Morning Report: 10 August 2018

August 10, 2018

GBP. Sterling continued its decline against the dollar yesterday, despite a fairly positive start to the trading day. The afternoon’s dollar strength drove GBPUSD to post a sixth consecutive day of losses, a trend that has continued this morning. The release of Q2’s Gross Domestic Product may offer support for sterling today, as the 09:30 release looks set to prove to markets that the UK’s economic growth is back on track with the Bank of England’s forecasts – if the reading comes in on forecast at 0.4%. This is the main data release that sterling has been building up towards all week, and a positive surprise may see GBPUSD kick its recent aggressive downtrend.

EUR. Euro was the first to suffer from the contagion risk of the historic fall in Turkish lira over concerns that the havoc in Turkish markets could negatively impact Europe’s biggest banks. The Eurozone’s financial watchdog, the Single Supervisory Mechanism, is keeping a close eye out on the ripple effects this can have, with BNP Paribas, UniCredit and Banco Bilbao Vizcaya Argentaria mentioned as banks with large exposure to the Turkish currency. The nervousness surrounding this got the single currency shaking and falling through a massive support level to a one year low against the dollar, which points to further downside risk on EURUSD. Further developments in Turkey and how this is felt in large European financial institutions is likely to dominate the direction of the single currency today.

USD. The dollar has taken no prisoners this morning, rallying against nearly every conceivable major currency except JPY – of which has hung on by the skin of its teeth. The major break in support for EURUSD sent the dollar composite DXY index off like a rocket, breaking the tight range it has been trading in since tariffs were installed on July 16th. A fresh year high was carved by the DXY index today, with US Consumer Price Index still to be released at 13:30 today. Currently, it looks like the dollar has batted off any pessimism about growing protectionism measures imposed by the White House as this week new sanctions on Iran and Russia have been announced. Emerging markets seem to be faring the worst from the latest bout of dollar strength.

CAD. The loonie continued to fall against the dollar as investors flee to safety as tensions between Canada and Saudi Arabia intensified. A further moderation in oil prices did little to stem the loonie’s decline, and with the greenback surging today, further loonie weakness may cap off its poor week. Labour market data released at 13:30 may come to the loonie’s savour today, as wages are expected to rise 3.6% YoY in July and the labour market continues to tighten with unemployment falling to 5.9%.

FX Elsewhere. The Turkish lira fell over 12% this morning as the Turkish delegation in Washington failed to persuade the US to drop sanctions and the Central Bank seems incapable of stemming the current fall. The currency is falling so fast that a parachute is the first thing that comes to mind to prevent the Turkish lira smashing into the ground. The parachute could be a hike of at least 500 basis points to calm markets and show commitment by the Central Bank of the Republic of Turkey to support the currency, or it could come in the shape of capital controls – both of which President Erdogan is strongly against. With Erdogan’s son-in-law Albayrak, who is Economic Czar of Turkey, announcing plans for a “new economy”, alongside sanctions imposed by the US, investors have pulled their money from Turkey this morning. All eyes will be on Albayrak and Erdogan’s statements at 12:00 BST today.

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