The US dollar is trading heavily against most of the world’s currencies today. The main exceptions come from the emerging markets where the Turkish lira, Russian ruble, and Mexican peso are the chief exceptions, and their losses are modest. This week’s dollar gains are being pared in largely corrective activity and amid a light news stream.
The threat of more sanctions on Turkey if it does not release the American pastor is helping the dollar recoup yesterday’s losses and puts it back near TRY6.0. Turkey has adjusted its policies to make it harder to short the lira, and Qatar signaled it would invest $15 bln. However, the unorthodox policies have not been addressed, and even if the lira were to stabilize here, the effect of the dramatic slide would work its way through the economy. Nearly three-quarters of its current account deficit, for example, is energy and the cost has surged in lira terms. Without corrective policy, domestic demand will suffer, and inflation will rise. The external sector will improve over time, as the weak domestic demand curbs imports and the weaker lira boosts exports.
The PBOC fixed the yuan higher today (~50 pips), ending a six-day streak of weaker fixes. It is the second consecutive session the yuan is firmer. Some observers are linking efforts to stabilize the yuan as part of the preparation for a resumption of trade talks in Washington. We are less convinced that that is their motivation. If the US strategy is maximizing pressure even as negotiations are announced ( and the US issued a new threat that China itself could be subject to sanctions if it does not respect the US oil embargo against Iran starting in November), then it does not make sense to look for China to seem soft.
Efforts to moderate the yuan’s decline began before the trade talks were announced. Lower Chinese rates seemed to have encouraged yuan weakness. China’s 10-year government bond yield rose for the second consecutive week, and the 19 bp increase puts the yield at its highest level in two months. Short-term Chinese rates are also stabilizing, which may also help take some pressure off the currency. Three-month SHIBOR edged higher for the fourth sessions today. Before this run three-month SHIBOR had eased every day since mid-June.
Leave A Comment