The US dollar has surged. The main impetus comes from the dramatic slide in the Turkish lira. After moving above TRY5.0 yesterday, it reached TRY6.30 today before stabilizing a little below TRY6.0 as the European morning progressed. The trigger seemed to be the lack of credibility of the government’s response as investors await officials to elaborate on the outline of the “new economic model” provided yesterday.

Turkey’s five-year credit default swap, insurance, is more expensive than nearly all countries but Argentina and Venezuela. There are three possible ways out, it appears. First, Erdogan can take bold action to restore investor confidence. The “new economic model” is not it. Second, Turkey can go hat in hand to the IMF. However, not only would going to the IMF represent a big climb down for Erdogan, but the likely terms of the conditionality would be particularly loathsome as they would most likely require a return to orthodox policies, such as much higher interest rates and austerity. Third, Turkey could impose capital controls, which are seen as a way to buy time, but that time must be used to institute reforms. Therefore is best coupled with other measures or promises of bold action to right the economic ship of state. 

According to press reports, the ECB has identified three European banks with the most exposure to Turkey: BBVA, Unicredit, and BNP. Financials are among the biggest drags on the Dow Jones Stoxx600, which is off about 0.8% in late European morning turnover. CoreEuropean 10-year benchmark yields are off around four basis points, while the periphery is lagging and Italy’s 10-year yield is up 2.5 bp.It came into the session flat on the week. 

The euro was soldoff, with the $1.15 finally buckling and sending the single currency to almost$1.1430. Recall that our $1.1450 target corresponded to a 50% retracement of the euro’s rally that began in early 2017. The 61.8% retracement objective is found a little below $1.12. What was support frequently becomes resistance and the market may want to test the $1.15 breakout level. Similarly, the Dollar Index pushed above 96.05, where a similar (50%) retracement was found. The 61.8% objective is just shy of 98.00. 

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