Market Roundup 7th May

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Turkish LiraThe big news this morning as London came online was the Reserve Bank of Australia’s surprising decision to leave its interest rate unchanged at 1.50% - analysts had mostly been expecting a further quarter-point cut of 0.25% to a rate of 1.25%. The surprise pushed the AUD/USD currency pair up by approximately 0.70%, and the market has given up about half of that gain since the release, so it wasn’t a dramatic movement. This may be partly attributable to the fact that the current “risk-off” sentiment, which is dominating the markets due to developments in the U.S. / China tariff dispute, weighs heavily on the Australian Dollar as an Asian “risk” currency, so there is perhaps a lot of inherent weakness there which even a failure to cut the interest rate can’t fully negate.

Apart from the weakness in the Australian and New Zealand Dollars, the big story in the Forex market today is the Turkish Lira, which is yet again hitting multi-month low prices against the U.S. Dollar. A few hours ago, USD/TRY reached a high just a shade under 6.2000. There are many reasons for the Lira’s long-term depreciation, but the proximate tension has been Erdogan’s veiled attempt to thwart the democratic victory of an opposition candidate who recently was elected as mayor of Istanbul, with a similar situation in Turkey’s capital Ankara also. The country’s electoral commission has ordered the elections to be re-run. There is certainly a long-term bullish trend making itself felt here. The difficulty for traders holding long USD/TRY positions are:

  1. Relatively high spread (cost of trading).

  2. High overnight financing fees due to the high interest rate of the Turkish Lira.

  3. High volatility and political instability mean very strong downwards movement can happen at any time and play out extremely quickly.

Adam is a Forex trader who has worked within financial markets for over 12 years, including 6 years with Merrill Lynch. He is certified in Fund Management and Investment Management by the U.K. Chartered Institute for Securities & Investment.