Sun, Dec 04, 2022 @ 07:36 GMT
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Swiss Franc Safety Amid TRY Collapse

Swiss franc safety

Mounting uncertainty in Europe has driven investors back into CHF. This, after steady Euro appreciation and EUR/CHF reaching the psychological 1.2 threshold, after the Swiss National Bank shifted its comment from “highly overvalued” to “highly valued” and slowed its FX intervention. The CHF title of safe-haven currency marginally eroded as geopolitical and trade tensions limited effect on investor’s appetite for CHF.

Now CHF has become regionalized: the safe haven during European risks. This new reality was highlighted by CHF strengthening during Italian elections. The concentration of European risk in the current environment has sent EUR/CHF down to 113.98. The SNB is still ready to intervene if necessary. We doubt the SNB will stand in front of a European crisis to secure CHF, but where is the pain threshold: 112, 111, 110?.

Foreign exchange markets are in a full-blown risk off trading. Extreme market pressure on Russia and Turkey has spread fears of contagion. Over the next weeks markets will turn their focus on Italy. The new government is expected to provide a budget for 2019, indicating how closely officials would stick to their expensive spending promises. Any extreme unfunded deficit spending will add to domestic turmoil and conflict with the EU.

Turkish lira hits new low

The spotlight is over Turkey, as the US is threatening to impose further sanctions against the country. Additionally, today’s Turkish economic model presentation is expected to disappoint investors, as economic growth forecast declined from prior estimates of 5.50% to less than 4%. Inflation remains largely above the 5% target set by the Turkish central bank (July CPI y/y: + 15.85%), a target that the country never reached since 2011, thus casting doubt over the Turkish central bank independence for managing Turkey’s monetary policy.

Accordingly, Turkish lira continues to lose ground against major currencies. USD/TRY is falling by over -6% intraday and -55.38% year to date. Therefore, if Finance Minister Berat Albayrak (Erdogan’s son in law) maintains an over optimism stance by overdoing the good health of Turkish banking system, the TRY downward move should strengthen further, as optimism does not mean rate hike any time soon. In addition, knowing Erdogan’s view to that regard, there is close to no hope to see any move in that direction.

Currently trading along 6, a historical high, the USD/TRY pair could be reaching the 6.20 range in the short-term.

EUR/USD at one-year low

Trading at the weakest range since mid-July 2018, the single currency is facing difficult times. Rumors surrounding a spill over on European banks of the Turkish lira situation being the main driver of the steep decline. According to an FT article, ECB’s Single Supervisory Mechanism warns that three large European banks are “particularly exposed” to the lira movement, as they allegedly are important lenders to turkey, though the situation is not viewed as “critical” by the monetary authority.

Following the news, the EUR/USD dropped by over -0.60% in early trading session, an excessive move that will most probably go the other way – at least until next week Italian budget plan for 2019, as Italy’s anti-establishment coalition is expected to negotiate further flexibility with regard to EU budget restrictions for its members.

Currently trading along 1.1450, EUR/USD is expected to bounce back along the 1.15 range

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