The Trade Week Ahead - We look to wages as currency wars return with a vengeance
I have long been of the opinion that Australia’s wage price index is being ‘undervalued’ by the FX market. That is certainly true if you look at any FX calendar platforms which place a minimum value on the release. However, this completely misses the point the RBA now makes around wage and why it sees this releases as a core for its view on inflation.
“Wages growth remains low. This is likely to continue for a while yet, although the improvement in the economy should see some lift in wages growth over time. Consistent with this, the rate of wages growth appears to have troughed and there are increased reports of skills shortages in some areas.”
That statement lifted verbatim from the latest statement, encapsulates everything that is dragging on the overall employment market and by inference inflation. The unemployment rate has fallen, forward-looking releases such as vacancy rates are high and employment growth has reaccelerated in the middle part of the year. However, the overall quality of employment is what has caused wages to lag. Issues such as underemployment and underutilization remain ever-present.
From a currency perspective, the market appears to be underestimating the impact Wednesday’s release could have. The AUD continues to hover between 73.3c and 74.2c if the wage price index continues to hold at the bottom-end for the recent cycles Wednesday’s release will the biggest economic release for the AUD this week and not the employment data on Thursday.
However it’s the events over the weekend that have really hit currency markets and will likely drive this week trade as terms such as contagion, currency wars and tariffs dominated Friday night’s trading and spread like wildfire through futures markets as well, this event is the movements in the Turkish lira.
The slide in the Turkish lira has been flashing in my peripheral vision for most of the past two weeks, I have seen the movements lower on fiscal worries and also saw the issue with the US over a Pastor from North Carolina being placed in indefinite detention. However, it was this tweet from The President that has moved the TRY from the peripheral to a front and center issue.
This tweet has wider ramifications for the world and is not just fall out in Turkish-US relations. Remember Turkey is a NATO ally (remember how the President address NATO a few weeks back), and the slide in the TRY is not just down to the political fallout from the Pastor but a collapse in its balance of payments has been a destination of choice for the carry trade in the unconventional monetary policy world that has been the post-GFC era (i.e USD and EUR monies have chased the high yielding TRY).
If the current run on continues don’t be surprised to see Ankara calling the IMF or going down the Cyrus/Greece path of 2011 and imposing capital controls on fund flows – see how well that goes when it happens.
There are two elements here that catch the attention immediately. First is ‘reasoning’ the President gives for increasing the tariffs on Turkey being the devaluation of the TRY against the USD – like they are deliberately doing it. This certainly won’t help pull Turkey out of the short-term spin it finds itself in nor will it help with US relations in Europe where the contagion issue could arise (more on that in the second point).
The tweet has a bigger implication for the US-China trade war. The USDCNY, in my view, is heading to CNY7 at 6.9 this year’s decline is one of the fastest and strongest declines in the new ‘financial stability’ era. If this continues the next set of tweets aimed at the global trade from the President will be to accuse China of currency manipulation to offset the current tariff program the White House has/is enacting. This will have wide-reaching ramification for equity and FX markets alike the most likely conclusion is USD strength, emerging markets and risk currency weakness (that includes the AUD and ASX)
This is clearly not priced in yet.
The second element that draws my attention is contagion in Europe if the balance of payment issues in Turkey hit wall who is left holding the poison apple? The French and Spanish bank has the largest exposure to Turkey. You only have to look at the performance of European banks over the past 8 weeks to see the market waking up to the fact there is a possible new ‘PIIGS’ contagion issue brewing only this time it’s a ‘stuffed Turkey’.
The EUR will be the gauge for contagion risk and possible fall outs in periphery and core nations of the Eurozone. What could make this more interesting is if the President views an EUR slide as a ‘currency war’ and slaps a trade tariff on European goods and heaping more pressure on the situation – time will tell?