The appetite for risk continued to be high on the first day of the week, as the average hourly wage growth rate in the USA slowed down in December and China lifted the quarantine practice for those entering the country. However, the statements of Fed officials lowered morale towards the close.
We are cautious about the continuation of the upward movement in euro/dollar, sterling/dollar, ounce gold and ounce silver prices. We are of the opinion that Fed officials will make statements similar to yesterday’s in the coming weeks in order to correct the rate cut pricing in the Fed funds futures contracts market and to prevent the easing of financial conditions.
While there has been no foreign exchange sale to BOTAŞ in the past six months, we assess that the $20 billion delay, if true, may be close to exhaustion in terms of amount. The fact that exporters have difficulty in exporting due to cost increases and that foreign exchange sales to BOTAŞ may start again indicate that controlled and limited increases in the exchange rate may continue in the coming period.
November employment and industrial production data will be released in Turkey today. Fed Chairman Powell is expected to speak on monetary policy independence in Stockholm today at 17:00.
The appetite for risk continued to be high on the first day of the week, as the average hourly wage growth rate in the USA slowed down in December and China lifted the quarantine practice for those entering the country. However, the statements of Fed officials lowered morale towards the close. Although the US 2-year bond yield managed to close the day at 4.21%, down 4 basis points, the S&P 500 index could not maintain its gains and ended the day with a decrease of 0.1%.
San Francisco Fed President Mary Daly expressed that she expects the US Federal Reserve to raise the rate to above 5%, while Atlanta Fed President Bostic said that the policy rate should rise above 5% at the beginning of the second quarter and stay there for a long time. The Fed funds futures market is currently pricing the rate to peak at 4.94% in June and drop in the second half of the year to end the year at 4.46%. This pricing is a significant difference from the 5.1% level, which is the peak and year-end average forecast of the Fed officials and does not foresee any rate cuts during the year. This difference has the risk of causing new pricing and volatility in the financial markets in the coming months.
The global depreciation of the dollar continued yesterday despite the statements of the Fed officials. The dollar index (DXY), which measures the dollar’s performance against six advanced market currencies, dropped 0.8% to end the day at 103.0. Euro/dollar parity, on the other hand, went up to around 1.0760 during the day and closed the day around 1.0730 by giving back some of its gains. The ounce gold price, which increased up to $ 1882, ended the day at around $ 1872 by giving back some of its gains with the effect of the statements of the Fed officials.
After the statements from the Fed officials once again pointed out that the market’s rate pricing may be wrong, the S&P 500 futures contract fell 0.1% this morning, while the Euro/dollar parity is trading around 1.0740 with a limited increase. An ounce of gold also rose to around $1874 with a limited increase.
The support that China’s removal of quarantine measures can give to global economic activity and the fact that the headline inflation will continue to fall is negative, although the dollar is negative, the determined stance of the Fed officials on interest rate hikes shows that at some point, the difference can be priced in with market pricing. Such a situation seems to be reflected in the price of Euro/dollar, Sterling/dollar, ounce of gold and ounce of silver in a downward direction. Although the factors mentioned at the beginning of the paragraph may enable these assets to continue to rise, we are therefore cautious about the continuation of the movement. We are of the opinion that Fed officials will make statements similar to yesterday’s in the coming weeks in order to correct the rate cut pricing in the Fed funds futures contracts market and to prevent the easing of financial conditions.
After the break last week, the rise of the exchange rate basket consisting of half dollar and half Euro continued on the first day of the week. While the exchange rate basket increased by 0.6% against TL yesterday, the dollar/TL increased 0.2% to end the day around 18.75. Our calculations indicate that the Central Bank’s foreign exchange supply caused the Turkish lira to appreciate against the currency basket last week. We calculate that the net reserves of the Central Bank, net of swaps, decreased by 3.3 billion dollars last week to -58.6 billion dollars. Normally, the CBRT’s net foreign exchange reserves should have increased due to the fact that the rediscount credits returned in foreign currency and the bank bought 40% of its tourism and export revenues.
While Turkey’s 5-year CDS fell 8 basis points to 518 basis points yesterday, the Eurobond market followed a positive course. The 5-year fixed coupon bond yield decreased by 63 basis points to 7.60% due to banks’ demand for collateral. Although the BIST 100 index continued its course above 5 thousand points, it decreased by 3.2% to 5171 points.
The dollar rate is trading around 18.77 this morning with a limited increase. Habertürk Newspaper Writer Bülent Aydemir had recently mentioned in his article that Russia accepted the postponement of $20 billion in natural gas payments to BOTAŞ. In the CBRT data, we see that the Central Bank did not sell foreign currency to BOTAŞ in December either. While there has been no foreign exchange sale to BOTAŞ in the past six months, we assess that the $20 billion delay, if true, may be close to exhaustion in terms of amount. The fact that exporters have difficulty in exporting due to cost increases and that foreign exchange sales to BOTAŞ may start again indicate that controlled and limited increases in the exchange rate may continue in the coming period.
November employment and industrial production data will be released in Turkey today. Fed Chairman Powell is expected to speak on monetary policy independence in Stockholm today at 17:00.
Excerpt from Chief Economist İbrahim Aksoy, HSBC Portfolio daily strategy report
