On Friday, the Turkish lira collapsed more than 13% in what certainly looks like the final leg lower on the way to capital controls or an IMF SOS. Barring either of those outcomes and assuming the central bank is hamstrung in their capacity to deliver a dramatic rate hike, an outright collapse in the Turkish economy appears to be in the cards.
This story has been developing all year long but came to a head late last month when negotiations between Washington and Ankara for the release of detained pastor Andrew Craig Brunson fell apart, ultimately leading the U.S. to slap sanctions on Turkey’s Minister of Justice Abdulhamit Gul and Minister of Interior Suleyman Soylu.
Last weekend, Erdogan vowed to respond and a Turkish delegation dispatched to Washington to try and mend ties on Wednesday reportedly refused to relent on Brunson, leading the U.S. to adopt a similarly belligerent stance on Mehmet Hakan Atilla and Halkbank.
(Major events impacting Turkish lira since March)
On Friday morning, following a Financial Times story that tipped ECB consternation about the exposure of some European banks to Turkey and on the heels of belligerent comments from Erdogan, the bottom fell out. This is a currency crisis, plain and simple.
(Lira collapses, capping off an abysmal run in 2018 amid myriad economic problems and worries about central bank independence following Erdogan’s move to consolidate power)
Amid the chaos, Erdogan delivered a speech on Friday and it was exactly the opposite of what the market wanted to hear. The Turkish autocrat doubled and tripled down on his contention that this is all an international conspiracy and for at least the third time in a week, he implored Turkish citizens to cash in any dollars, euros and gold they have stashed “under their pillows” for lira. Here’s the key clip:
“The lira is in a meltdown”, Bloomberg’s Chief Middle East Economist Ziad Daoud said as Erdogan spoke. “Every word from him is making things worse.”
As it turns out, the market hadn’t seen “worse” quite yet because just minutes later, Donald Trump tweeted this:
I have just authorized a doubling of Tariffs on Steel and Aluminum with respect to Turkey as their currency, the Turkish Lira, slides rapidly downward against our very strong Dollar! Aluminum will now be 20% and Steel 50%. Our relations with Turkey are not good at this time!
— Donald J. Trump (@realDonaldTrump) August 10, 2018
Analysts have variously contended that Trump has yet to convince Erdogan that the U.S. is serious when it comes to the Brunson issue. “Publicly, Turkey will have to appear to be self-righteously indignant, and to retaliate, [but] privately, we believe negotiations on Pastor Brunson’s release continue apace,” SocGen’s Phoenix Kalen wrote last week, before suggesting that Trump will first have to convince Erdogan the U.S. is prepared to impose the kind of sanctions that could plunge Turkey into an economic crisis before negotiations on Brunson will move ahead in earnest.
Now, Trump appears willing to go that route. That tweet suggests he’s hoping to capitalize on the lira’s Friday woes by turning what was already a raging dumpster fire into an outright five-alarm blaze.
(Annotating Friday’s collapse in the lira)
Also note that Trump references “our very strong dollar” in that tweet. That simultaneously indicates that he understands his ability to tank an emerging market currency with one tweet and that he’s still cognizant of the fact that his previous comments about the Fed and rates have failed to arrest the greenback’s ascent.
Meanwhile, the iShares MSCI Turkey ETF is toast. The product, already nursing egregious YTD losses, is down nearly 19%. It traded 1 million shares in the pre-market, the most ever.
(The Turkey ETF is roasted)