FX round-up: Turkish lira plummets amid speculation emergency rate hike imminent

The biggest price action in the foreign exchange arena on Thursday was in the Emerging Markets space, amid speculation that Ankara might be forced into an emergency rate hike as soon as Thursday evening, although the standard central bank playbook was for the monetary authority to wait until the weekend, hopefully giving it time to explain its actions to market participants.

According to analysts at TD Securities, the country's central bank should hike its repurchase rate by at least 300 basis points from 17.75% at present, as a first move towards an eventual top in the repo rate towards 30.0%.

As of 2115 BST, the Greenback was soaring 4.94% against the Turkish lira to reach 5.5397, purportedly after Turkish officials failed to commit on Tuesday night to freeing American pastor, Andrew Brunson.

Nevertheless, it should be noted that the lira had already lost nearly two-thirds of its value against the US dollar over the past five years, having shed 30% in just the year-to-date.

Also on Thursday, the country's finance ministry lowered its forecast for GDP growth in 2018 to a range of between 3.0% to 4.0%, versus the 5.5% pace of expansion it had previously penciled-in for the economy - alongside talk that Prime Minister Erdogan was set to make an appearance.

In any case, on 3 August, Turkey's national statistics office had pegged the rate of advance in CPI for July at up by 15.85% year-on-year.

Unsurprisingly, two-year sovereign bond yields in Turkey were being quoted at 21.72%, underlining the country's predicament.

Commenting on the quickly-deteriorating situation in Turkish assets, TD Securities explained: "Turkey's financial situation is the direst it has been in years. Since the end of July, the lira has weakened by a staggering 10% against the dollar. Without rapid intervention, Turkey will head into a [balance-of-payments] crisis with unforeseeable but significant consequences.

"[...] We think the [central bank] has to act swiftly (even tonight) to short-circuit the adverse market dynamic."

Elsewhere in the EM space, the US dollar was at a roughly two-year high against the Russian rouble at 66.6917 amid speculation that Washington's stance towards Moscow might be hardening, increasing the scope for further sanctions either from the White House or Congress.

From a bird's eye view, the US dollar was trading within a whisker of its 52-week highs versus the currencies of its main trading partners, with the US dollar spot index up by 0.52% at 95.580 and just off the 95.6520 52-week high.

Dollar strength was evident despite the release of a slightly-lower-than-expected reading on US factory gate prices for July earlier in the session, although over recent days and weeks rate hike expectations for 2018 had been slowly shifting higher.

Euro/dollar was down sharply as well, retreating 0.69% to trade at 1.15297 with cable off by 0.43% to 1.28270. For the former, David Madden at CMC Markets UK was pointing out the 1.1510 mark as the level to watch, telling clients that its loss might pave the way for further downside.

The pound was however finding a small respite against the euro, mostly as a result of arbitrage, with investors apparently giving short shrift to reports that European Union member states might be willing to allow Britain to remain within the single market for goods, despite having opted out of the free movement of labour.