USDTRY erases morning drop and moves towards ATH

Summary:

• Rise in US-Turkey tensions sink Turkish lira

• The CBRT reserve requirement ratio cut did little to ease the sell-off

• USDTRY erases morning drop and moves back above the 5.30 handle

Turkish lira experienced a heavy sell-off yesterday as relations between Turkey and the United States continued to worsen. In the previous week we wrote about US imposing personal sanctions on two Turkish officials. However, much has happened since then and in this analysis we will cover the latest developments concerning the Turkish currency.

After a disappointing CBRT meeting in the late-July USDTRY saw another jump in the aftermath of the US imposing personal sanctions on the Turkish ministers. Source: xStation5

The mentioned personal sanctions on Turkish ministers were a backlash for Turkey’s reluctance to release the US pastor Andrew Brunson who has been held captive for alleged membership in one of the groups associated with military coup in 2016. The Turkish President Recep Erdogan decided to retaliate by freezing Turkish assets of the US Minister of Justice and Minister of Interior “if they have any”. However, while this could rise some concerns over deepening diplomatic dispute between two countries the real bombshell came on Friday evening. Namely, the US authorities announced that they are reviewing the Turkey’s duty-free access to the US market. Let us recall that Turkey was included in the US Generalised System of Preferences last year what meant that the Turkish exports of goods, like for example motor vehicles and parts, jewelry or precious metals, would not be charged with duties while imported to the United States. The alleged value of goods being subject to the duty-free programme is said to be around $1.6-$1.7 billion.

The CBRT reserve requirement ratio cut meant to ease TRY sell-off managed to fend off bears just for a moment. Source: xStation5

While the case of pastor Brunson and the review of duty-free programme coincide in time the US officials claim they are not related. The review is said to be an aftermath of Turkey levying retaliatory tariffs on the US goods (including tobacco, whiskey and machinery equipment) after the world’s biggest economy imposed duties on steel and aluminium imports. The $1.6-$1.7 billion figure corresponds to around 17.5% of total Turkish exports to the United States in 2017. The Turkish runaway current account deficit unveils to what degree the country’s economy relies on the foreign capital therefore additional trade limitations, like for example tariffs, may make the outlook even more grim. As this developments surfaced mostly throughout the weekend the market’s reaction was unclear until Monday and once the new week began the investors rushed to sell their TRY holdings. The currency began to underperform severely against both USD and EUR. Even the CBRT decision to lower reserve requirement ratio from 45% to 40% managed to halt sell-off just for a moment. USDTRY rushed from around 5.085 (post-weekend opening price) to new ATH at 5.425 on Monday. Lira began to recoup its losses after news concerning the United States reaching preliminary agreement with Turkey to resolve crisis involving imprisonment of the US citizens reached the markets in the late evening. In turn USDTRY moved lower from ATH at 5.425 to 5.18 handle. However, the upward move has been resumed since. Do notice that the closest CBRT meeting is scheduled for September 13 therefore if the Turkish lira continues to depreciate we may witness another emergency rate hike.

A correction move on the USDTRY has been already almost completely erased. Unless the dispute with the US is resolved or monetary conditions in the Turkish economy improve the extended upward movement remains a base case scenario. A breakout zone ranging 4.91-4.94 may be area to watch in case we see a reversal. Source: xStation5