With price pressures still running at a subdued level throughout the developed world, hotter-than-expected inflation readings have been hard to come by of late. Perhaps today’s Canadian inflation data marks a turning point for that trend.
The price action so far today is emblematic of a textbook “risk off” day: stocks are falling across the globe, oil is trading off by nearly 3%, bond yields are generally retreating, and the yen is the strongest performing major currency (though we would note that gold bugs still can’t seem to catch a break!).
Technically speaking, the dollar index formed a clear “ascending triangle” pattern through May, June and July. The bullish breakout from that pattern, in-line with the recent uptrend, suggests that rates may have further to rally in the days and weeks to come.
Pound bulls hoping to see a big beat on the July inflation numbers were left disappointed, as the data merely met expectations. Although off its lows, sterling remained under pressure after breaking the $1.27 handle overnight following yesterday’s news of weaker-than-expected growth in wages, and amid ongoing concerns over a no-deal Brexit outcome.
The Turkish Lira resumed its drop early Monday touching a new record low of 7.21 per dollar before recovering slightly during Asia trade. Comments from President Recep Tayyip Erdogan and Finance Minister Berat Albayrak over the weekend that a plan would be revealed today to calm the markets failed to restore confidence.
Another week has flown by and what a disastrous one it has been for the likes of the Turkish lira and to a lesser degree the British pound, but once again it has been a good for the US dollar. Next week should be equally exciting as there are a few important data releases to look forward to, while the ongoing situation in Turkey could bring about further volatility – not just for the lira but the stock markets too.
The economic situation in Turkey has been a powder keg for months, and it’s finally found a spark. While investors have never truly trusted Turkish President Recep Tayyip Erdogan, he’s shredded his last vestiges of credibility in recent months by appointing his son-in-law as the country’s finance minister and espousing his belief that lower interest rates were needed to fight inflation, the exact opposite of economic orthodoxy (and your humble author would argue, all the empirical evidence of centuries of central banking); indeed, Erdogan recently stated, “interest rates are the mother and father of all evil."
After a sharp slide, the pound has finally caught a bid today. While it is too early to suggest that a low has been hit, today’s rebound is certainly a welcome relief for the pound bulls. The British pound/U.S. dollar (GBP/USD) currency pair has ended a run of five consecutive losses, the GBP/JPY is up after falling six days in a row, while the euro/British pound (EUR/GBP) is back below 0.90 after a sharp four-day rally.