Markets Retrace on Turkey Policy Moves

Turkish assets regained some losses this morning on the back of the latest policy initiatives. Meanwhile, activity indicators in emerging markets continue to pose challenges on the policy front.

The Turkey re-tracement this morning (aided by the liquidity provisions from the central bank and a 150bps increase in the effective funding rate) leaves room for “regular” macro releases, including a big activity data dump in emerging and developed markets.

The persistent weakness of China’s domestic activity continues to draw attention. Retail sales, industrial production, and investments undershot consensus in July by a wide margin, pointing to weaker fundamental support for the currency. Note, however, that slowing activity reflects the lagged impact of past deleveraging (especially in shadow banking), and the latest policy fine-tuning can reverse this trend in the coming months. The Q2 GDP prints in Central Europe were also interesting as they ran counter to the central banks’ policy biases in all four countries (stronger in Hungary, Romania, and Poland, and weaker in the Czech Republic). Against this background, solid activity surveys in the U.S. (the small business optimism index surprised strongly to the upside in July, rising to 107.9) add to the U.S. dollar’s fundamental strength.

On the policy front, Argentina’s central bank (BCRA) continued to surprise with its orthodox policy initiatives (Turkey, pay attention!). The BCRA raised its new key rate by a whopping 500bps to 45%, while committing only to a partial rollover of short-term central bank debt notes (LEBAC), which should allow it to get a firmer grip on monetary expansion. Moving currency interventions solely under the BCRA’s auspices (the first USD500M auction to be held today) was another welcome policy move.