The upbeat momentum with the vaccination program in developed countries has helped accelerate the boost in the markets. A marked increase in U.S. Treasury bond yields pressured higher growth areas of the equity markets and accompanying U.S. dollar strength was also a headwind for emerging markets. Emerging markets investors are exhibiting a lack of market conviction and directionality and are seeking signals that the move in U.S. rates is priced in, while remaining selective to account for differences in vaccine rollouts, and CoVID-19 cases across emerging market countries. The underlying backdrop remains more benign for high-beta/high yield and commodity FX, although there is likely to be some differentiation based on country-specific factors.
TURN THE TABLE
Neither the euro nor the dollar are able to convince the market at present. Even though there is a lot supporting the dollar at first glance: thanks to the progress with the vaccination program in the U.S. and the Biden administration’s multi-trillion-dollar fiscal packages, the market expects the U.S. economy to emerge from the crisis better and more quickly and that inflation will rise on a sustainable basis as a result, as the rise in inflation expectations over the past weeks illustrates. This fuels expectations on the market that the Fed will normalize its monetary policy medium-term. The Fed will look through a temporarily higher inflation. Against this backdrop economic data coming in below expectations can put a dampener on the dollar from time to time. That means the dollar has not been able to turn the tables in its favor which points towards continued volatile trading in the range of 1.17 – 1.20 in EUR-USD due to the fluctuating vaccination and data situation on either side of the Atlantic.
Antje Praefcke, strategist, Commerzbank, April 9
CAPITAL CONTROLS WOULD PROBABLY BE INEFFECTIVE
Turkey’s large external vulnerabilities mean that aggressive rate cuts by the Central Bank (CBRT) would run the risk of sharp and destabilizing falls in the lira. A probable next step by policymakers would be a turn towards capital controls. But we doubt that these would be effective and, with officials unlikely to take steps to restore macro stability, some form of adjustment will still be needed in the coming years. The key problem in Turkey lies with foreign investors’ sales of Turkish assets, not Turkish residents increasing their foreign assets. Outflows of capital by Turkish residents are much smaller than foreign capital inflows (1.5% of GDP). And were Turkey to impose restrictions on foreign investors, that might cause capital inflows to dry up (out of concerns about not being able to repatriate investments), making it much harder to finance current account deficits and roll over external debts. More fundamentally, capital controls might work if they came alongside efforts to foster macroeconomic stability.
Jason Tuvey, economist, Capital Economics, April 8