Lack of movement came despite a couple of political flare-ups
An interesting and sometimes confusing week for the euro saw it bounce across two-cent ranges against sterling and the US dollar. Overall it added two thirds of a US cent and lost half a cent to sterling. On average the euro strengthened by 0.6% against the other dozen most actively-traded currencies.
A week ago financial markets were all about caution and risk-avoidance. Softness in energy and commodity prices was amplified by relatively weak economic data from China, causing investors to avoid the supposedly risky commodity-oriented currencies while favouring the safe-haven yen and euro.
Late on Sunday night there was news that, after two months of negotiations following the general election, German Chancellor Angela Merkel had failed to form a coalition. On Monday morning the euro dropped half a cent. Then it recovered. Then it fell again. The sensation was that investors did not much like the situation but neither did they know what to do about it.
Leaving aside the South African rand, which went from zero to hero with a 40-cent rally, sterling was the best of the bunch, sharing first place with the Japanese yen. The UK economic data were not all helpful to the pound: consumer price index inflation did not pick up as expected, remaining steady at 3.0%. However, the employment and retail sales came in at or above forecast.
The Brexit news and – more often – rumours tended to lean towards the idea of an eventual deal with the EU. The story bandied around on Monday was that the government would increase its divorce settlement offer to £40bn, still short of the £60bn apparently suggested by Brussels but narrowing the gap significantly. With that offer, the argument went, the EU would allow that “sufficient progress” had been made to allow trade talks to begin. The possibility left investors better-disposed towards sterling.
The Turkish lira is more affordable than ever to UK holidaymakers. On Tuesday morning £1 would buy 5.3 lira in the wholesale market, a record high for the “new” lira (code TRY) that replaced the old one (TRL) in 2005
The lira is therefore at a record low against the pound and just about everything else. It has been mostly on the retreat for seven years, falling by -57% from its level in autumn 2010. In the last year alone the lira has lost nearly 30% of its value.
Political interference is the main culprit. The Turkey’s central bank does not enjoy the same independence as, say, the Bank of England when it comes to managing inflation. President Erdoğan wants the bank to cut interest rates, to stimulate the economy, even as the governor wants to increase them to fight inflation. The result is official interest rates (7.25% – 9.25%) that lag behind inflation, last measured at 11.90% according to the central bank.
And the result of that gap is a negative real interest rate which encourages people and businesses to hold their cash in anything other than the lira. So the lira goes down. The sad thing is that we have seen all this before in Turkey in the 1980s and 90s. Decisive central bank action stopped the rot in the early 2000s but, by then, £1 would buy around 2,000,000 lira.
Sarah, Senior Account Manager at Moneycorp
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