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TRY Bounces Back As Risk Sentiment Stabilises

Turkey’s bounce

As emerging-market currencies quake, now could be an opportunity to bargain hunt. Turkey has bounced back: the market has lost its appetite for pushing TRY further, as USD/TRY 1 month at-the-money volatility stands at a whopping 60. Argentina, Mexico and South Africa have regained lost ground, decelerating the rabid risk-off trade seen Monday. Argentina raised interest rates by 5% (seven-day notes at a record 45%) and announced it will sell USD 500 million to support the peso.

President Trump has shown his trademark pattern: threaten, and then back off. Overnight, top national security aide John Bolton warned Turkey there would be no negations until the US pastor is released. Despite pugnacious position by both sides, efforts are being made to reduce tensions. It’s the only meaningful evidence to forecast USD/TRY’s next move. Besides, a juicy 17.75% in nominal rates will attract speculators who view the current calm as a scalping opportunity.

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Indian rupee soft amid contagion

USD/INR hit its historic high: currently at 69.83, it is expected to trade sideways near the 70 psychological resistance level. The Reserve Bank of India (RBI) decision to raise its Repo Rate for a second consecutive time on 1 August appears to have paid off. The decision was taken amid strong economic growth (GDP 7.40% for 2018) and increasing inflation numbers that are strongly driven by oil price volatility and INR weakness. Headline inflation in July remains at 4.17%, a slowdown from May’s 5%.

As the Turkish lira is spooking emerging market currencies, the RBI will remain attentive and safeguard economic welfare by raising rates at its 4 October meeting. Additionally, core inflation in July remains at 6.29% (prior: 6.29%), too high for the RBI’s liking.

Pound still soft

UK unemployment should fall further toward 4% (expect 4.1%). Wage growth should stagnate at 2.7%. Rising inflation should give the Bank of England confidence to raise rates in August. However, European growth concerns and Brexit uncertainty should keep the BoE sidelined for the rest of the year. We remain negative on sterling.