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Euro Recovers but Turkish Lira Threat Remains

In early trading rounds on Tuesday 14 August 2018, the euro recovered the losses it had suffered previously. These losses were linked to the free fall of the Turkish lira. However, the euro is not yet in the clear. Investors have said that European banks still have exposure to Turkey and this would come to haunt the single currency.

In August 2018, the TRY has plunged 30% as the diplomatic problems between Turkey and the US comes to the forefront. President Erdoğan is not willing to raise interest rates even though the country is reeling under inflation.

In Tuesday’s trading session, the TRY recovered from a record low of 7.24. This recovery came after the Central Bank of the Republic of Turkey vowed to ensure liquidity as global economies are at their worst and forex markets across the world face a meltdown.

The EUR was trading 0.1% higher at $1.1420, after falling to a 13-month low, to $1.1365. However, all is not well with the euro. In August 2018, it has lost 2.4% of its value.

Yukio Ishizuki, Senior Strategist at Daiwa Securities, said that the fall of the EUR was connected to the exposure European banks have to the TRY. However, this fear is unfounded as the exposure is not perceived to be excessive.

Other analysts feel that the gains the EUR has had in 24 hours will not last long. Viraj Patel, Currency Analyst at ING, pointed out that the EUR was not witnessing an increase even though the latest data shows that Germany’s economy was growing.

Investors are tentative about the fall in the TRY and, as a result, capital is flowing out of other emerging economies that depend on foreign capital and have significant current account deficits.

Emerging currencies are presently in freefall, with the ZAR falling 2%, the RUB plunging 1.4%, and the MXN falling nearly 0.8%.

Forex traders are focussing on currencies that they consider safer. These include the Swiss franc (CHF) and Japanese yen (JPY). This is evidence that the market is worried about the TRY, but fears may be subsiding.

After hitting a one-year high at 1.1288, the CHF lost value against the EUR. Also, the JPY fell 0.4% against the USD and settled at 111.145.

Antje Praefcke, Currency Strategist at Commerzbank, said that until the Turkey crisis is over, the risk aversion will remain high. Furthermore, it would benefit those currencies that forex traders and investors believe are safe.

The USD has been trading high against all major currencies since the TRY crisis started a few days ago. However, it is now heading to its biggest daily drop in August. Against major currencies, the USD was down 0.2% and was trading at 96.230.

Even onshore Chinese yuan (CNY) has joined currencies from other emerging markets and is falling. It has fallen 0.7% and is trading at 6.8851 per USD. The CNY stayed optimistic until the publishing of the economic indicators, which showed the Chinese economy is cooling off. The CNY is within sight of the 15-month low value of 6.8965 which was set earlier in August.

Risk Statement: Trading Foreign Exchange on margin carries a high level of risk and may not be suitable for all investors. The possibility exists that you could lose more than your initial deposit. The high degree of leverage can work against you as well as for you.


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