Just when you thought it was safe to jump back into the lira…
I’m just kidding. I certainly hope no one thought it was safe to take the long side of that trade. The currency, coming off its second worst week in nearly a quarter century, was in the middle of three-day rally on the back of a series of steps taken by the central bank to try and stanch the bleeding, but that’s now in jeopardy thanks to comments from Steve Mnuchin.
On Wednesday, Turkey secured what amounts to a $15 billion bailout from Qatar, a staunch regional ally whose ties with Ankara were further cemented last year when Turkey supported Doha during the Saudi-led embargo. Later Thursday, Erdogan entertained a phone call from Angela Merkel, who is keen to avoid a scenario where Turkey descends into chaos, a state of affairs that would likely worsen the European migrant crisis at a time when Italy’s new populist government has taken a hardline stance on immigration behind League leader Matteo Salvini.
On Thursday, Berat Albayrak – Erdogan’s son-in-law- hopped on a conference call with some 6,000 investors to insist that capital controls aren’t in the cards. Of course that’s exactly what someone who is pondering capital controls would say. Erdogan appeared to hint at the seizure of FX deposits on Sunday, and since then, officials have been at pains to play down that possibility. For their part, BofAML had this to say in a note dated Wednesday:
Will there be capital controls? Unlikely. CBT net reserves at about US$30bn will be able to cover Treasury’s amortization needs in hard currency in the next few years. Banks and non-financial sectors so far have borrowed above their amortization needs i.e. 12m trailing external debt rollover ratios of 105% and 135% as of June. Non-financial sector is long fx in the short-term, and if fx rollover ratios decline, banks can rely on fx deposits by offering higher interest rates. Current account adjustment if turns into surplus will provide the needed fx that will help to reduce external debt stock.
Whatever the case, Albayrak did manage to bolster confidence in the currency – right up until Mnuchin said the U.S. has already prepared more sanctions for Turkey if Erdogan doesn’t release Andrew Brunson post haste. The comments came at a White House cabinet meeting.
The reaction in the lira was swift, although it pared losses quickly:
The beleaguered Turkey ETF snapped lower on Mnuchin’s comments as well.
For his part, Trump had this to say at the same meeting:
Turkey has not turned out to be a great friend.
ðŸ˜Ÿ ðŸ˜¡ ðŸ˜¡ ðŸ˜¥
To be clear, Turkish equities did not need this. The Borsa Istanbul fell sharply on Thursday as 30-day volatility spiked to its highest since the failed coup in 2016.
“The recent limitations on swap and swap-like transactions have led a lot of funds in search of lira,” a trader at BGC Partners Securities in Istanbul told Bloomberg, adding that “it seems like in order to raise liras, they’re selling equities and bonds”. This was the second consecutive day of 3%+ losses for the benchmark.
Thursday’s threat from Mnuchin comes just a day after Erdogan slapped additional tariffs on U.S. imports including liquor, rice and cars and two days after the Turkish President threatened to boycott iPhones.
What’s going to be particularly interesting here (and I think this is something folks should pay attention to), is whether the Trump administration somehow manages to make Erdogan look like the rational one in this equation.
Obviously, detaining Americans on dubious accusations of being aligned with Fethullah GÃ¼len is absurd, but I find it hard to imagine that GCC countries and European nations are going to be willing to sit idly by as the Trump administration deliberately causes an economic collapse in Turkey.