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Turkey On Verge Of Currency Collapse As Lira Implodes, Crashes 4% In Minutes

Turkey On Verge Of Currency Collapse As Lira Implodes, Crashes 4% In Minutes

In recent weeks we have had our share of humorous hot takes on the current state of Turkey’s currency, which thanks to the “sage” economic despotism of the country’s authoritarian ruler has been in freefall for much of the past decade.

Well, this morning the most profitable FX short this year of all expanded major FX pairs…

… continued to be the gift that keeps on giving, and collapsed as much as 4% in minutes, in an episode right out of hyperinflationary Argentina or Venezuela.

While there was no immediate catalyst for today’s drop – the lira only dropped below below 10 vs the dollar for the first time ever last Friday – traders are dreading this Thursday’s central bank meeting at which policymakers are expected to cut interest rates further even as Turkish inflation tops 20%.

Citing two local traders, Bloomberg said that the recent move of the lira “is the result of a surge in local demand for the dollar” which, of course, is obvious… even more so since it is extremely difficult if not impossible to buy bitcoin or other cryptos as a hyperinflation/currency collapse hedge.

The central bank is expected to cut its benchmark one-week repo rate by a further 100 basis points this week to 15%, according to a Bloomberg survey of 21 participants. Meanwhile, inflation is at or above 20%.

And while conventional economists claim there is no way that Turkey can be the next locus of hyperinflation, all we can say there is give Erdoganomics another five years (because Erdo isn’t going anywhere) and check back then.

…click on the above link to read the rest of the article…

Waypoints on the road to currency destruction — and how to avoid it

Waypoints on the road to currency destruction — and how to avoid it

The few economists who recognise classical human subjectivity see the dangers of a looming currency collapse. It can easily be avoided by halting currency expansion and cutting government spending so that their budgets balance. No democratic government nor any of its agencies have the required mandate or conviction to act, so fiat currencies face ruin.

These are some waypoints to look for on the road to their destruction:

  • Monetary policy will be challenged by rising prices and stalling economies. Central banks will almost certainly err towards accelerating inflationism in a bid to support economic growth.
  • The inevitability of rising bond yields and falling equity markets that follows can only be alleviated by increasing QE, not tapering it. Look for official support for financial markets by increased QE.
  • Central banks will then have to choose between crashing their economies and protecting their currencies or letting their currencies slide. The currency is likely to be deemed less important, until it is too late.
  • Realising that it is currency going down rather than prices rising, the public reject the currency entirely and it rapidly becomes valueless. Once the process starts there is no hope for the currency.

But before we consider these events, we must address the broader point about what the alternative safety to a fiat collapse is to be: cryptocurrencies led by bitcoin, or metallic money to which people have always returned when state fiat money has failed in the past.
Introduction

When expected events begin to unfold, they can be marked by waypoints. These include predictable government responses, and the confused statements of analysts who are unfamiliar with the circumstances. We see this today in the early stages of an inflation that threatens to become a terminal cancer for fiat currencies.
…click on the above link to read the rest of the article…

“Panic, Pure Panic” – Chilean Peso Collapses To 800/USD, Blowing Through Record Lows

“Panic, Pure Panic” – Chilean Peso Collapses To 800/USD, Blowing Through Record Lows

The Chilean peso extended a four-day losing streak on Tuesday, sinking by the most in eight years, to a new record low at 800/USD.

Source: Bloomberg

Bearish market sentiment, political chaos, and a national strike intended to ratchet up pressure on the government and its plans to change the constitution…

Berlin Wall commemorations: In the first half of 1989 “there wasn’t a sense of imminent collapse”

Source: Bloomberg

“This is panic, pure panic,” said Felipe Alarcon, chief economist at EuroAmerica in Santiago.

“It’s the gringos leaving the country.”

However, Bloomberg reports that Citigroup believes that the Chilean peso is not yet at a stage where BCCh would intervene.

The central bank last stepped into market in 2009, when CLP’s real effective exchange rate was ~9% weaker than the current level (REER was about 3% weaker in 2014-15 vs now and the bank didn’t intervene back then).

Citi adds that Chile’s low growth, low inflation environment means country can afford weaker currency without much discomfort.

But, according to Eurasia, President Ivan Duque’s low political capital “heightens social risks as discontent with the administration will probably increase adherence to a national protest” planned for Nov 21.

Will MMT Trigger the Collapse of “Money”?

Will MMT Trigger the Collapse of "Money"?

Will MMT Trigger the Collapse of “Money”?

If the supply of money in an economy is $1 billion, each unit of currency buys X (the purchasing power of each unit of currency).

If the money supply is doubled without any expansion in the consumers’ pool of goods and services, the purchasing power of each unit of currency falls in half. This reduction in the purchasing power of each unit of currency is called inflation.

Governments facing soaring demands and limited tax revenues are naturally tempted to meet these demands with “free” new currency, since the political and financial pain caused by skyrocketing taxes leads to governments being tossed from power.

This temptation explains the regular occurrence of hyperinflation and debt default, as the temptation to over-borrow and pile up interest payments leads to governments defaulting on their debt. In both cases — hyperinflation and debt default — there’s a currency/ governance/ financial crisis that upends the status quo.

This is one common objection to MMT: the freedom to issue new currency is difficult to limit, as there will always be more demands for government spending. Without some “governor” to limit the issuance of new currency to align with the expansion of goods and services, then governments tend to issue new currency far in excess of what the real economy is creating.

This generates inflation, which impoverishes everyone using the currency.

MMT advocates claim that since MMT generates goods and services, it won’t generate inflation. But rebuilding a bridge doesn’t actually create any new goods and services, or increase productivity: it generates wages and consumes materials and energy.

Since it doesn’t generate more consumable goods and services, the expansion of wages and demand for materials will drive prices higher.

 …click on the above link to read the rest of the article…

The monetary lessons from Germany

The monetary lessons from Germany 

Germany suffered two currency collapses in the last century, in 1920-23 and1945-48. The architect of the recovery from the former, Hjalmar Schacht, chose to cooperate with the Nazi successors to the Weimar Republic, and failed. In that of the second, Ludwig Erhard remained true to his free market credentials and succeeded. While they were in different circumstances, comparisons between the two events might give some guidance to politicians faced with similar destructions of their state currencies, which is a growing possibility.

Introduction

Let us assume the next credit crisis is on its way. Given enhanced levels of government debt, it is likely to be more serious than the last one in 2008. Let us also note that it is happening despite the supposed stimulus of low and negative interest rates, when we would expect them to be at their maximum in the credit cycle, and that some $17 trillion of bonds are negative yielding, an unnatural distortion of markets. Let us further assume that McKinsey in their annual banking survey of 2019 are correct when they effectively say that 60% of the world’s banks are consuming their capital before a credit crisis. Add to this a developing recession in Germany that will almost certainly lead to both Deutsche Bank and Commerzbank having to be rescued by the German government. And note the IMF recently warned that $19 trillion in corporate debt is a systemic timebomb, and that collateralised loan obligations and direct exposure to junk held by the US commercial banks is approximately equal to the sum of their equity.

Then we can say with some confidence that a major credit crisis is developing, and that it will almost certainly be far greater than Lehman.

 …click on the above link to read the rest of the article…

Turkey On Verge Of Collapse As Overnight Swaps Hit 700%, CDS Soar

Turkey On Verge Of Collapse As Overnight Swaps Hit 700%, CDS Soar

In Turkey’s ongoing attempt to crush currency manipulators, yesterday we reported that in addition to launching a “probe” against JPMorgan, the biggest US bank, for daring to cut its TRY price target, as well as threatening unnamed “manipulators”, on Monday Turkish authorities took a page of the Chinese currency manipulation playbook, when they made it virtually impossible for foreign investors to short the lira as they soaked up virtually all intermarket liquidity, potentially threatening to kill the economy.

As we reported yesterday, the overnight swap rate on Monday soared more than ten-fold over the prior two sessions to more than 300%, the highest spike on record going back to the nation’s 2001 financial crisis as offshore funds clamoring to close out long-lira positions failed to find counterparties and the cost of a lira short exploded.

Think Volkswagen short squeeze but for a currency, or FXwagen.

Well, FXwagen went turbo on Tuesday, when this unprecedented move continued as Turkish Lira swaps exploded again, more than doubling overnight, and hitting an insane 700%, with some reporting prints as high as 750%

There was just one problem: whereas on Monday this “shock therapy” meant to force out the shorts did in fact work, sending the Lira soaring, and the USDTRY tumbling, the continuation of this painful squeeze no longer has a positive impact on the currency, where as of this point most of the shorts had already been stopped out. As a result, the USDTRY actually rose for the day, and was up to 5.4272, after hitting 5.3051 on Monday.

Commenting on this unprecedented move in swaps, Bloomberg’s Mark Cudmore notes that he doesn’t recall “seeing this happen to any liquid and freely tradeable currency in the past 15 years.”

 …click on the above link to read the rest of the article…

As Emerging Market Currencies Collapse, Gold is being Mobilized

As Emerging Market Currencies Collapse, Gold is being Mobilized

In recent weeks, global financial markets have been increasingly spooked by an intensifying crisis in emerging market currencies including those of Turkey and Argentina. Add to this the ongoing currency crisis in Venezuela and the currency problems of Iran. While all of these countries have economy specific reasons that explain at least some of their currency weakness, there are some common themes such as a stronger US dollar, high domestic inflation rates, economic mismanagement, reliance on foreign borrowing, and in some cases economic sanctions imposed by the US.

As one currency plummets, this intensifies emerging market risk across the entire asset class, and it’s not unreasonable at this time to at least speculate whether the contagion could spread. The Brazilian Real and South African Rand have come under pressure and in Asia, the Indonesian Rupiah and Indian Rupee are also now weakening against the US Dollar.

It is against this backdrop that physical gold is being increasingly mentioned within these emerging economies, with gold coming to the fore as it always does in times of crisis. It is for this reason that its interesting to take a look at a number of these currencies and examine how gold is playing the role of safe haven for these countries’ citizens as well as creating a challenge for these nations’ leaders and central banks.

Buying up Gold as the Turkish Lira Plunges

With ongoing currency and external debt problems, Turkey, with a population of 90 million, has played a central role in the current currency crisis and remains a catalyst for potential risk contagion across other troubled emerging market currencies.

Turkey’s currency woes come against a backdrop of a stronger US dollar, domestic inflation of 15%, increasing default risk, market skepticism about the independence of Turkey’s monetary policy, and a series of US sanctions against the Turkey economy.

…click on the above link to read the rest of the article…

Argentine Peso Collapses To New Low Despite Massive Intervention

Update: *ARGENTINE CENBANK SAID TO OFFER $5B IN PESO MARKET AT 25/USD – That’s 10% of reserves!!

* * *

The Argentine Central Bank spent over $1 billion buying pesos on Friday (and another billion to buy short-term bonds back) to support the collapsing currency…

But… the weekend appears to have provided no confidence improvement for investors who are wary of this week’s maturing bills (traders see Tuesday as key day for the BCRA, when it is scheduled to faces maturity of ARS673mm in Lebacs) and the potential delays of any IMF bailout…

However, BNP Paribas says the Peso is too risky to even short, even taking into account the carry return…

“…we prudently decided to close our tactical short 1m NDF USDARS at 23.75,” strategists led by Gabriel Gersztein write in a report,

“If anything, this is not the time to be structurally positioned in ARS assets, in our view”

But JPMorgan is even more concerned, warning that the peso may face “disorder” this week if the nation’s central bank struggles to roll over about $30 billion of short-term notes set to expire.

As Bloomberg reports, the central bank is scheduled to auction notes known as Lebacs on Tuesday, in order to roll over about 674 billion pesos ($30 billion) of securities that mature on Wednesday.

The yield on Lebacs due June jumped to 58.1 percent in the secondary market today, forcing the central bank to intervene in secondary markets.

“A failure in rolling over the maturing Lebac stock would lead to a disorder bid on the dollar and renovated capital outflow,” JPMorgan analysts Diego Pereira and Lucila Barbeito wrote in a note.

“The recent measures by the central bank, together with Lebac rates above 40 percent suggest the authority would be able to roll a significant share of the stock.”

…click on the above link to read the rest of the article…

Venezuela’s Inflation Surges to A New High: 7459%

After backing off over the past month and a half, Venezuela’s hyperinflation is surging again, making a new high of 7459% yr/yr.

The Grim Reaper has taken his scythe to the Venezuelan bolivar. The death of the bolivar is depicted in the following chart. On the black market (read: free market), a bolivar is worthless, and with its collapse, Venezuela is witnessing today the world’s worst inflation.

On January 29th, Venezuela announced that one of its two official exchange rates was being eliminated. So, now the bolivar “trades” at one rate, under new auction rules. The official rate is now B/USD = 24,968, for those lucky enough to obtain it. But, following the elimination of Venezuela’s official multiple exchange-rate system on January 29th and Maduro’s announcement that the Petro raised $735 million on its ICO in late February (02/20/2018), the hapless bolivar staged something of a rally. In consequence, the currency has come off its lows and Venezuela’s hyperinflation has come off its highs.

Some have applauded Maduro’s recent moves, claiming that they will stabilize the bolivar and eliminate inflation. This, of course, is nothing more than a pipe dream. While the bolivar has strengthened a bit and inflation has temporarily abated and stabilized, the bolivar bounce is nothing more than a classic dead cat bounce.


As the bolivar collapsed and inflation accelerated, the Banco Central de Venezuela (BCV) became an unreliable source of inflation data. However, from December 2014 until January 2016, the BCV did not report inflation statistics. Then, the BCV pulled a rabbit out of its hat in January 2016 and reported a phony annual inflation rate for the third quarter of 2015. Nonetheless, the last official inflation data reported by the BCV is still almost two years old. To remedy this problem, the Johns Hopkins – Cato Institute Troubled Currencies Project, which I direct, began to measure Venezuela’s inflation in 2013. We measure the monthly and annual inflation rates on a daily basis. We measure. We do not forecast.

…click on the above link to read the rest of the article…

Inflation v Deflation–State Finances

There is a general belief, and that is all it is, that state finances fare better in an inflationary environment than a deflationary one. This perception arises from the transfer of wealth from lenders to the state through a devaluation of the currency, which occurs with monetary inflation, compared with the transfer of wealth from the state to its creditors through deflation. The effect is undoubtedly true, even though it is played down by governments, but it ignores what happens to continuing government obligations and finances.

This article looks at this aspect of government finances in the longer term, first on the route to eventual currency collapse which governments create for themselves by ensuring a continuing devaluation of their currencies, and then in a sound money environment with a positive outcome, for which there is good precedent. This is the second article exposing the fallacies of supposed advantages of inflation over deflation, the first being posted here.

Inflationary policies

While central bankers have convinced themselves, in defiance of normal human behaviour, that consumption is only stimulated by the prospect of higher prices, there can be little doubt that the unmentioned sub-text is the supposed benefits to borrowers in industry and for government itself. Furthermore, the purpose of gaining control over interest rates from free markets is to reduce the general level of interest rates paid to lenders, further robbing them of the benefits of making their capital available to willing borrowers.

All this is in defiance of the principles behind contract law, but the courts do not accept that the unbacked state-issued currency of today is no different from the gold-backed money of yesteryear, nor the same as tomorrow’s further debased currency. Tax on interest is an added distortion, reducing net interest received by holders of depreciating currency even more.

…click on the above link to read the rest of the article…

Canadians Are Panicking Over Food Costs After Currency Collapse

Canadians Are Panicking Over Food Costs After Currency Collapse

canadian flag wikimediaIt’s no secret that America has a serious inflation problem. Though the Federal Reserve insists that our inflation rate is only at around .5%, we’ve all seen the price of food, rent, healthcare, and energy skyrocket over the past 10-20 years. However, this has been a gradual shift. Canada on the other hand, has just seen the price of every day goods rise precipitously over a very short period of time.

The crash in oil prices has crippled their economic growth, and led to the decline of the Canadian dollar, as well as a predictable increase in the cost of imports like food. For those of us living in the US, this provides a really good example of what life may be like should the dollar take a plunge in the near future. Here’s what our northern neighbors have been dealing with:

It is often said that a free-floating currency acts as a shock absorber.

But when Canadians go shopping for groceries these days, they’re getting nothing but the shock—sticker shock, that is.

On Tuesday, the Canadian dollar, commonly known as the loonie, broke below 70 U.S. cents for the first time since May 1, 2003.

For America’s northern neighbor, which imports about 80 percent of the fresh fruits and vegetables its citizens consume, this entails a sharp rise in prices for these goods. With lower-income households tending to spend a larger portion of income on food, this side effect of a soft currency brings them the most acute stress.

James Price, director of Capital Markets Products at Richardson GMP, recently joked during an interview on BloombergTV Canada that “we’re going to be paying a buck a banana pretty soon.”

Canadians took to twitter this week to share their collective horror over the rising cost of food. Cucumbers are $3 each. A head of cauliflower is $8.

…click on the above link to read the rest of the article…

Canadians Panic As Food Prices Soar On Collapsing Currency

Canadians Panic As Food Prices Soar On Collapsing Currency

It was just yesterday when we documented the continuing slide in the loonie, which is suffering mightily in the face of oil’s inexorable decline.

As regular readers are no doubt acutely aware, Canada is struggling through a dramatic economic adjustment, especially in Alberta, the heart of the country’s oil patch. Amid the ongoing crude carnage the province has seen soaring property crime, rising food bank usage and, sadly, elevated suicide rates, as Albertans struggle to comprehend how things up north could have gone south (so to speak) so quickly.

The plunging loonie “can only serve to worsen the death of the ‘Canadian Dream'” we said on Tuesday.

As it turns out, we were exactly right.

The currency’s decline is having a pronounced effect on Canadians’ grocery bills. As Bloomberg reminds us, Canada imports around 80% of its fresh fruits and vegetables. When the loonie slides, prices for those good soar. “With lower-income households tending to spend a larger portion of income on food, this side effect of a soft currency brings them the most acute stress,” Bloomberg continues.

Of course with the layoffs piling up, you can expect more households to fall into the “lower-income” category where they will have to struggle to afford things like $3 cucumbers, $8 cauliflower, and $15 Frosted Flakes. Have a look at the following tweets which underscore just how bad it is in Canada’s grocery aisles.

Three bucks. For a cucumber.

Loonie Lurches To 13 Year Lows As Crude Nears ‘2’ Handle

Loonie Lurches To 13 Year Lows As Crude Nears ‘2’ Handle

This can only serve to worsen the death of the Albert Dream, and all the societal depressions that is bringing with it.

Argentine Peso Collapses 29% After Government Lifts Currency Controls

Argentine Peso Collapses 29% After Government Lifts Currency Controls

For those interested in a case study of what happens after a dramatic devaluation, you now have front row seats for what is likely to be a 25-30% peso plunge. Grab the popcorn. 

That’s what we said on Wednesday evening in “Prepare For Peso Plunge: Argentina Lifts Currency Controls,” after the country’s FinMin Alfonso Prat-Gay announced that, as promised, new President Mauricio Macri would move to unify the official and black market exchange rates in the face of depleted FX reserves and still sky high inflation.

Here’s what the gap looked like as of yesterday:

On Thursday, the move to a float sent the peso plunging by nearly 30%:

Now let’s just hope Macri’s move to negotiate new terms for the $17 billion derivatives book amassed by former central bank governor Vanoli is enough to keep the country from taking a massive hit on its dollar futures.

Oil Producer’s Currencies Are Collapsing As Brent Breaks Below $40

Oil Producer’s Currencies Are Collapsing As Brent Breaks Below $40

 Not helped by weakness in China trade data, questions over global growth and inflation expectations are growing. Oil-exporting nations  (and growth-linked currencies) are getting monkey-hammered…

Just when traders thought the bottom was in…

As Reuters notes, with lower oil prices likely to add to global deflationary concern and Chinese data doing little to improve sentiment, risk appetite remained fragile.

The Canadian currency fell 0.4 percent against the U.S. dollar, to C$1.3555. That was the U.S. dollar’s strongest level since mid-2004.

Similarly the Norwegian crown fell a six-week low against the euro.

“If you are looking to play weak oil prices, you would want to sell the Canadian dollar and the Norwegian crown,” said Jeremy Stretch, head of currency strategy at CIBC World Markets. “With oil prices falling and some even talking about oil falling to $30 a barrel, revenues for these countries will take a beating and hence their currencies will remain under pressure.”

The Australian dollar fell 0.6 percent to $0.7220 AUD=D4 as this week’s tumble in iron ore and the latest Chinese data weighted on the currency’s woes.

Citi recommended that investors sell the Aussie through options. “The weakness in the Chinese economy will spill over to Australia through commodities demand as well as reduced demand for the Australian dollar via reserves and other channels. This should leave it vulnerable to an eventual leg higher in the dollar,” they said.

Charts: Bloomberg

With the oil price collapse accelerating (Brent just dropped below $40 for the first time since Feb 2009), the currencies of major oil-exporting nations – such as the Canadian dollar and Norwegian crown – are plunging…

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