Talking Points:
- USD/TRY[1] has extended its retracement, but not because of improving conditions between the US and Turkey, but rather because the Turkish government is making it harder for foreigners to short the Lira.
- A weak earnings report by a major Chinese financial institution has done more to move emerging markets today than anything out of Turkey.
- Retail traders[2] are continuing to buy EUR/USD[3] and GBP/USD[4], leaving us with a bullish outlook for the US Dollar.
See our longer-term forecasts for the US Dollar, Euro[5], British Pound[6] and more with the DailyFX Trading Guides[7]
The US Dollar (via the DXY[8] Index) has rallied to a fresh yearly high this morning as risk appetite remains depressed following the events out of Turkey in recent days. USD/TRY's pullback today may be misleading, insofar as the catalyst, the government's decision to limit the total amount of foreign currency and lira swap and swap-like transactions to no more than 25% of banks’ legal shareholder equity, is essentially a measure designed to make it harder for foreigners to short the Lira.
Market participants are looking through this charade of a policy, and while USD/TRY has indeed dropped, other emerging market currencies with similar fiscal profiles (particularly the South African Rand) as well as developed market currencies with exposure to Turkey (particularly the Euro, via its banking system) continue to suffer.
As was the case yesterday, as far as the news goes, nothing material has changed over the past 24-hours that would lead us to believe that the situation is de-escalating at this point in time. The same holds true
