Page 40 - TURKRptJul19

The consumer price index-based real effective exchange rate (REER) of the Turkish lira fell to 69.79 in May, latest central bank data shows. That’s the lowest level recorded since last September's record low of 62.45. In 2018, the rate fell below 80 for the first time since the central bank started publishing the data series in January 2003. The REER calculates the weighted average of domestic prices relative to those of Turkey's trading partners.
Turkish lira loses 1.5% on S-400 reports but effect likely exaggerated by thin trading. The Turkish lira weakened by as much as 1.5% during May 7 trading as Turkey, following a week-long holiday for workers, prepared for a two-week run-up to the controversial Istanbul election revote and the US upped the pressure on Ankara over its plan to deploy Russian S-400 air defences. The weakening in the Turkish lira (TRY) marked the currency’s second losing day since a 10-day winning streak that was its longest winning run since May 2014. The Turkish markets, which took a three-day holiday, re- opened on May 7. They came back on news of a weaker dollar and growing anticipation that the US Federal Reserve will cut interest rates and help the sluggish global economy. The TRY’s troubles on May 7 appeared partly driven by a Reuters report that cited US officials as saying Washington will block any additional Turkish pilots who plan to train in the US on F-35 fighter jets. The US seems set to block deliveries of the F-35 to Turkey if Ankara does not give up on its plan to install S-400 systems which Nato officials say could compromise the security of the aircraft, the world’s most expensive fighter plane. Thin trading on the market probably exaggerated the reaction of the TRY to the report. By after business hours, the lira was 0.36% weaker against the USD, standing at around 5.80 levels. In the year to date it has lost around 10% against the dollar, following the 28% it shed last year, which included the summer-time lira crisis. The lira gains over the past week were due to foreign investors buying the currency via swap positions ahead of the holiday, the dovish shifts at the Fed and European Central Bank, and quick pricing in the low-liquidity environment, Orkun Godek, a strategist at Deniz Investment, told Reuters. On May 6, S&P Global Ratings said Turkey's lira was fundamentally undervalued and would continue to support the country's export sector. The main Istanbul stock exchange BIST-100 share index was up 0.46% on May 7, while the main banking index rose 1.69%.
7.2 Lira under control of “invisible hand”
The TRY has been trading just below the 5.80 level against the USD since the week-long Bayram break that Turkish workers took, but the rate is obviously synthetic. Market commentators’ attempts to offer conventional explanations for the lira’s movements, tagging it to the news flow, fall short of logically explaining the situation. That’s been more and more the case since last November when the government moved in to boost its behind the scenes control of the currency. Although the S-400 ultimatum, delivered in a letter from the acting US defence secretary to his Turkish counterpart on June 6, has not significantly hurt the lira, there is still the potential for it to do so as the ultimatum deadline is July 31.
The US Senate and House of Representatives, as well as top officers at the Pentagon—in fact basically everyone in the US establishment except Donald Trump—have been pushing the threat of sanctioning Ankara if it flies in the face of the US demand that it scraps the S-400 order placed with the Kremlin. Turkish officials, meanwhile, are feeding hopes that a scheduled Recep Tayyip Erdogan–Donald Trump meeting on the side-lines of the G20 meeting to be held in Osaka on June 28-29 can work the situation out to everyone’s satisfaction. Meanwhile, the Russians continue to enjoy the S400 row and play it for all it’s worth in upsetting the Nato alliance. One day a Russian officer says the missile deliveries have been delayed to August, the next day a different Russian official says they will be be made in July.
Back in the lira market, Turkey’s public lenders are said to remain active while the latest rate cut signalling from the Fed, along with the woes in South
40 TURKEY Country Report July 2019 www.intellinews.com