It’s a return to volatility after several stable weeks on the foreign exchange market, The euro plunged against the dollar and the Swiss franc. Against the greenback, it reached 1.1317 – the lowest in 13 months. Against the franc, the fall has been just as spectacular as the single currency has fallen below the 1.1300 levels last seen more than a year ago. These movements were triggered by crisis in the Turkish lira. On Friday, the Financial Times reported that the fall of the Turkish currency worried the European Central Bank, with the situation of three European banks – BBVA, Unicredit and BNP Paribas – drawing the most scrutiny in view of their exposure to this country. BBVA holds 50% of Garanti, Unicredit 40% of Yapi Kredi and BNP Paribas 72% of Türk Ekonomi Bankasi. Added to this are loans granted to the country, its industry, SMEs and other individuals. The Bank for International Settlements, which compiles the volume of loans granted by foreign banks to Turkey, shows that Spain is the most exposed country. At the end of March, it appears that Spain held
loans worth $82 billion to Turkey ($19 billion to the government, $59 billion to companies, $2.3 billion banks and the rest private), followed by France with $38 billion and Italy with $17 billion. These figures that frightened the markets, causing a rush towards safe havens and a dive of stock indexes. The Turkish currency, which has lost about 45% of its value against the greenback since the beginning of the year, with a 15% drop since Friday, hit a record low at 7.2362 lire to the dollar before recovering and stabilising around 6.50 pounds. On Monday Turkey announced a series of measures to try to calm the markets as President Erdogan cried out about a conspiracy against his country and called for the solidarity of his fellow citizens by asking them to sell all the foreign currencies they held to support the national currency. Nevertheless, the situation remains very fragile. For analysts, only an increase of several basis points of interest rates, in the range of 3 to 5%, would be able to stabilise the situation. But such a measure would go completely against President Erdogan’s campaign promises.

Other emerging country currencies were also in turmoil after the fall of the Turkish lira – the South African rand, for example, or the Indian rupee which hit a historic low on Monday at 70 rupees to the dollar. The Argentine peso also fell sharply against the dollar and reached new lows, forcing the Central Bank of Argentina to raise its rates from 500 basis points to 45%. The rouble fell to a two-year low after the US announced new sanctions against Moscow by the end of the month. The Russian government deemed the sanctions as unacceptable. The Russian currency fell to 69.35 roubles to the dollar on Monday.

Faced with the prospect of a “hard” Brexit, the British currency is under pressure again in recent days reaching its lowest level since August 2017 against the greenback. It momentarily passed the bar of 0.9000 against the single currency, a level not seen since October 2017, and 1.2650 against the Swiss franc to reach its lowest since September of the same year. “Everyone needs to prepare for the possibility of a chaotic no-deal Brexit,” British Foreign Minister Jeremy Hunt said yesterday.

In New Zealand the central bank has left its rates unchanged at their lowest level in two years as expected. But it opened the door to further declines if the economic outlook were to remain weak. “We expect to keep the OCR at this level through 2019 and into 2020, longer than we projected in our May Statement. The direction of our next OCR move could be up or down,” said RBNZ Governor Adrian Orr. The New Zealand currency, which has fallen against the dollar since the beginning of this year, dropped after those comments to its lowest level since March 2016.

Gold has dipped under the $1,200.00/oz bar for the first time in one year and a half despite uncertainties in the market. The reasons cited include the strength of the dollar and the prospect of further rate increases by the Fed.

In the bond market, the borrowing rates of the southern European countries have shot up. The Turkish crisis and rumours surrounding Italy’s future budget have prompted investors to reduce their exposure to risk. Thus, the Italian 10-year BTP yield rose from 2.9930% to 3.0820%, that of Spain rose 1.4070% to 1.5050% and that of Portugal from 1.7780% to 1.8640% earlier this week.

Levels

EUR/USD  1.1340 DOW JONES 25’999.92
USD/CHF  0.9960 SMI 9‘010.19
EUR/CHF  1.1295 BRUT 66.75
USD/RUB  66.57
XAU/USD  1’189.00