Turkey is moving to a flexible exchange rate as gov’t adopts ‘rational’ economic policies

Progress on Turkey’s return to rationality? The TRY dropped 7% to a record low of 23.17 against the greenback on Wednesday, in what traders see as a sign that the central bank is moving towards a floating FX rate, Reuters reports. After burning through sizable FX and gold reserves to prop up the currency through most of the year, the bank is reportedly switching up its policy, with reserves starting to hold steady as of last week, according to traders. Net foreign reserves had hit a record low of negative USD 4.4 bn in May, when the election process sparked a surge in demand. Reelected Turkish President Tayyip Recep Erdogan last week signaled a return to a more orthodox monetary policy when he appointed Mehmet Simsek — widely seen as a safe pair of hands — as his new finance minister.

Latest Chinese export data may not bode well for the global economy: Chinese exports plunged 7.5% y-o-y in May — the biggest fall since January — on faltering global demand, Reuters reports. This was far faster than the 0.4% fall forecast, highlighting the degree to which higher interest rates and inflation are slowing economic activity and weakening demand in developed economies.

Developed economies need to tighten their belts, says OECD: “We have seen understandable and necessary fiscal support in response to the [Ukraine] war and the pandemic . . . [but] now is the time that blanket fiscal support needs to be withdrawn,” OECD Chief Economist Clare Lombardelli told the Financial Times as the organization released its latest global growth forecast.

The organization predicts global growth of 2.7% this year: A slightly improved outlook on global growth — with the OECD upping its 2023 prediction by 0.1 percentage point to 2.7% in 2023 — and the fading covid and energy shocks means that now is a good time for governments to curb spending, Lombardelli said. Noting that interest rates would likely need to remain high or even rise further to tackle persistent inflation in developed economies, she pointed to the risks of unbridled spending in a time of high borrowing costs. “We don’t want forever more to be ratcheting up levels of debt. That does make countries less resilient.”

A flood of US treasuries could put more strain on the country’s banking sector: The Biden administration’s success in raising the US debt ceiling could have a negative knock-on impact on liquidity at US banks, the Financial Times reports. Having managed to push up borrowing limits, Washington could issue a USD 1.1tn “flood” of short-term treasury bills into the debt market — including USD 850 bn by September — according to JPMorgan data. The sheer volume of new T-bills will cause yields to rise, drawing custom away from bank deposits and potentially pressuring banks to raise their deposit rates, analysts said. The story also got ink in the Wall Street Journal.

THE CLOSING BELL-

The EGX30 fell 0.8% at yesterday’s close on turnover of EGP 3.6 bn. Foreign investors were net sellers. The index is up 18.3% YTD.

In the green: Rameda Pharma (+4.5%), CIRA Education (+4.3%) and Madinet Masr (+1.7%).

In the red: Ezz Steel (-4.8%), Abu Dhabi Islamic Bank Egypt (-3.7%) and Egypt Kuwait Holding (-3.5%).

Shares and bonds are largely in the red this morning after the Canadian central bank’s decision yesterday to raise interest rates caused traders to increase bets that the Federal Reserve will continue tightening when it meets next month. US and European equity futures are also trading lower.