Predictably, it’s not pretty for the Turkish lira to start the week.
Over the weekend, President Recep Tayyip Erdogan took things up a notch in the increasingly contentious diplomatic spat surrounding the detention of North Carolina evangelical Christian pastor Andrew Craig Brunson, who is facing some three decades in a Turkish jail if he’s found guilty of conspiring with Erdogan’s arch nemesis Fethullah Gulen.
“We were patient until last night but I gave instruction to freeze all assets of the U.S. justice and interior ministers, if they have any”, Erdogan said on Saturday, responding to Washington’s decision to move ahead with sanctions on Turkey’s Minister of Justice Abdulhamit Gul and Minister of Interior Suleyman Soylu.
The lira hit a fresh record low against the dollar on Monday amid the worsening diplomatic row and as soaring inflation puts the central bank between a rock and hard place. It was the sixth straight day of declines for the currency, which fell more than 4%.
Obviously, Turkey needs to hike rates, but having eschewed that option last month in the first scheduled meeting since Erdogan placed his son-in-law in charge of the economy, it’s now abundantly clear that the political pressure is more palpable post-election.
Midway through the day, CBT tried to put a Band-Aid on what amounts to a gunshot wound, lowering the upper limit for the FX maintenance facility to 40% from 45% (basically, they were trying to provide banks with some extra dollar liquidity). They shouldn’t have bothered. In fact, CBT would have been better off not doing that, as it seemed to telegraph just how unwilling the central bank is to step in with an emergency hike. “[The] move to adjust the reserve options mechanism will only lead to more currency weakness”, Commerzbank’s Lutz Karpowitz lamented.
“Is the lira collapse over? Doubtful,” Swissquote’s Peter Rosenstreich wrote in a note, adding that in order to arrest the slide, “CBT would have to raise rates right now (not at September meeting) 3-5 percent.” On Monday, 10Y yields in Turkey surged again, rising 64bps to 19.83%.
(Bloomberg)
Again, it’s possible that Erdogan will be forced to cave on the Brunson issue and indeed, he may see that as preferable to an emergency rate hike when it comes to taking some pressure off the currency.
That said, he’s pretty keen on using U.S. sanctions as a tool to marshal domestic support for his broader contention that foreign interests are behind the slide in the currency, thus deflecting blame from his own notoriously misguided economic policies.
On Friday, Erdogan reiterated his call to Turkish citizens to tap into their imaginary stash of dollars, euros and gold. “Bring out the dollars, the euros and the gold,’’ he commanded late last week. “Turn them into liras. Show your local and national resistance against the entire world’’.
Meanwhile, EM volatility is at its highest since February of 2017, according to JPMorgan.
(Bloomberg)
