Asia Cautious As Turkish Lira Takes A Dive

SYDNEY: Asian markets faced a fresh stress test on Monday as a plunge in the Turkish lira lifted the safe-haven yen and blunted risk appetite, although the fallout so far looked to be relatively contained.

The dollar was trading almost 15% higher on the lira at 8.3000 after President Tayyip Erdogan shocked markets by replacing Turkey’s hawkish central bank governor with a like-minded critic of high interest rates.

“Erdogan’s decision to fire Governor Agbal, who had sought to instil some price stability and perception of Bank independence, now raises question as to whether the new Governor will look to lower rates while still aim to fight higher inflation,” said Rodrigo Catril, a senior FX strategist at NAB.

The uncertainty was enough to see Nikkei futures ease to 29,280, pointing to an opening drop from the cash close on Friday of 29,792.

Nasdaq futures dipped 0.3% and S&P 500 futures 0.2%. June futures for Treasury 10-year notes edged up just 1 tick, suggesting there was no broad rush to safety.

Investors are still struggling to deal with the recent surge in U.S. bond yields, which has left equity valuations for some sectors, particularly tech, looking stretched.

Bonds had another wobble on Friday when the Federal Reserve decided not to extend a capital concession for banks, which could lessen their demand for Treasuries.

The damage was limited, however, by the Fed’s promise to work on the rules to prevent strains in the financial system.

Monday’s tumble in the lira saw the yen firm modestly, with notable gains on the euro and Australian dollar. That in turn dragged the euro down slightly on the dollar to $1.1880.

After an initial slip, the dollar soon steadied at 108.86 yen, while the dollar index was a shade higher at 92.080.

Also lifting the yen were concerns Japanese retail investors that have built long lira positions, a popular trade for the yield-hungry sector, might be squeezed out, so triggering another round of lira selling.

Still, analysts at Citi doubted that episode would lead to widespread pressure on emerging markets, noting the last time the lira slid in 2020, there was little spillover.

“In terms of impact on other parts of the high-yielding EM, we believe that will be quite limited,” Citi said in a note.

There was little sign of safe-haven demand for gold, which eased 0.3% to $1,739 an ounce.

Oil prices fell anew, having shed almost 7% last week as concerns about global demand prompted speculators to take profits on long positions after a long bull run. [O/R]

Brent was off 29 cents at $64.24 a barrel, while U.S. crude lost 24 cents to $61.18 per barrel.

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