Fear of a Turkish currency crisis is now fading. Threats of additional US sanctions on Turkey have had a muted effect; TRY is regaining lost ground. Most currencies are higher against the USD as contagions and risk aversion diminished.
The US and USD remain the talk of the town but the panicked flight to this safe-haven has ended. Global equities firmed, led by improvements in the S&P 500 on stronger Q2 earnings. It might be a bit too early to throw in the towel on contagion, but all the indicators are positive.
Tactically speaking, now might be a good time to snap up bargains. Latin America looks especially good, given BRL and MXN are caught up in geopolitics. We expect trade risk to fade into the fall. Currencies have been oversold.
While the US is white hot, we anticipate a slowing in Q4, allowing emerging markets to rise. Despite the hype, we don’t see a significant change in long term geopolitical relationships (the EU/USA was already in the process of pushing Turkey away). Barring a significant deceleration in China growth, credit issues or rapid repricing of US interest rates, we see further appreciation of emerging market and G10 currencies against the USD.
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