Lira opens its eyes in a dark post-coma room

The SEC sued Coinbase, a day after it sued Binance for allegedly breaking US security rules. A 101-page complaint revealed how Coinbase allowed its users to trade tokens which were, in reality, unregistered securities in the US.  

Coinbase dived 12% yesterday and is down by almost 30% since the start of the week, Binance Coin lost up to 10% while Bitcoin has fully recovered the Binance shock and barely reacted to Coinbase news.  

Cryptocurrency valuations have been impressively resilient to shocks in crypto exchanges; it is now clear for most crypto traders that the existential threat of cryptocurrency exchanges is not an existential threat for cryptocurrencies.  

Globally sticky inflation and rising yields are a stronger headache for cryptocurrency valuations than crypto exchanges’ trouble with the SEC.  

Pause, skip, hike? 

The Fed is broadly expected to keep interest rates steady next week, but preserve the possibility of further rate hikes for the July meeting. The threat of another rate hike – sometime down the road – should be enough to keep the pressure in US yields to the upside. The US 2-year yield is steady around the 4.50% level.  

Across the Atlantic Ocean, the policy tightening results are better seen and felt. Consumer expectations for the euro area fell significantly in April, a week after the Euro-area inflation revealed a much faster-than-expected fall in both headline and core numbers. According to the latest European Central Bank (ECB) survey, the inflation expectation for the next 12-months is down from 5% to 4.1%, and the expectation for the next 3-years is down from 2.9% to 2.5% - a stone’s throw distance from the ECB’s 2% policy target. The German 2-year yield slid more than 1% yesterday on the news, and the spread between the 10-year German and Italian bonds fell to the lowest level since April on improved sentiment following good news from the inflation front. The question is, whether the ECB will soften its hand, and adopt a Fed-like policy, where the rate hikes could pause, after next week’s almost certain 25bp hike, or will the Eurozone policymakers continue sounding and acting as hawkish as possible to avoid any accident between now and success. ECB Chief Chhrstinte Lagarde insisted in her latest speech that she sees ‘no clear evidence’ that inflation has peaked.  

For now, investors are ready for two more 25bp hikes into the end of summer.  

What does it mean for the euro? Well, because another Fed rate hike – in July, and two other ECB hikes in the coming meetings are broadly priced in, the softer inflation data from the eurozone comes to support the ECB doves, and apply additional pressure on the EURUSD. But because the US dollar also stagnates near 3-month high levels, and because the dollar rally is also giving signs of exhaustion, the EURUSD could hold ground and not crumble below the 1.07 level.  

More of central bank talk, the BoC is expected to keep rates steady at 4.5% when it meets today, while the RBA surprised investors with a 25bp hike yesterday, pointing at sticky inflation, but softer-than-expected Australian GDP data and shrinking Chinese exports came to halt gains in the AUDUSD into the 200-DMA. 

Lira jitters 

The Turkish lira is back to running from record low to record low. The dollar-lira is up by almost 15% since mid-May, and more importantly, it looks like the central bank’s efforts to fight a stronger dollar is either fading – after Erdogan’s victory in the latest elections – or keeping the lira steady is becoming more difficult and increasingly expensive for the Turks.  

In all cases, we see a movement in the lira that we haven’t seen for a long time. Keep in mind that the lira has not been trading freely since the end of 2021.  

Do you get back to selling the lira? The lira is still a black box, and no one knows what the government is really up to. But we know that there is effort, after the elections, to shift Turkey’s beyond-absurd monetary policy toward a more orthodox place – which requires higher interest rates, obviously.  

As a result, Turkey appointed Mehmet Simsek as its new finance minister. Mr. Simsek is well-known and well-appreciated by the markets, and is now supposed to clean up the mess of the past year-and-a-half, and eventually restore investor confidence.  

But restoring confidence won’t be a piece of cake of course. In past years, Turkey didn’t lack talneted finance ministers or smart central bankers. But each time sometime tried to do his/her job correctly – which in Turkey means raising the rates – he/she got rapidly sacked. Therefore, what investors want to see in Turkey is not how talented Mehmet Simsek is in finance, but how resistant he will be to the low-rate pressure from the presidential office.