards a balance of payments crisis as its foreign exchange reserves run out.

Societe Generale recently said the sacking of Turkey’s central-bank governor had “put Turkey on the road of no return”. Exiting any long positions in Turkish assets is recommended. The bank expects the Turkish lira to weaken to 9.70 by the end of the second quarter and 9.30 by the end of the year. Turkey’s one-year repo rate is expected to end the second quarter at 17 percent and end the year at 20 percent.

Rabobank said it dropped its cautiously optimistic view on the Turkish lira. One has to assume that Turkey’s easing cycle may start sooner and sooner than previously thought.

“Other emerging market countries are not in the same situation as Turkey, but the impact could still spread,” said Masafumi Yamamoto, chief currency strategist at Mizuho Securities. “There is a suspicion that people will start taking profits in other markets. Now seems to be the time to rethink your investment strategy as the rotation towards high-yielding emerging market currencies takes a pause.”

Analysts say they are bracing for more volatility as more investors enter the market later. The safe-haven dollar and yen gained favor.

However, Treasury prices rose on Monday morning as a sharp fall in the Turkish lira sparked fears of a new currency crisis, curbing the dollar’s gains and pushing the dollar index back below 92.

The yield on the benchmark 10-year Treasury note fell to 1.6804% around 5:50 a.m. ET, while the yield on the 30-year note fell to 2.3881%. Yields move inversely to prices.

Late last week, the yield on the 10-year Treasury rose to a 14-month high of 1.7 per cent, while the yield on the 30-year Treasury briefly rose above 2.5 per cent. The sharp rise in yields came after speeches by the Federal Reserve and its chairman Jerome Powell signalled that the central bank would allow inflation to rise.

At the start of the year, the 10-year Treasury yield was less than 1%.

For the session, investors are focused on comments from Federal Reserve Chairman Colin Powell. Mr Powell will speak on innovation in the digital age at a meeting of the Bank for International Settlements at 21:00 Hong Kong time on Monday.

More important, though, will be the speech that follows. Powell will appear before a congressional committee with Treasury Secretary Janet Yellen on Tuesday and Wednesday to give his views on the outlook for the economy and interest rates.

On Friday, the Fed said it would not extend temporary outbreak-related regulatory easing measures set to expire at the end of this month, and large U.S. banks will have to resume holding additional capital against U.S. government debt and central bank deposits starting next month.

To ease stress in the U.S. Treasury market caused by COVID-19 and to encourage bank lending if U.S. households and businesses were affected by the pandemic blockade, the Federal Reserve in April last year temporarily excluded U.S. Treasuries and central bank deposits from the Supplementary Leverage Rating (SLR) until March 31 this year.

Leave a Reply

Your email address will not be published. Required fields are marked *