What a year

P otr Matys, strateg st, Rabobank

The Turkish lira outperformed its peers by a very wide margin in Q4 rallying more than 14% against the US dollar. However, 2018 will be remembered as a year when the lira plunged to a new all-time low mainly on the back of idiosyncratic factors, including a diplomatic spat with the US and substantial market concerns about the overheated economy.

While the depreciation of the CEEMEA currencies in 2018 can be attributed to tightening global liquidity with the Fed raising interest rates four times, to our mind the main source of capital outflows from risky assets proved to be the trade war between the US and China. To recall, the vast majority of EM currencies rallied against the US dollar in Q1 led by the Mexican peso, as the MSCI EM FX Index illustrates. Admittedly, additional pain came from a stronger US dollar supported by a widening in interest rate differentials as the Fed proceeded with rate hikes at the time when all major central banks stayed put. Even though the Fed revised its dot plot to show two instead of three hikes, it is very unlikely that its peers will be raising interest rates significantly amid mounting signals of slowdown in global activity. WTO’s Chief Economist Robert Koopman warned that global trade looks increasingly precarious as leading indicators point to a meaningful slowdown next year. This doesn’t sound encouraging. The Fed is set to slow the pace of tightening and may even pause the cycle. But, this may not prove sufficient to seriously undermine the US dollar should other central banks remain reluctant to raise rates. Even more importantly for the CEEMEA currencies than the Fed’s monetary policy will be further developments in the US-China trade war. To reiterate the point we’ve made on numerous occasions, it is not only about reducing the substantial trade deficit with China, but the US’s objective is to slow down China’s progress toward becoming the global superpower. This in turn implies that the relationship between China and the US is likely to remain tense and we are sceptical that the trade conflict will end soon.

(December 21)