Former trader Richard Breslow took Monday off, but he’s back on Tuesday and he’s got some thoughts on Turkey and lira.
As you’ll recall, it’s been a rough ride this week following Erdogan’s decision to escalate the simmering feud with Washington by arresting still more people in his ongoing effort to blackmail the U.S. into extradicting Fethullah Gulen, whose spies the Turkish President imagines are lurking around every corner.
The lira has taken a lot of punishment, quite a bit of which occurred in the initial knee-jerk on Sunday evening when markets are notoriously illiquid.
The most important part of what you’ll read below is the bit about how nothing comes free. In other words, the risk of a sharp spike in DM yields isn’t the only thing to worry about if you’re knee-deep in the carry bonanza. There’s a reason why these trades are lucrative. You shouldn’t be surprised when there are bumps in the road. I mean what did you expect? It’s Erdogan:
Where you come in on a discussion can make a huge difference. This is especially true if there’s a need to understand context, let alone what modern “conveniences” have done for market structure. And to make matters worse, 24/7 news and market access can be a curse as well as a benefit. Keep this in mind when judging the price action in the Turkish Lira in the middle of a Sunday night. And perhaps ask yourself why anyone would actually trade the thing at that moment in time and with liquidity virtually nil.
- I’ve no idea how far this latest of spats involving Turkey’s President will go. Is he tilting at yet another windmill or serious about going to the mattresses? I doubt he knows, so it’s awfully hard to figure it out on the fly. Especially if you are using the illiquidity of the early foreign exchange opening as a guide
- The initial trading in the lira looks a lot more like a flash crash than a reasoned response to any of the headlines. The fact that this darling of the carry search crowd had already been weakening for the last month only exacerbated the seeming panic. Especially as the spot price has been moving further and further from the heady exchange rate forecasts which worked those lusciously attractive interest rates into the formula. You don’t always get something for nothing. Worth remembering when the time does come for a proper shakeout. As is the fact that a higher USD/TRY can also be the product of a strong dollar as well as a weak lira
- The gap opening yesterday on the Borsa Istanbul was indeed ugly. But before we talk blood bath, remember, we are currently trading at levels last seen only eight days ago. Having taken the U.S. holiday off, I’d point out that I could also be focusing on today’s headline, that I didn’t see, about the market gapping higher on the open bringing the YTD return to over 30%. Sounds pretty good. Traders like to blame all the world’s ills on central bank behavior and then scream when markets act like markets. Or their machines act like robots
- It’s the favorite game out there to be the first one to claim bragging rights for having called the end of whatever bubble is on today’s hit parade. And, despair not, we’ll get that event at some point. But look at things a little differently. With all the horrifying news out there, the fact that the markets aren’t yet ready to even remotely collapse is the truly impressive phenomenon. That certainly has been the dispositive factor we should be pondering, not I missed the boat and can’t stand seeing it continue to sail on without me