News & Analysis

FX traded with a tentative risk-on tone this week, with the dollar seeing losses to most of the G10. Euro periphery currencies such as NOK, SEK, CZK and PLN all saw noteworthy performances, consistent with improving sentiment about the region’s growth prospects.

The biggest loser, NZD, was driven by idiosyncratic factors as New Zealand’s largest city returned to lockdown and the RBNZ expanded asset purchases. Following comments from Governor Lowe about the desirability of a weaker currency, RBNZ Chief Economist Young Ha also told MNI that the Bank would only consider foreign asset purchases to weaken the Kiwi dollar if the currency “got out of line with fundamentals”. Ha also acknowledged that the exchange rate was an important transmission mechanism for the central bank, although one that they had less control of compared to interest rates. US-China tensions continued to simmer, with a few minor headlines about reciprocal sanctions coming early in the week, but news attention is turning inexorably to domestic politics, and above all the looming Presidential election.

This week’s calendar is relatively quiet, leaving markets with a few highlights to focus on in addition to ongoing global macro themes such as covid numbers and geopolitics:

  • Monday 17th: A relatively quiet day data-wise, with Rightmove releasing their house price index at midnight. Last week’s Royal Institute of Chartered Surveyors survey release showed that the short-term outlook for the UK housing market had improved markedly, but respondents remained pessimistic over a 12-month horizon. The Empire State Manufacturing Index will be released in the US at 13:30 BST, alongside Canadian foreign securities purchases data.
  • Tuesday 18th: RBA minutes will be released at 02:30 BST, but are unlikely to offer much more information considering how comprehensive the RBA’s communications were this month, between the rate announcement, statement on monetary policy, and parliamentary testimony. The RBA has maintained opposition to negative rates (unlike the RBNZ), and in last week’s testimony Governor Lowe expressed additional caution around further monetary easing, saying “at the moment we wouldn’t get much traction from that” and “there are limits to what more we can do”. These statements arguably leave the RBA as the most hawkish G10 central bank. The rest of the day’s data is second-tier, with US building permits and starts data out at 13:30.
  • Wednesday 19th: UK inflation figures for July will be released at 07:00 BST, followed by its eurozone equivalent at 10:00 and Canada at 13:30. With monetary policy focused on interpreting high-frequency and forward looking data, a lagged indicator like inflation is of reduced importance for markets. The minutes from the FOMC’s July meeting, however, will be of interest to markets. Jerome Powell was characteristically clear about the two big questions for near-term Fed policy, which are “when will the Fed ease further” and “how will they do it”. To the former, Powell linked policy tweaks to the conclusion of the Fed’s ongoing strategy review. Regarding the latter, Powell was clear that asset purchases, credit facilities, and forward guidance would be the tools used. We continue to expect a combination of enhanced, outcome-based forward guidance combined with asset purchases to further flatten and lower the US Treasury curve, and keep the dollar on the defensive. However, the timing of these moves will be crucial for the short-term outlook for the dollar. Wednesday’s minutes will hopefully shed light on if the FOMC will be in a position to implement these measures by September, or if deliberations about long-term strategy will drag things out longer.
  • Thursday 20th: Another of day mid-tier data, with the ECB’s latest meeting minutes out at 12:00 BST. The ECB has maintained a fairly robust line on its mandate to conduct purchases under the PEPP, and so far appears to have been successful, together with the Bundesbank, in batting away interference from the German constitutional court. Purchases data from July and June showed that the ECB has continued to take advantage of its flexibility to purchase a disproportionate amount of periphery bonds in the short run, while converging to the ratios in its capital key in the long run. Thursday’s minutes may offer some insight into discussions on asset purchases, as well as the Governing Council’s views on the economic outlook. Initial jobless claims and the Philly Fed index will be out for the US at 13:30. The Central Bank of the Republic of Turkey will also release its latest rate announcement at 12:00, discussed in detail below.
  • Friday 21st: A busy morning for European data in general, with UK Retail Sales out at 07:00 BST. There are good reasons to believe Retail Sales in the UK continued to expand after the 13.9% bounce seen in June, with several high-frequency indicators recently favoured by the Bank of England, suggesting a sustained recovery in consumer spending. The median forecast for retail sales ex auto fuel is -0.5% on Bloomberg. The breakdown of spending will be particularly interesting, as it will give some hints of how consumers are likely to allocate spending in an ongoing pandemic. Purchasing managers indices for the UK and various European Economies will be released throughout the morning, and are discussed in greater depth below, as is Canada’s Retail Sales release at 13:30.


USD dollar on back foot, with NZD underperforming due to idiosyncratic risks




Since our last edition of the Week Ahead, the TCMB have effectively raised interest rates without embarking on a traditional rate hike. By restricting access for both domestic lenders and then primary dealers to the policy one-week repo facility, the central bank forced market participants into the overnight repo window and late liquidity window. Both of these lending facilities command higher interest rates at 9.75% and 11.25% respectively. This increased the weighted average interest rate local banks face and tightened monetary policy effectively without raising rates. The lack of liquidity at lower rates and in the interbank market in general was highlighted on Thursday when the central bank conducted a one-month repo auction. Unlike the overnight and one-week policy repo facilities, the one-month auction is an open market operation and rates are therefore decided by market forces. The TRY20bn auction yielded an average rate of 10.96%, some 271bps above the policy one-week repo rate – which is now no longer accessible due to the restrictions put in place. In last week’s edition of the week ahead, we highlighted how we expected liquidity conditions to be tightened in the run-up to the TCMB’s meeting on Thursday as authorities try to stem the pressure on the lira without embarking on an inter-meeting rate hike. If the latest measures failed to limit the lira’s slide, an inter-meeting rate hike would have been likely. However, the signalling of such a move may spook investors, which would result in the central bank having to hike rates more aggressively and would therefore be counterproductive.

Given the opposition to such an event, we expect authorities to continue tightening liquidity conditions in the banking sector to limit further TRY depreciation in the run-up to Thursday’s meeting.

This could take the form of limiting access to the overnight rate at 9.75% and forcing banks to lend in the more expensive late liquidity window.


Weighted average lending rate rises as the TCMB freeze’s access to the one-week repo rate



Over the course of the last week, TRY deposits in the banking system fell by TRY23.7bn to TRY1,536.8bn with FX deposits increasing by US$6.5bn to US$243.9bn. This highlights the domestic consequences of the latest lira depreciation – a pivot in deposits away from the domestic currency – along with the forces in play in onshore markets purely from depositor demand. From an external standpoint, Friday’s data showed Turkey ran a current account deficit for the seventh consecutive month in June. While exports rose by 15.7% annually, the 8.7% rise in imports and slowdown in tourism kept Turkey’s current account recording a deficit. While the data is lagged by almost two months, it highlights the structural imbalances at play externally which forced the lira to drain the central bank’s FX reserves by $7.7bn in June. Net portfolio outflows came in at $1.5bn while non-residents sold $31m in Turkish stocks and $427m in sovereign bonds. The latter is more concerning as it underlines the fragile trust of foreign markets which needs to be bolstered to finance Turkey’s current account deficits.


Lira volatility stabilising but authorities are struggling to stem its depreciation




With Turkish authorities assisting a wounded lira to Thursday’s meeting, it is no longer a question of whether the TCMB will hike rates but instead it is a question of how much. Given the political opposition to higher rates, we expect the central bank’s upcoming hiking cycle to be more restrained than that of 2018. This is reinforced by our view that the TCMB will aim to bide time with their policy stance until the global recovery assists the stabilisation of the situation and credit growth eases pressures on the current account. While this will undoubtedly take time to filter through to the economy and FX markets, it gives the TCMB leeway to avoid using the 2018 playbook and embark on a more conservative hiking cycle. While this won’t be signalled explicitly by the central bank, we also expect the hiking cycle to be front-loaded to sure up confidence in markets. While this may not necessarily allow authorities to reintroduce the one-week repo window to domestic lenders, it will tighten the policy channel further and lift the weighted average cost of funding. With liquidity measures implemented, this means the TCMB effectively hiked rates by 250bps in a fortnight despite only officially hiking rates by 100bps. This should be enough to strike a fine balance between buffeting the current market forces caused by external and financial imbalances while avoiding dramatic political consequences. In the short-term, we also see the tolerance of the central bank towards a weaker lira increasing relative to previous periods given the depletion of reserves once accounting for domestic swap agreements. In addition to this, over the medium-term the global economic recovery will also help ease the pressure on Turkey’s external financing strain, assisting the domestic recovery via the current account, while the scaling back on the asset-ratio rule will also temper the pressures stemming from domestic credit growth. In supplementary meetings, we expect the TCMB to continue hiking rates in line with the rising inflation trajectory but in a less aggressive manner than that of Thursday’s meeting. With an additional 4 interest rate meetings for 2020, we expect the central bank to hike in increments of 25bps a piece in order to maintain confidence in the current framework, whereas the timing of liquidity conditions normalising is less certain. However, this view is at the mercy of the lira.



July PMI figures

August PMI forecasts

The week’s main eurozone data release will be flash August Purchasing Managers’ Indices scheduled for release on Friday. Both manufacturing and services indices are expected to rise for the eurozone as a whole, while Germany’s manufacturing survey is expected to slightly fall. Overall, all indices are expected to print in the expansionary territory (above 50), which is in line with the narrative of a pickup in economic activity.

A few thoughts on factors and data relevant to the eurozone PMIs:

  • The GDP figures. The eurozone economy contracted by 12.1% in Q2 2020. The German and French economy contracted by 10.1% and 13.8% respectively while the Spanish and Italian economy shrank by 18.5% and 12.4%. For now, the worst seems to be over, especially as sentiment indicators such as business and consumer confidence showed month-on-month increases in June and July, while retail sales in July even showed a year-on-year increase. The year-on-year increase is key here, as it corrects for the initial rebound due to the gradual loosening of lockdown measures.
  • A resurgence in virus cases. On Thursday, Germany recorded the highest number of daily infections in more than three months, as new cases stayed above 1,000 for three consecutive days. Similarly, France saw 2524 new cases in the past 24 hours, the highest jump since lockdown measures were lifted in May. Spain announced on Tuesday that there are 675 “active outbreaks” in the country.
  • The ZEW survey. Germany’s ZEW Survey current assessment figures dropped from -80.0 in July to -81.3 in August, arguably indicating that economists are increasingly anticipating some increased drag following the resurgence of virus cases throughout the eurozone.

The GDP figures showed the worst contraction in the history of the eurozone. From here on, things were expected to gradually improve – as July’s hard data releases proved they did. But the second and third bullet point indicate that markets should be aware that there are bumps on the way to recovery. Lockdown measures in major eurozone economies at the time of the survey were less stringent than e.g. in the US or the UK, although Germany is eying renewed restrictions. The difference, however, is that the potential restrictions being eyed by Germany include more targeted measures like localised bans on travel in and out of hotspots, and mandatory mask wearing. This has a less damaging effect to the economy than a full lockdown and is more supportive of the labour market that broad and lasting restrictions on whole industries or regions.

Concerns related to the resurgence in virus cases may therefore not be reflected in the upcoming PMIs.

Instead, the PMIs may suggest that a broad-based recovery is continuing, even though market conditions may slowly be deteriorating again. It is therefore crucial to view the PMIs on a rolling, multi-month basis, to account for the chops and changes in recovery prospects.




Inflation data is having a lesser effect on markets lately as central banks overlook the latest price growth data and focus on the progression of the domestic economic recovery. With no monetary policy implications, sub-par CPI readings for the remainder of 2020 are unlikely to have an impact for FX markets, especially if yield-curve control becomes a more popular policy choice and real yields show less fluctuation.

This means Friday’s retail sales data for June, released at 13:30 BST (08:30 ET) will be the predominant focus for markets in Canada’s data calendar.

Retail sales grew by 18.7% MoM in May, with core retail sales growing 10.6%, as a number of provinces began to re-open their economies, aiding the recovery in consumption. All subsectors except food and beverage stores saw positive sales growth which highlights the natural unwind of Covid-induced consumption patterns. While the growth rates were positive, the level of sales remain substantially below those seen prior to Covid-19. Statistics Canada’s flash reading for June’s data suggests retail sales increased by 24.5%. Such a reading would bring the nominal level of sales back to pre-virus levels, but this by no means suggests that Canada’s retail sector has evaded the impact of Covid-19 relatively unscathed.


May’s flash estimate of June’s retail sales suggests the nominal level of sales will return to pre-virus levels



The Canadian dollar finally caught up with the G10 last week and returned to pre-virus levels, having failed to do so in July when the dollar weakened generally. We argued a few weeks back in the Week Ahead that this was due to the dollar weakening off of a slower growth outlook relative to G10 economies, which also weighed on the trajectory of Canada’s recovery due to trade linkages and the oil price rebound. However, with the loonie now trading near levels not seen since January 30th, positive surprises in economic data may be enough to see the loonie catch up with the rest of the G10.


Could a strong retail sales print be enough to help the loonie catch up with the G10 rally?
FX rates are normalised to the rate on the 2nd March 2020 – the first trading day of March – to reflect the return to pre-virus levels in the G10 market


Ranko Berich, Head of Market Analysis
Simon Harvey, FX Market Analyst
Ima Sammani, Junior FX Market Analyst



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