EUR/USD Recovery Proving Shallow Despite Rebound By Lira

USD/TRY REVERSAL BOOSTING MARKET SENTIMENT…

The US Dollar (via the DXY Index) is set to lose ground for the first time after four consecutive days of gains, thanks in part to improved investor risk appetite around Tuesday’s trading session. With focus remaining on Turkey, a sharp reversal in USD/TRY has market participants hopeful that any economic or financial fallout is contained to the country, and the collateral damage to emerging market or other currencies will be limited.

Price action developing today is essentially a mirror image of what we’ve seen since Thursday: the US Dollar is trading lower, as is the Japanese Yen; US equity futures are pointing higher, following their Turkish counterpart; and US Treasury yields are pushing higher. The demand for safe haven assets has been quelled.

But as far as the news goes, nothing material has changed over the past 24-hours that would lead us to believe that the situation is de-escalating at this point in time. Turkish President Recep Erdogan has pledged to retaliate against the US by boycotting the import of US electronic goods, and no timeline has been established to end the diplomatic schism surrounding the arrest of a US pastor.

USD/TRY Price Chart: Hourly Timeframe (August 2018) (Chart 1)

It’s important to put the USD/TRY reversal into content, then. While the stability in USD/TRY may be calming for market participants at present time, it won’t do much to change the long-term calculus that the sharp depreciation in the Turkish Lira poses. Put simply, It’s just a matter of time before loan defaults occur and financial insitutions start eating losses.

…BUT PAIRS LIKE EUR/USD AREN’T RALLYING

Despite the reversal seen in USD/TRY thus far, the losses are paltry compared to what would be needed in order to convince market participants that an economic and financial crisis in Turkey would be contained. With longer-term issues still at play – who is going to pay back all that money owed to the banks? – there hasn’t been much scope for recovery for other impacted currencies.