- AUS Dollar hits 20-month low as Turkish crisis rattles markets.

- Global sentiment to drive AUD this week, not domestic data.

- Although poor wage number Wednesday could amplify AUD losses.

© Greg Brave, Adobe Stock

The Australian Dollar fell to a 20-month low Monday as markets remain in "risk-off" mode amid ongoing concerns over the stability of the Turkish currency and economy, which will matter more for the Antipodean over coming days than any data emerging from the domestic economy.

Analysts are warning the Aussie could face even further losses this week if global markets remain in a panic over Turkey, given the Antipodean currency is underwritten by Australia's commodity exports and remains highly sensitive to changes in investors' appetite for risk.

"After about 8 weeks of range-bound trade inside 0.73-0.75, AUD/USD has finally broken out. As we suspected, the catalyst was not domestic data or RBA policy, but global factors. In particular, risk aversion jumped on Friday as the Turkish lira’s weakness became a collapse," says Sean Callow, an FX strategist at Westpac.

The AUD/USD rate was quoted 0.34% lower at 0.7275 Monday, marking its lowest level since January 2017, while the Pound-to-Aussie rate was up 0.56% at 1.7521. The Aussie was also quoted lower against all other developed world currencies.

Above: AUD/USD rate shown at weekly intervals.

Turkey's Lira has been clobbered on currency markets, falling 17% on Friday and by 82% against the US Dollar this year, as markets fret over an escalating dispute between Ankara and Washington, a politically compromised central bank and deteriorating economic fundamentals.

The currency has been in free-fall ever since it became clear the central bank is being prevented by government from raising interest rates, despite runaway levels of inflation, which are now being made far worse by the substantial fall in the currency. A weaker currency stokes inflation by making imported goods more expensive to buy.

European banks have close to €100 bn of loan book exposure to Turkey. This is a small number when spread across Eurozone countries and the region's banks but nonetheless, markets have become fearful that Turkish defaults might hurt an already-weak European banking sector, weakening the Euro and other risk assets in the process.

Turkish officials are set to unveil a raft of measures aimed at shoring up confidence in the Lira, and government, on Monday but given Friday's debacle, confidence that any plan will work is quite low.

"This week in Australia we have plenty of data including Q2 wages and July employment. But whether AUD/USD is able to stabilise around 0.73 or will instead slide under 0.72 will probably depend more on global equity sentiment (including news from Turkey) than on local data," says Callow. "Turkish authorities are looking for a circuit-breaker but until that occurs, markets seem set to remain skittish, hurting AUD/USD."

Above: AUD performance relative to G10 basket on Monday, 13, August.

This leaves the Australian Dollar in an undesirable position ahead of the all-important second-quarter wages report due on Wednesday, as the Aussie may struggle to capitalise on a positive number, but will be especially responsive to a poor wages outcome.

Markets are looking for the wage price index to have risen 0.6% during the second quarter, up a fraction from 0.5% previously, which is expected to see the annualised pace of Aussie wage growth remain at 2.1%. This is still far below the 3% wage growth that economists say would be necessary to draw a response from the Reserve Bank of Australia.

"The AUD lacks any catalyst to pursue a sustained move higher, not least because the domestic data flow is uninspiring from an RBA rate hike perspective, even more so after the disappointing Q2 CPI. The global environment will continue to dominate moves," says Daneil Been, head of FX research at Australia & New Zealand Banking Group. "The environment is looking increasingly challenging. Risks around the housing market may also weigh on the Aussie."

Markets care about wage data because of the influence that rising household incomes can exert over demand within an economy and therefore, on consumer price inflation. And it is inflation that central banks are attempting to manipulate when they tinker with interest rates, which are of course the raison d'être for most moves in currency exchange rates.

After all, changes in interest rates, or hints of them being in the cards, are only made in response to changes in domestic inflation but impact currencies because of the push and pull influence they have on international capital flows and their allure for short-term speculators.

The Reserve Bank of Australia (RBA) has held its interest rate at a record low of 1.5% for two years now, citing below-target inflation and a debt laden household sector that it says is ill-equipped to handle the pressures of higher borrowing costs given years of weak wage growth. Markets do not see a change in policy coming until at least the middle of 2019.

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