News: Syria Pushes TRY over the Edge, MXN Roller Coaster Continues

I did not think Syria would have much of an effect on the markets, but as one story on the wires put it, the market has "a good old fashion case of the geopolitical jitters."  Risk is being sold today, and the usual suspects are coming out on top.  JPY and CHF are both modestly up today, with USD/JPY falling off towards the 97 base.  USD/CHF was also dinged for a good 40 pips.  

EM space was mixed; USD/MXN pushed as high as 13.38 before falling sharply back toward 13.25.  This pair has been especially volatile of late.  Today marks the second time in a week that the Peso has fallen sharply only to regain its footing and then some.  Recent numbers in the Mexican trade account also present a puzzle.  Surging imports for in July in both consumer and capital goods contradicts the story that the Mexican economy is slowing, since weak sentiment ought to hurt both investment and consumer demand.  Exports to the US were also up, for both petroleum and non-petroleum products.  The fact that a currency under mild to moderate pressure from general EM turmoil also did not crimp Mexican demand for both capital and consumer broads from abroad further underscores the resilience of both consumer and business confidence.  Indeed, the former is approaching its one year high.  Business confidence is still subdue but is rising.  The X-factor is the Fed and the Bank of Mexico.  When and if tapering comes, and if the Bank of Mexico is willing cut further will dominate headlines in short term.  However, longterm, Mexico still appears to be poised to benefit from the US recovery.  

Turkey's Lira continued its free fall, with USD/TRY surging past the big 2.00 figure to reach highs of 2.04, before retreating to 2.03  These record lows for the Lira vis-a-vis the dollar expose underlying vulnerability of the lira and the overall performance of the Turkish economy.  Turkey remains highly dependent on exports to both the Middle East and Europe.  With the former in political upheaval and the latter still years away from full employment, Turkish growth prospects and diminishing and that is being reflected by the fall in the lira.  To make matters worse, a falling lira and rising energy prices brought on by Mid-East turmoil threaten to erase hard won gains in plugging Turkey's substantial current account deficit.  Finally, markets responded poorly to statements by the governor of the Turkish Central bank, indicating that the monetary authorities will use reserve sales in the FX market, rather than interest rate hikes, as its main tool to shore up the lira.  Perhaps markets are overdoing it as usual, but I must agree that in the medium to longterm, Turkey's outlook has weakened.