FX markets

Currency war – expression of monetary hopelessness

The obstacles to a political influence on monetary policy have apparently not only fallen in countries with a correspondingly bad reputation. The step to the next border crossing is obvious: the activation of monetary policy; no longer only subliminal by the political attempt to convince monetary policy of the necessity of an even stronger expansion, but by a targeted devaluation policy of the domestic currency. It is not for nothing that not only the speculations about interest rate cuts have been overturning in recent months. The tiresome debate about a global currency war is also picking up speed again. Although the discussion may sound familiar, it currently has a new component. The financial markets now recognise the limits of traditional monetary policy and the (perceived) hopelessness of the central banks to such an extent that they even allow room for speculation about currency market interventions. And this not only with…

Is Erdogan driving Turkey into the next crisis?

President Erdogan has demonstrated in recent days that he is always good for a negative surprise. With the unexpected dismissal of central bank chairman Cetinkaya and the announcement that the central bank would be completely restructured, the head of state has made it clear that in future he regards monetary policy as part of his economic policy. And as if the frontal attack on central bank independence weren’t bad enough, the diplomatic conflict with the USA over the purchase of a Russian air defence system is escalating. Independence of the central bank in danger, political quarrels between Ankara and Washington – the parallels with the drivers of last year’s lira crisis are obvious. Nevertheless, the reaction on the financial markets has so far remained very subdued. There are no clear signs of an existing or expected crisis in Turkey. The fact that this picture can change rapidly is mainly due…

Renewed defeat in Istanbul increases the pressure on Erdogan

The new mayor of Istanbul is Ekrem Imamoglu – and this time for real. The candidate he ran against, Binali Yildirim of the AKP, has already conceded defeat, and President Erdogan has congratulated Imamoglu on his success. For the AKP, and above all for the head of state, the loss of the economic powerhouse to the opposition is a problem. No less a person than Erdogan himself is rumoured to have said: “Whoever wins Istanbul, wins Turkey.” Imamoglu is undoubtedly still well away from achieving that, but having lost the largest city in the country, the AKP has also lost a major source of money with which to supply favourites and others upon which favour is to be bestowed with lucrative jobs and contracts. In addition to this, the AKP now no longer holds the reins in any of the three largest cities in the country. Even if many pundits…

Turkish Lira in difficult waters

This year, the Turkish Lira has to date made no headway. On the contrary, the currency has lost a good 10% against the Euro since the beginning of the year. The list of factors dragging it down is anything but short. Global trends play a role, admittedly, but this should not detract from the fact that the major challenges to the Lira are to be found on the home front and, as was the case last summer, the difficulties are indeed home-grown. Against the backdrop of the annulled results of the local elections in Istanbul, investors have become ever more concerned that Turkey under Erdogan is distancing itself (still) further from basic democratic principles. It is precisely these worries that are damaging the reputation of the Turkish central bank, on top of which diplomatic relations with the US are tense. Washington is threatening that the NATO partner will face consequences…

China, the USA and the “Potemkin Villages” of FX stability

The USA and China are on the verge of making a breakthrough to a new trade treaty. The subject of “foreign exchange” is said to play a key role and there are apparently “exactly defined structural agreements” in place – we wait with bated breath to see what they look like. The speculation to date is that China has promised to take the lid off its interventions in the foreign exchange market. Meaning the emphasis is not on forgoing interventions and also not on ex-ante information or even US permission, but simply on making the interventions more transparent after the event. That said, we should not forget that China has long since ceased to keep the Yuan on the desired track only by resorting to the entrance-level model of forex-policy, namely simply cash market interventions. The structure today is far more complex and includes a mixture of outright, forward and…

Shift in sentiment: currency markets react calmly, while bond markets do not

The view taken by financial market participants vis-a-vis the global fundamental environment has changed considerably in recent months. While economic momentum in the eurozone had already eased noticeably during 2018, estimates in particular for the growth prospects of both the US and the global economy have become less favourable in the past few weeks. Potential reasons for this are easily identifiable: on the one hand, we have the trade disputes between the world’s most important economic powers, the longest government shutdown in US history and the uncertain outcome of Brexit, to name a few. Various central banks have reacted to the new environment impacting on monetary policy. Examples include the downward revision of growth prospects and warnings about heightened risks for the still dominant economic outlook. On the other hand, central banks such as the Federal Reserve and the Reserve Bank of Australia have rejected the idea of previously envisaged…

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