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Currency ETFs Winners & Losers on Turkey Crisis

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Turkish currency lira has been struggling this year. So far,double-digit inflation, the after-effects of policy tightening in the United States and political woes have been bothering the currency. Then, President Donald Trump’s doubling of metal tariffs acted as the final nail in the coffin, sending lira to a tailspin.

President Trump lately announced, via Twitter, that he has doubled steel and aluminum tariffs against the country. Turkey is already facing U.S. sanctions for its arrest of U.S. pastor Andrew Brunsonin 2016.

In reply, Turkish president Recep Tayyip Erdogan came up with a non-conciliatory tone against the United States. Plus, Turkey has intensified its relationship with Russiaat a time when the United States and Russia are not sharing good vibes, per an article published on MarketWatch. Iran – yet another country sharing tensed relationship with the United States – is also in support of Turkey.

Lira on a Downhill Ride

Turkey ETF TUR slid 14.5% on Aug 10, 2018 while lira slumped as much as 17% on Friday, reflecting the biggest decline since the country’s banking crisis in 2001, per Bloomberg. The currency has lost about 30% since President Recep Tayyip Erdogan took office in late June. Fears of a complete authoritarian takeover are looming large in the economy (read: Erdogan Victory Takes Turkish ETF to 9-Year Low).

The bid-ask spread of lira trading has widened beyond the difference witnessed at the height of the global financial crisis in 2008. The crisis in the currency makes it pricier for Turkish borrowers to pay back foreign-currency loans. With this, Turkey now appears more prone to default on its debt than Greece, per an article published on Bloomberg.

Turkey’s capacity to repay foreign-currency debts rattled the global equity markets. The current CDS pricing indicates 25% chances of non-payment in the next five years, as per data compiled by Bloomberg.

Per J.P. Morgan Asset Management, the slump in the lira is many-sided. Along with a wide current account deficit and insufficient currency reserves, a stressed political environment is one of the main causes of this plunge.

Against this backdrop, let’s take a look at the currency ETFs that won and lost amid a deepening rout in lira.

Losing Currency ETFs

Invesco CurrencyShares Euro Currency FXE

The prolonged rout in the lira also weighed on the euro. “The euro is especially vulnerable given its exposure to the Turkish economy,” especially banks, per analysts. The euro plunged to its lowest against the greenback in more than a year on Aug 10. The fund lost about 1.1% on Aug 10.

Invesco CurrencyShares Australian Dollar Trust FXA

Australian dollar is commonly viewed as a risky asset and thus investors sold it. The fund shed more than 1.1% on Aug 10.

Winning Country ETFs

Invesco DB US Dollar Bullish UUP

The greenback is widely viewed as a safe-haven asset and gained amid the Turkish turmoil. Plus, monetary policy tightening in the United States helped the currency to gain. The fund added about 0.7% on Aug 10.

Invesco CurrencyShares Japanese Yen (FXY - Free Report)

This is yet another safe-haven currency, which advanced more than 0.2% on Aug 10.

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