Forex
Exclusive-European fund giant Amundi dips toe back into Turkey’s lira
© Reuters. FILE PHOTO: A logo of Amundi is seen outside the company headquarters in Paris, France, February 3, 2023. REUTERS/Sarah Meyssonnier/File Photo
By Marc Jones
LONDON (Reuters) – Amundi, Europe’s largest asset manager and among the top 10 in the world, has started dipping its toe back into the Turkish lira having been impressed by the country’s turnaround efforts since its mid-year elections.
The Paris-based firm, which has $2 trillion worth of assets under management, is yet to go all in given the lira’s ongoing grind lower but says it has taken its first step towards it by reversing long-held bets against the currency.
Sergei Strigo, Amundi’s co-Head of Emerging Markets Fixed Income, said last week’s 500 basis-point interest rate hike to 40% in Turkey was “all very positive” and a sign of its seriousness in tackling its inflation problem.
“We have started to cover our underweight in Turkish lira a few weeks ago,” Strigo told Reuters, referring to the process of taking a more positive view on the currency.
“We are not yet ready to increase the allocation but it is definitely on our radar screen.”
Having seen international appetite for investing in Turkey shredded by the near 85% plunge in the lira’s value over the last five years, more positive moves by heavyweight firms like Amundi will be seen as a signal of hope.
Following his re-election in May, President Tayyip Erdogan brought in a new-look cabinet and central bank that have sought to ditch years of unorthodox policymaking by embracing aggressive interest rate hikes.They have also begun unwinding the state’s heavy-handed financial market regulations to help entice investment and rebuild depleted reserves wiped out over recent years.
Amundi, while the first major fund to formally declare its shift, is not alone in testing the waters, according to other foreign investors and bankers.
Investment bank JPMorgan has recommended the FX forwards trade in recent weeks and both it and rival Goldman Sachs are aggressively pitching Turkish government bonds with durations of 1-10 years, according to some investors.
The scars of Erdogan’s unpredictability however – including firing four central bank chiefs in the last four years – means international funds as a group hold less than 1% of lira-denominated government bonds. “It could be one of the most interesting stories for 2024,” Strigo said, referring to a potential mass return of investor appetite if the policy shift sticks.
For now, the FX forwards that Amundi is using currently price in the lira slumping another 40% to around 40 to the dollar over the next year, which Strigo sees as unlikely. Amundi’s tentative optimism is balanced by upcoming nationwide local elections in March, when vote-getting fiscal stimulus could distract Erdogan from his newfound policy path.
“It is probably the easiest way for now,” Strigo said about the use of FX forwards to express that balance.
Next year could be the time to start buying local currency debt he added, but “local elections have historically been the event when the fiscal (stance) needs to be loosened up to get the necessary votes.”
Seeking to boost confidence in the policy shift – and convince sceptics that Erdogan backs it – Central Bank Governor Hafize Gaye Erkan will hold the bank’s first investor day meeting in New York on Jan. 11.
With the bank having lifted rates to 40% from 8.5% since June, Amundi thinks another hike next month could finish the job. “For sure what is true is that the lira as a currency, considering the carry (interest rates on bonds versus elsewhere in the world), is becoming much more attractive than it use to be.”
Investing.com – The US dollar rose in thin holiday-impacted trade Tuesday, retaining recent strength as traders prepared for fewer Federal Reserve rate cuts in 2025.
At 04:25 ET (09:25 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% higher to 107.905, near the recently hit two-year high.
Dollar remains in demand
The dollar has been in demand since the Federal Reserve outlined a hawkish outlook for its interest rates after its last policy meeting of the year last week, projecting just two 25 bp rate cuts in 2025.
In fact, markets are now pricing in just about 35 basis points of easing for 2025, which has in turn sent US Treasury yields surging, boosting the dollar.
The two-year Treasury yield last stood at 4.34%, while the benchmark 10-year yield steadied near a seven-month high at 4.59%.
“We think this hawkish re-tuning of the Fed’s communication will lay the foundation for sustained dollar strengthening into the new year,” said analysts at ING,in a note.
Trading volumes are likely to thin out as the year-end approaches, with this trading week shortened by the festive period.
Euro near to two-year low
In Europe, fell 0.1% to 1.0396, near a two-year low, with the set to cut interest rates more rapidly than its US rival as the eurozone struggles to record any growth.
The ECB lowered its key rate earlier this month for the fourth time this year, and President Christine Lagarde said earlier this week that the eurozone was getting “very close” to reaching the central bank’s medium-term inflation goal.
“If the incoming data continue to confirm our baseline, the direction of travel is clear and we expect to lower interest rates further,” Lagarde said in a speech in Vilnius.
Inflation in the eurozone was 2.3% last month and the ECB expects it to settle at its 2% target next year.
traded largely flat at 1.2531, with sterling showing signs of weakness after data showed that Britain’s economy failed to grow in the third quarter, and with Bank of England policymakers voting 6-3 to keep interest rates on hold last week, a more dovish split than expected.
Bank of Japan stance in focus
In Asia, fell 0.1% to 157.03, after rising as high as 158 yen in recent sessions, after the signaled that it will take its time to consider more interest rate hikes.
edged 0.1% higher to 7.3021, remaining close to a one-year high as the prospect of more fiscal spending and looser monetary conditions in the coming year weighed on the currency.
Beijing signaled that it will ramp up fiscal spending in 2025 to support slowing economic growth.
Investing.com– Most Asian currencies moved in a tight range on Tuesday, while the dollar extended overnight gains as traders positioned for a slower pace of interest rate cuts in the coming year.
Trading volumes were muted before the Christmas break, while most regional currencies were nursing steep losses against the greenback for the year.
Asian currencies weakened sharply last week after the Federal Reserve effectively halved its outlook for rate cuts in 2025, citing concerns over sticky U.S. inflation.
Dollar near 2-year high on hawkish rate outlook
The and both rose about 0.1% in Asian trade, extending overnight gains and coming back in sight of a two-year high hit last week.
While the greenback did see some weakness after data read lower than expected for November, this was largely offset by traders dialing back expectations for interest rate cuts in 2025.
The Fed signaled only two rate cuts in the coming year, less than prior forecasts of four.
Higher U.S. rates diminish the appeal of risk-driven Asian markets, limiting the amount of capital flowing into the region and pressuring regional markets.
Asia FX pressured by sticky US rate outlook
Most Asian currencies weakened in recent sessions on the prospect of slower rate cuts in the U.S., while uncertainty over local monetary policy and slowing economic growth also weighed.
The Japanese yen’s pair fell 0.1% on Tuesday after rising as high as 158 yen in recent sessions, after the Bank of Japan signaled that it will take its time to consider more interest rate hikes.
The Australian dollar’s pair fell 0.2% after the minutes of the Reserve Bank’s December meeting showed policymakers saw an eventual easing in monetary policy, citing some progress in bringing down inflation. But they still flagged potential upside risks for inflation.
The Chinese yuan’s pair rose 0.1% and remained close to a one-year high, as the prospect of more fiscal spending and looser monetary conditions in the coming year weighed on the currency.
Beijing signaled that it will ramp up fiscal spending in 2025 to support slowing economic growth.
The Singapore dollar’s pair rose 0.1%, while the Indian rupee’s pair rose 0.1% after hitting record highs above 85 rupees.
Investing.com — The dollar has surged past its post-2022 range, buoyed by U.S. economic exceptionalism, a widening interest rate gap, and elevated tariffs, setting the stage for further gains next year.
“Our base case is that the dollar will make some further headway next year as the US continues to outperform, the interest rate gap between the US and other G10 economies widens a little further, and the Trump administration brings in higher US tariffs,” Capital Economics said in a recent note.
The bullish outlook on the greenback comes in the wake of the dollar breaking above its post-2022 trading range, reflecting renewed confidence among investors driven by robust U.S. economic data and policy expectations.
A key risk to the upside call on the dollar is a potential economic rebound in the rest of the world, similar to what occurred in 2016, Capital Economics noted.
Following the 2016 U.S. election, economic activity in the rest of the world rebounded, while Trump’s tax cuts didn’t materialize until the end of 2017, and the Fed took a more dovish path than discounted, resulting in a 10% drop in the DXY on the year, which was its “worst calendar year performance in the past two decades,” it added.
While expectations for a recovery in Europe and Asia seem far off, a positive surprise for global growth “should be ruled out”, Capital Economics said.
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