Somehow, the Turkish lira held onto gains on Tuesday, despite the fact that the diplomatic row between Ankara and Washington has seemingly deteriorated into a confirmed stalemate, with John Bolton telling Serdar Kilic that negotiations will not resume until Andrew Brunson is released.
The lira’s respite will likely prove fleeting. If anything, Erdogan’s Tuesday speech represented a further escalation, albeit a characteristically ridiculous one. Apparently, Turkey will now boycott U.S. electronics. Erdogan specifically singled out iPhones which he imagines are inferior products to the vaunted Vestel Venus.
Erdogan’s son-in-law Berat Albayrak spoke on Tuesday as well and predictably, he’s sticking to the family script because really, what choice does he have?
Speaking in Ankara, Albayrak claimed the dollar has “lost its trustworthiness” and is being used “as a tool of political punishment”.
He also said this about dismemberment and beards:
We will continue to take steps that will make our lira stronger. They will lose their arm in attempt to cut our beard. We won’t turn our cheek to those with a clenched fist.
Again, this has descended into farce, which is precisely what you’d expect in a mudslinging contest between Erdogan and a reality TV star whose two principal claims to fame are a bad toupée and gaudy golden monuments to his own ego .
It’s also worth noting that while Erdogan and Albayrak are decrying the stronger dollar, so is Trump. The irony here is that both Turkey and the White House would really appreciate it if Jerome Powell would take a pause on the rate hikes – Turkey, because dovish Fed policy would reignite the carry trade and the White House, because a drop in the dollar would help Trump’s trade war.
“The lira could still be in the eye of the storm today’s rebound notwithstanding”, Rabobank’s Piotr Matys wrote in a note, adding that the country has a lot of “important issues” to address.
Obviously, inflation is going to explode from here thanks to recent lira weakness. Here’s Barclays, from a note dated Monday:
The TRY has depreciated c.40% against an equally weighted basket of USD and EUR since end-July (or since the July MPC). Using an FX pass-through coefficient of 15%, the recent TRY depreciation could add 6pp to annual inflation. This combined with the inflation impact of the recent hike in electricity and natural gas tariffs (c.0.4pp), means a substantial addition – around 7.0pp to an already elevated inflation rate (c. 16% in July).
But it won’t matter – if the market learned anything on July 24 and then again on Monday when the central bank eschewed rate hikes for Band-Aids, Erdogan isn’t going to hike to put a stop to this.
“Judging by the historical policy reaction, the CBT’s stance on political/geopolitical risk-driven market volatility has generally been to wait and see whether the shock proves to be transitory before taking a policy rate action”, Barclays writes, in the same note cited above, adding that “the private sector, and its FX mismatches concentrated in certain sectors (energy and construction), is at the root of Turkey’s economic fragilities.”
(Barclays)
Turkish equities are of course in a tailspin. On Monday, the Borsa Istanbul Banks index essentially collapsed, falling some 12% at one point, the most since 2006. The iShares MSCI Turkey ETF had its worst week on record last week. It’s up today, but the losses since the January peak are nothing short of horrific.
Amusingly, the product actually took in $90 million on Monday.
(Bloomberg)
Here’s Bloomberg’s Eric Balchunas†with the quick explanation for that:
Create to lend action.
So you know, at least you’ve got a way to hedge this train wreck if you’re so inclined.
