Turkish Lira, Fed's Harker and meta thinking

Dow Jones is trading around all time high levels. Dollar Index is trading just below 90. US 10-year yield is trading around 1.60 levels. Emerging market currencies are showing strength against the greenback. The most prominent run up has been in the South African ZAR which is close to its highest level since March 2019. The pandemic era low of ZAR was around 19 ZAR to a dollar. Indian Rupee is also slated to open below 73 today, the pandemic era low for it has been around 77 which was witnessed in the month of April last year. The way all the EM currencies moved in tandem against the US Dollar highlights the one point which we keep making time and again, that the global market is a highly intermeshed deeply connected machine where policies in one part impact the other parts extensively. Every now and then some local factors like elections, scandals, monsoons, and droughts will emerge but those will remain essentially a side show.

Local factors however were in the limelight in Turkey where a comment by the President on the high interest rates created panic in the currency market resulting in Lira dropping to its life time low of 8.77 against the Dollar. The Turkish President made a unique remark saying that the interest rates need to be reduced to rein in the inflation which was a sort of a contrarian take on conventional economic wisdom. In turkey policy rates are close to 19% and the government has indicated multiple times in the past that high rates are stifling the economy. Country has also changed 3 central bankers in the recent past.

Continuing on local factors, the Indian Rupee forwards market saw a lot of action yesterday where the forwards were received in plenty resulting in a sharp drop in the hedging cost. 12-month forward premia which was trading around 380 paise dropped by 40 paise during the day prompting a bonanza for the importers which have already gained by appreciation in Rupee against the Dollar.

We noted previously that we wait for two important events to unfold tomorrow. First is RBI’s MPC and second is the US NFP. Given that the last MPC happened just when the second covid wave carnage was starting the text of the last MPC statement will be of little help in understanding the mood of the members. The more relevant document will be the RBI’s annual report which was released last week and has the commentary till mid may. The text shows a sobering realisation about the speed and the nature of the economic recovery. A V shaped recovery is no longer the base case. As we often write the future remains uncertain.

On the NFP front, readers would remember the great miss which was witnessed last time for April where the market had predicted 1 million job additions and the actual number was around 266k. The reasons were bandied aplenty from virus related hesitancy to step out to the adverse impact of paycheck support programs which were thought of disincentivising people to work. There is a speech delivered by Philadelphia Fed President Patrick Harker (available on philadelphiafed.org) yesterday on the topic of The Economy, inflation and Forbearance where he discusses the job data and its implication in detail. Just assimilate and appreciate the sheer diversity of thoughts on the employment issue. We would recommend our readers to take a look. At the end of the speech don’t forget to read his comments on tapering of the bond purchase. He writes it may be the time to “at least think about the thinking about tapering of monthly bond purchase”. This is second order derivative statement. Harker is part of FOMC so the comments can’t be dismissed outrightly. Thinking about thinking is called Meta thinking. Think about it.