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The US dollar gained against all of its G10 peers, as the FOMC Chair Janet Yellen hinted at an upcoming Federal Reserve (Fed) interest rate hike. The Fed action in December is now seen as almost granted, giving greenback lovers a free rein into the end of the year. The dollar index hit 101.32, as the US 10-year yield jumped to 2.3369%.
Gold retreated to $1205; oil and commodities resumed their slide.
Prospects of further USD appreciation weighed on commodity currencies, such as AUD and NZD.
Janet Yellen also gave a decent shake to the global bond markets.
The Antipodean sovereign bonds sold-off aggressively before the weekly close; the AU 10yr yields rose by 15.2 basis points, as the NZ 10yr added 11.2 basis points.
The UK’s 10-year gilt yield surged by 7 basis points at the London open (+1.48%), followed by significant increase in French (+5.6bp), Italian (+4.4bp), and Spanish (+4.6bp) yields.
Diverging ECB/Fed outlook weighs on the euro-dollar
In his speech in Frankfurt, the ECB President Mario Draghi reiterated that despite the improvement in the Euro area's banking sector, which allowed a better monetary policy transmission to the real economy, the stabilisation in recovery and inflation ‘rely on the continuation of the current unprecedented financing conditions'. Hence; ‘the substantial degree of monetary accommodation is necessary to sustain growth’.
The euro tanked to 1.0582 against the US dollar. The widening divergence between the Fed and the European Central Bank (ECB) policy outlook is favourable for a further depreciation in the single currency. It is just a matter of time before the euro slides to the 1.05 handle.
A rapid glance to the Central Bank of Turkey
The Central Bank of Turkey (CBT) is expected to maintain the status quo at next week’s monetary policy meeting.
The steep depreciation in Turkish lira and prospects of rising capital outflows from domestic assets give the CBT no other option than to remain seated on its hands.
The CBT is currently acting via alternative policy tools, as the ROM (Reserve Option Mechanism), in order to temper the lira depreciation. These measures are certainly effective for avoiding an emergency action and for preventing an overshooting in the domestic markets during periods of high volatility. Nevertheless, the unconventional policy tools are insufficient to fight a fundamental strengthening in the US dollar.
It is just a matter of time before Turkey turns hawkish on its rate policy.
The average cost of CBT’s funding fell from 9+% to 7.75% in the first nine months of the year. The policy simplification has served to loosen the average cost of lira funding.
Turkey is no longer in a position to afford a steeper depreciation in its currency. Therefore, a looser monetary policy is out of the CBT’s reach in the current global macro picture.
We expect the funding rate to be brought up to 8.25%-8.50% by the end of December, and above 9% in the first quarter of 2017.