CBRT’s « bazooka »

The easing cycle is alive and well in EM counties with Turkey moving forward with a significant reduction. In an unexpected move, the Central banks of Turkey chopped its benchmark one-week repo rate by 325bp. The policy rate now stands at 16.5% from 19.75% bringing the total cuts to 750bp in this easing cycle. There is a general relief that the policy rate slash was not deeper and more destabilizing. While given low global interest rates, the markets are more tolerant of large rate cuts. However, without high-interest rates, Turkish asset is exposed to sell-offs. A new guidance sentence from the interest rate announcement indicated that the front-loading of monetary easing is over and further policy decisions would be data-dependent, specifically the direction of inflation. The CBRT detailed that “at this point, the current monetary policy stance, to a large part, is considered to be consistent with the projected disinflation path.” Overall, the new central banker team did not strengthen their credibility. The larger than expected reduction indicates that President Erdoğan is in clear control of policy setting. Erdogan has indicate that interest rates would be reduced to the single digits over the coming month. In the mid-term CBRTs aggressive policy easing will challenge the market and amplified scope for policy error. The October decision will be critical in determining how quickly their credibility will develop. Yet with the political pressure “coming in hot” we doubt CBRT can achieve independence.

Japanese data are worrying ahead of a potential trade deal

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The recent events of the week have been taken largely positively to the detriment of haven assets though. The yen is expected to show the largest weekly loss among G10 currencies, highest in over six months against the greenback for instance (-1% week-to-date), suggesting that things should improve for the export-reliant economy. Yet the upcoming data from trade and inflation are likely to leave a bitter taste next week as the Japanese administration seems willing to satisfy US President Trump at great expense, making many concessions without receiving bulletproof guarantees in return. Furthermore, time is running short as both leaders are expected to meet during the United Nations General Assembly starting next Tuesday in New York while concrete negotiations have only just begun.

Indeed, without cosnidering the recent drop of machine orders in July of -6.60% and producer prices in August, which fell –0.90%, lowest since December 2016 due to lower commodity prices compared to last year and more specifically crude oil, forthcoming releases of August trade and inflation data are likely to disappoint. While exports and imports are likely to tick along -10% (prior: -1.50%) and -11% (prior: -1.20%) respectively, marking the largest declines since October 2016, headline and core consumer prices should head towards 0.30% (prior: 0.50%) and 0.50% (prior: 0.60%), thus keeping pressures vivid on the Bank of Japan at its monetary policy meeting next Thursday and paving the way to further easing starting from October 2019. With regard to the latter point, we would assume that Abe’s administration’s attempt to settle things by committing to avoid currency devaluation and implement tariff reductions on US agricultural products in exchange for lower tariffs for Japanese car manufacturers, at best, is delicate. Japanese policymakers struggle to get assurance from the White House that no tariffs hikes would occur while import quotas could also come into play. Looking at current situation, it seems that a signature of the new trade agreement as early as next week is subdued, putting additional pressures on the export-reliant nation.

Currently trading at 107.97, USD/JPY is expected to trade sideways short-term.

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