Italy got its prime minister, now what?
The Swiss franc took a big hit on Wednesday afternoon after Sergio Mattarella names Giuseppe Conte as Prime Minister as USD/CHF rose more than 0.6% to 0.9978. Similarly, EUR/CHF climbed from 1.1581 to 1.1660, up 0.68%. However, the Swissie’s losses were proved to be short-lived as the greenback resumed its debasement.
In the short-term, we expect that the franc appreciation against the euro will ease as the uncertainty generated by the Italian situation becomes of secondary importance. Nevertheless, the League and the 5-star Movement have promised to take a bunch of measures that will eventually widen the country’s budget deficit (cancellation of pension reform, flattening tax, increase spending, etc.), which will raise the hairs of investors’ back. Therefore, we believe that over the medium-term, we may see some renewed buying pressure on the Swiss on the franc against the euro.
However, for USD/CHF this is a complete different story, as fundamentals are not supportive for further dollar appreciation. US interest rates have started to move lower recently with the 2-year yield easing to 2.51%, while the 10-year one slid below the 3% threshold. The trade tension between China and the USA have eased recently, as the Trump administration is backpedalling. Moreover, the latest Trump geopolitical manoeuvres have affected negatively the relationship between the US and most of its allies.
TRY in wild swings
Volatility in EM FX continues to fuel speculation of a wider risk unwind. This time its events in Turkey, which are driving traders into safe-haven trades. Investor are dumping the Try as years of poor financial managements, crony-capitalism, less independent CBT and political uncertainty are now in play. Rising US yields are clearly the catalyst but weak fundamentals make short TRY trade simpler. USDTRY 1 month atm volatility has spiked above 30. In an attempt to stem the outflows the Turkish central banks unexpectedly jacked interest rates.
Unexpectedly because Present Erdogan recently communicated that the central banks independence would be in jeopardy should he win and expand executive powers on 24th June general election. He express that Turkish interest rate should be lower to support weak growth, rather than higher to target inflation. Wednesday after markets had closed, in an emergence session CBT hiked late liquidity lending rate by 300 basis points to 16.5%. The statements was short highlighting higher inflation fears and weak TRY as primary reason for monetary policy tightening. The immediate reactions in TRY was a relief rally however since then the Try has continued its march higher. We don’t see any relief in TRY sell until after the 24th elections and even then the failure to address key fundamental issues and attractive US rates will likely keep TRY weak.