Euro drama in currency markets

This is an audio transcript of the FT News Briefing podcast episode: Euro drama in currency markets

Marc Filippino
Good morning from the Financial Times. Today is Friday, November 19th, and this is your FT News Briefing.

[MUSIC PLAYING]

There’s more monetary madness in Turkey, but some foreign investors are still sinking money into the country. Carmakers Ford and GM are forging friendships with chipmakers. Plus, we haven’t talked about currencies for a while, and there’s a good reason for that.

Katie Martin
Currency markets for major currencies have been incredibly boring for a really long time.

Marc Filippino
But now there’s drama starring the euro. The FT’s Katie Martin will tell us what’s going on. I’m Marc Filippino and here’s the news you need to start your day.

[MUSIC PLAYING]

The global semiconductor shortage is forcing companies to find new ways to obtain chips. Some big companies like Apple and Huawei have decided to make their own. And yesterday, two big US carmakers said they are pursuing stronger ties with chipmakers. Ford said it had signed a non-binding agreement with GlobalFoundries. That’s a New York chipmaker owned by Abu Dhabi’s sovereign wealth fund. GM said it’s looking at a partnership with the chipmakers like TSMC and Qualcomm.

[MUSIC PLAYING]

Something unusual is happening in currency markets. This week, the euro fell to its lowest level against the US dollar in 16 months. To understand why this is a big deal, I have the FT’s markets editor Katie Martin on the line. Hey, Katie.

Katie Martin
Hey, how are you doing?

Marc Filippino
I’m doing well. So what’s the story of this week with the euro?

Katie Martin
The short version is going down. Do you want the long version?

Marc Filippino
Yeah. Hit me with the long version, Katie. Why not?

Katie Martin
Otherwise this would be a really quick briefing. So currency markets for major currencies have been incredibly boring for a really long time. So one of the main things that currency markets care about is interest rates, and all the major interest rates have just been like nailed to the floor. So what the market has got a bit of a sniff of now is that the European Central Bank is going to be way behind the others in eventually lifting interest rates or tightening policy by curtailing quantitative easing or anything like that. So we’ve already seen that the Fed is on this clear trajectory towards cutting back its monthly bond purchases. It’s starting to look like the Bank of England is at the very least having this conversation, whereas the ECB is just saying not gonna happen. And so that is the recipe that you need to push the euro lower and that’s exactly what’s happened.

Marc Filippino
Right, and you know, when it comes to the ECB doing something with the intent to benefit markets, forget about it. You know, we’ve said that Christine Lagarde, the president of the ECB, doesn’t do things with the markets in mind; does things with the bloc in mind. So why do we care if the euro is sinking?

Katie Martin
Well, just to go back to what you what you were saying. Christine Lagarde does care very deeply about stresses and strains in the eurozone government bond markets, but she could certainly live with a falling euro, probably. And again, you know, this is Lagarde message working, you know, she told the European Parliament at the start of this week that tightening policy would actually do more harm than good. So what will Christine Lagarde think about this? I mean, yes, a falling euro will help exporters. But another senior figure at the European Central Bank, Isabel Schnabel, was also noting this week that if you see the euro sliding like this, then that could push up inflation by as much as 0.3 percentage points. That doesn’t sound like a huge amount, but the ECB is very sensitive to inflation, and that’s actually quite a large increment. So if we do start to see the point where the floor falls out of the euro exchange rate, which I’m not really expecting but never say never, you know? But if this accelerates quickly and we do see this really pumping up inflation levels, then the ECB could potentially have a bit of a sense of humour failure about it.

Marc Filippino
You know, one of these days, Katie, we’re going to have a conversation that doesn’t include inflation.

Katie Martin
That’s never going to happen.

Marc Filippino
Never going to happen. OK, well, and in that case, let me ask you a follow-up question. How significant are these drops? Are there any comparisons to previous eras, previous times economies were, you know, recovering from a crisis or shock?

Katie Martin
Yeah. So, you know, if you cast your mind back to the time before we had the pandemic and all central banks just chopped up their interest rates and, you know, through a mincing machine and everyone was caught on the same level, these sorts of moves would have been fairly standard. You know, it was pretty normal for currencies to move around. Believe it or not. So this isn’t like an extreme currency crisis, you know, cough, cough, Turkey.

Marc Filippino
We’ll get to that in a second.

Katie Martin
We’ll get to that. This is more kind of a return to the good old days where currencies provided some volatility, and people weren’t bored out of their mind on kind of currency trading floors.

Marc Filippino
Speaking of Turkey, we are, we’re going to go to Turkey in a bit when we talked to Laura Pitel in our next segment. Just give us the quick and dirty. What’s going on there?

Katie Martin
Oh, Turkey’s gonna Turkey. So it cut interest rates by another full percentage point to 15 per cent. That’s the third cut in a row from the central bank, though, which is under enormous pressure from President Erdogan to keep interest rates as low as possible. You’ve got inflation running there at something like 20 per cent so the currency fell 4 per cent in response to this interest rate cut, which the central bank has indicated will be followed up again before too long. So the Turkish lira is now trading at about 11 to the dollar. It’s never been in this kind of territory before. You know, international analysts and investors are just exasperated, and there appears to be no end in sight here.

Marc Filippino
Yeah, if you’re keeping score at home, the lira has plummeted more than 30 per cent this year. Katie Martin is the FT’s markets editor. Pleasure, as always, Katie.

Katie Martin
Pleasure is mine. Thank you for having me.

Marc Filippino
So Turkey has scared off a lot of investors, but not everyone. This week, the Spanish bank BBVA announced plans to spend more than two billion euros to buy the remaining 50 per cent of the Turkish lender Garanti. Our correspondent in Ankara, Laura Patel, has details.

Laura Pitel
Now, some people were pretty surprised by this seeing as the economic backdrop is not exactly easy. But I think the main motivation of the bank was that it already owns half of Garanti, and the price of buying the other half of the bank is incredibly cheap due to the depreciation of the Turkish lira. And they see it as a good deal.

Marc Filippino
So Laura, who else is putting money into Turkey because they see long-term value or, you know, they’re looking for a bargain?

Laura Pitel
Well, it’s really interesting because I’ve been keeping my ear to the ground to see if investors are going to come in to snap up this hugely undervalued assets here. An interesting picture emerges. What I hear from analysts and diplomats and people who work in mergers and acquisitions is that new entrants to Turkish market are incredibly hesitant. They look at the political backdrop, which is pretty turbulent. President Erdogan has been accused of consolidating his own powers, eroding the rule of law, meddling in the central bank. And they think, no thank you. They decide that they want to stay away, by and large. On the other hand, companies who already have a presence in Turkey, sometimes like a decades long presence, sometimes feel bolder about the idea of expanding here. I think they feel that they are used to the ups and downs. They think that there’s good profits to be made here. Turkey is a big country with a young population and a strategic location with access to markets in the Middle East and Europe and Asia. And if you have a high-risk appetite, there can be opportunities here. One interesting exception is the tech sector, which has actually been enjoying a real boom recently. And thanks to that investment, we’re actually expecting to see a slight increase in Turkey’s foreign direct investment figures this year after about five years of declines.

Marc Filippino
Still, though, you know you’ve reported many big name companies have left Turkey. Is there anything that could bring them back?

Laura Pitel
Honestly, I think that the main thing that would reverse the trend is if President Erdogan loses the next set of elections, which are scheduled for 2023. The opposition in Turkey is incredibly bullish about their prospects of forcing him from power at the ballot box. And that’s an idea that has started to catch the interest of investors. I think most of those that I speak to still think that it would be an enormous gamble to bet that that’s going to happen, add on the formidable politician who has a lot of tools at his disposal, and it’s by no means guaranteed that he will lose and that he will leave power. But if you have a high-risk appetite and fancy a gamble, then you know there’s an opportunity there. I think if and when there’s a change of government, a lot of money will flow into Turkey.

Marc Filippino
Laura Pitel is our correspondent in Ankara.

[MUSIC PLAYING]

And before we go, we want to say thank you. Your votes helped us win a really big award. This week we were awarded a People’s Lovie. The Lovies are the European version of the Webbys. They honour the best of the European internet. Not only that, we also won a Gold Lovie, which is selected by a panel of judges. It’s a huge honour, and we want to thank you for voting us, and most of all, for listening in every day.

[MUSIC PLAYING]

You can read more on all of these stories at FT.com. This has been your daily FT News Briefing. I’ll be taking next week off, but you’ll be in the excellent hands of our fill-in host Joanna Kao. See you in a bit.

[MUSIC PLAYING]

[00:10:05] The FT News Briefing is produced by Fiona Symon and me, Marc Filippino. Our editor’s, Jess Smith. We had help this week from Peter Barber, Gavin Kallmann and Michael Bruning. Our global head of audio is Cheryl Brumley, and our theme song is by Metaphor Music.

This transcript has been automatically generated. If by any chance there is an error please send the details for a correction to: typo@ft.com. We will do our best to make the amendment as soon as possible.