EM currencies plunge as lira keeps crashing

Summary:

• EM currencies declines across the board steered by the TRY weakness

• Turkish President Erdogan sticks to its unorthodox view

• Turkey cuts reserve requirements to boost liquidity and undertakes several other steps

• US sets a deadline  for Turkey to release pastor, Erdogan says

The Turkish currency remains in the spotlight as the new trading week is slowly unfolding. The TRY began the week with a gargantuan decline on late Sunday as it crashed above 7.2 per dollar following Erdogan’s speeches over the weekend and remarkably thin volatility conditions then. Other EM currencies have also taken a hit with the South African rand plummeting over 10% on late Sunday. Taking a look at the FX space in the morning one may sum up that things are unlikely to be sorted out any time soon. As of 6:43 am BST the lira is trading at 6.9245 per dollar (roughly 7% down on a daily basis), the ZAR is plunging 3.9%, and the Mexican peso is falling 1.5%. Overall, the entire EM FX basket is experiencing its heaviest 2-day decline since the US presidential election in November 2016. What happened over the weekend?

Emerging markets currency index hits its lowest level since mid-2017 driven by the TRY runaway sell-off. Source: Bloomberg

Let us begin with highly contentious comments of Recep Erdogan who spoke repeatedly on Sunday. He stood by his opposition to high interest rates claiming the lira’s weakness did not reflect the country’s economic realities. In this respect he could be right at least to some extent as the latest runaway TRY’s plunge has begun when relations with the United States have deteriorated in connection with a US pastor being imprisoned in Turkey. Therefore a currency attack being steered by the US is highly possible. Nevertheless, do not forget that the Turkey’s economy itself does not look well alike. Taking into account the plunging lira one may anticipate domestic inflation to soar and being completely out of the CBRT’s control given the unaltered stance of Erdogan with respect to monetary policy. Furthermore, speaking in Trabzon the Turkish president dismissed any suggestions that the country was in a financial crisis like some Asian countries had been two decades ago. This view seems to be astonishing given what has happened with the lira over the recent weeks. All in all, Erdogan appears to stick to his unorthodox view receding odds for any rate hikes that seem to be necessary to take downward pressure off the currency (a US pastor release could also help the TRY recoup some of its gains when relations with the US improved).

In the Monday’s morning the CBRT cut reserve requirements for all maturities by 250 basis points in an attempt to boost liquidity. However, this step did not help the currency for longer as it resumed falling a while later. On top of that, the central bank ensured that more than one repo auctions will be conducted per day in order to meet any liquidity demands. In turn, on Sunday the Turkish banking watchdog BDDK announced it will limit Turkish banks’s swap, spot and forward transactions with foreign investors to 50% of a bank’s equity. Finally, Recep Erdogan referred to the latest negotiations in Washington saying that the US gave Turkey a deadline (till Wednesday) to release the US pastor. Let us notice that Donald Trump authorized a doubling of steel and aluminium tariffs against Turkey, and one may suppose that more such steps could be taken in nearest future if Turkey did not release the pastor. To sum up, given the informations we were offered over the past two days one could expect that disorderly moves on the TRY could still take place which in turn may spill over other EM currencies weighing on equities and encouraging investors to seek safer assets such as US bonds.

The currency crisis in Turkey keeps unfolding with no signs of relief on the horizon. Source: xStation5