The Australian dollar fell to an 18-month low against the US dollar on Monday, as worries about an impending financial crisis in Turkey prompted selling in the currency with strategists warning of more downside ahead.
The Australian dollar fell 1 per cent at the end of last week and stumbled again on Monday to trade at US72.83¢, a level not seen since the beginning of 2017.
"It's a stark reminder that the Australian dollar enjoys the status as the market's preferred risk proxy," National Australia Bank's head of foreign exchange, Ray Attrill, said.
There could be more weakness for the Australian currency to come, he said, with the signs "relatively ominous" from a technical point of view after the latest drop pulled it out of the trading range it had been in for the past year and a half.
Mr Attrill said another step lower for the Australian dollar could see it fall to around US68¢ to US69¢ against the greenback.
While the path from a crisis in Turkey to selling the Australian dollar "is a pretty long bow", it was the Australian dollar's superior liquidity that made it such as magnet for traders trying to de-risk in nervous times, he said.
The attraction of that deep liquidity was exacerbated by Australia's own economic fundamentals as Australia was still a very indebted country from the point of view of foreign exchange markets, Mr Attrill noted. When traders got nervous and retreated to their home markets, they might be less inclined to roll over Australian dollar debt, for example, he said.
Skittish investors sent the Turkish lira to a record low against the US dollar on Friday after US President Donald Trump reportedly said he had authorised higher tariffs on imports from Turkey in response to the sliding Turkish currency.
A defiant response from Turkish President Recep Tayyip Erdogan, the self-proclaimed "enemy of interest rates", did nothing to soothe the market mood after Mr Erdogan said the Turkish population should trade in assets denominated in other currencies for lira.
"Whilst it might play well on the campaign trail, this is not what markets want to hear right now," Brown Brothers Harriman emerging markets strategist Win Thin said.
He said Turkey had "not yet reached its pain threshold", where it was forced to shift to a more orthodox policy stance. "That means things will get much worse before they get better. But make no mistake, Turkey is in for some serious pain," the BBH strategist added.
"If it keeps going down its current path, Turkey (and the market) has to be prepared for a hard landing, corporate defaults, and bank failures," he said.
NAB's Mr Attrill noted it was reported late last week that some European banks were exposed to Turkey. Those banks included Spain's Banco Bilbao Vizcaya Argentaria, Italy's UniCredit and France's BNP Paribas, the Financial Times reported.
The newspaper also reported that the European Central Bank had grown increasingly concerned about euro zone exposure to the Turkish financial system following the lira's deep plunge.
"There could be implications for the flow of credit in the euro zone," Mr Attrill said.
Aussie tipped to fall to US70c
While markets are on alert for contagion from Turkey to the rest of the emerging markets space, BBH is downplaying that risk "in favour of one that recognises that emerging markets are in a broad-based bear market", the BBH strategist said.
Shane Oliver at AMP Capital also believes Turkey is a special case within the emerging markets sphere.
"Its currency has crashed 42 per cent this year because of current account and budget deficit blowouts, surging inflation, political interference in its central bank, economic mismanagement generally and political tensions with the US," Mr Oliver said.
"While Brazil, Argentina and South Africa also have particular problems the rest of the emerging world is in far better shape."
Mr Oliver sees the Australian dollar moving down to around US70¢ after it broke out of the narrow trading range that was centred around the US74¢ mark.
"Friday's fall in the Australian dollar also reminds that being short Australian dollar and long US dollar or Japanese yen is a good hedge against threats to the global growth and share market outlook," he noted.