Page 71 - TURKRptMay19

All in all, there are desk calculations based on official data that can lead us to conclude that the lira is less vulnerable compared to last year . Yet, delve behind those data for some more telling figures and add in the disintegration evident in Turkish and international politics coupled with the polarisation and accelerating disintegration of Turkey on all fronts—it is hard to find real assurance that the lira is any less susceptible to a cave-in than it was in the spring of last year.
Turkish lira falls to weakest level in nearly seven months. The Turkish lira (TRY) saw its weakest intraday level against the dollar since mid-October on April 24 as a multitude of economic and geopolitical worries involving differences with the US continued to weigh on investors. It weakened as far as 5.8912 from the previous close of 5.83, bringing its decline so far this year to 10%, following the near-30% fall it suffered during 2018. Dollar strength contributed to the depreciation that brought the weakest level since October 15, excluding a brief overnight “flash crash” in January. By the end of April 24, the TRY was trading at 5.87 levels. “Assessments of the Istanbul election challenges [as to whether there might be a rerun] are continuing, this is a risk. Also, US relations are being discussed again,” one banker was quoted as saying by Reuters, adding: “Negative lira expectations will continue to be priced in.”
The yield on Turkey’s benchmark 10-year bond rose to 18.22% on April 24 from 17.99% on April 22 . Markets were closed for a public holiday on April 23.
7.2 Lira under control of “invisible hand”
The lira still seems under the control of the ‘invisible hand’ of officials that strive to set depreciation barriers. It has been knocking against the 5.80 threshold against the USD since April 12 after breaking the 5.70 and 5.75 barriers during the previous week. Following the renewed pressure on the lira, Turkey’s 5-year credit default swaps (CDS), a better tracker as they are set under free market conditions, moved up 12% w/w and 45% m/m to 441 on April 15.
“The path of the Turkish Lira is tied to credit. The 2017 credit boom made the Lira vulnerable to the 2018 sudden stop. The subsequent credit contraction stabilized the Lira, until the Q1 2019 credit boom destabilized things again. That credit boom is now ending, a positive for the TRY,” Brooks added on April 12.
In other remarks on April 16, Albayrak claimed that the lira liquidity shortage that was seen in the London swaps market prior to the local elections was not orchestrated by the government. The government had simply acted in line with “free- market rules”, according to Albayrak.
Here’s what Bloomberg reported money managers and strategists as saying about the lira’s inertia:
Credit Agricole’s Tresca:
● “Since the rise of the overnight FX forward rate foreigners are thinking twice before shorting the lira”
Cristian Maggio, the London-based head of emerging-market strategy at TD Securities
● “It could be a delayed response as a result of thin liquidity and, perhaps (this is me speculating) state-owned banks are keeping a lid
71 TURKEY Country Report May 2019 www.intellinews.com