A right royal mess to greet us today

The FT’s ECB story about banks exposure to Turkey has sparked the latest round of EM selling and with the Turkish central bank seemingly powerless and with its head stuck in the sand, we’ve seen USDTRY kick up above 6.00. The highs are many (another problem for the fibs) depending on the broker. Reuters show it as 6.2860 but some platforms are showing over 6.40.

Obviously, that’s kicked on into other EM pairs vs USD, and many are looking at the break in the DXY but remember, the DXY isn’t a leader or driver. It moves because the dollar is moving vs the rest of the basket. At the moment, the dollar is a safe haven currency vs EM exposure. Obviously that exposure has been flagged via the FT to European banks, hence why EURUSD has taken a battering. The yen might be getting some risk off flows but the main driver is the better Japanese data overnight.

The point I’m trying to repeat is one that my colleague Kman made some weeks ago, it’s not primarily the dollar being bought, it’s everything else getting sold. On paper (our charts) that may not make a difference but in reality it does. USD isn’t stronger because the US fundamentals are fantastic, it’s because many other places are looking far worse.

How that affects trading is very important.

We’ve got a big data point today with US CPI. The market is going to be looking at this to make sure that the Fed gets in the remaining hikes this year. At any other time, any data that would upset that path would bring a big move south in the dollar but with these wider moves going on, a disappointing inflation print is probably not going to bring a meaningful change in the USD’s direction. We know a good number won’t either because that will just cement hike expectations, as we’ve seen time and time again. Right now, what’s going on in the FX world is far bigger than just one country’s fundamentals and so that should be factored into our trading.

Ryan Littlestone

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