Dollar up on strong economy
Strong economic data sent US yields higher across the board. 10-year treasuries surged to 3.225%, adding 0.12% overnight. USD bulls charged, bidding up the greenback versus developed and developing currencies alike. Worries of a slowdown trade tensions were nowhere to be found. Markets now expect a steeper rate curve in 2019 with additional rate hikes. Federal Reserve Chairman Jerome Powell boosted the sell-off, saying he is “very happy” with the “remarkably positive” economy, adding that the expansion might “continue for quite some time”.
Fed policymakers continue to signal that gradual rate hikes are starting to reprice the yield curve, especially in its longer end. Emerging currencies are under extreme scrutiny, as higher US yields will further draw out capital. INR and IDR, with heavy USD funding and reliance on imported oil, have come under heavy selling. With US drillers coming offline, distillates below historical average and supply disruptions expected in Iran and Venezuela, crude prices continue to trade higher. We are sidelined: expectations for USD weakness have not appeared and scheduled events for USD selling are far off.
Turkish lira in trouble
Inflation in Turkey blew out expectations, with the core reading up to 24.5% and producer prices hitting 46%. Oddly, TRY is stable, which must mean markets are confident the Central Bank of Turkey will fix it. So the CBT must hike. However, we have a hard time seeing the bank has freedom to hike enough. Food tabs rose 27.7%, energy inflation 27.03%: core inflation is likely to head higher. The CBT should raise at least 1.5% to keep real interest from going negative. But a 25.5% interest rate would be a killer – President Erdogan is unlikely to allow it. Give the macro environment, we look for the lira to weaken.
