The yen, Swiss franc and dollar are stronger, as the Turkish lira sell-off spreads to equities leaving the euro vulnerable to a further sharp sell-off, according to a leading foreign exchange analyst.
With the Lira down 28% against the dollar so far this month, in a note to clients on Monday (13 August), the Head of FX at Société Générale - Kit Juckes – wrote: "For some G10 context, the pound fell by just 11% in September 1992, though the Lira fell by 30% in February 2001 (with a formal devaluation) and lost half its value over the course of the year. A year when the rand lost 37%.
"Both are vulnerable to international portfolio flows drying up. Asian equities are down across the board and European markets opened lower too."
Two further issues are worthy of market attention, according to Juckes. "The first is the risk that the Lira's woes take EUR/USD to 1.10 or so. And the second, related, is that the global landscape is different now because US inflation is edging higher and the Federal Reserve has more work to do, limiting the scope to pour oil on the market's troubled waters."
The danger to the euro comes from BTPs, 6bp higher this morning, as well as Turkey. "Europe is obviously more vulnerable to shockwaves, economically and politically, than the US is. And while the big EUR long has been all but eradicated, the euro still lacks yield support and there is room for shorts to build. There's nothing to stop the current slide continuing this week and beyond," Juckes added.
EUR/USD is crying out for Bund support and not getting any.
"The threat from the Fed is, I think, less clear. July core CPI inflation reached its highest level since 2008 but 2.4% isn't that high and wage growth, at 2.7% isn't scary. Our US economics team thinks that core CPI will be back around 2% by year-end. Year end's a long way away however and 10-year Note yields are at 2.86 this morning. The more the market thinks the Fed can’t or won't ride to asset markets' rescue, the deeper the sell-off can be. Another reason to be long yen."
