Financial Market Research and Analysis

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Lira is the biggest gainer as AKP gains majority
The lira has been the biggest gainer against the US dollar and the euro as the ruling party AKP gained majority in the government at November 1st snap election. As a knee-jerk reaction, the lira gained ten big figures against the US dollar. USDTRY hit 2.7580 for the first time since August, euro cheapened to 2.0439 lira for the first time in almost three months. Borsa Istanbul index gap opened at 83653.72 points (Friday’s close 79409).
The inversion on the front end of the lira sovereign yield has steepened however. The 1-year yield spiked to 10.30% from 10.25% last week, hinting that the post-election relief remains fragile.

The single party government could bring the economic stability and some social security that Turkey is craving for following months of geopolitical chaos in the region. Nevertheless, talks of a possible constitutional change and political uncertainties around such an important issue could be a drag for mid-long term investors. Therefore, Turkey may be facing a period of high market volatility due to the high proportion of hot money currently flowing in the country.

And there is the Fed. Turkey is among the most UST-sensitive emerging markets, alongside with Brazil, South Africa and India. Although it managed to reduce the gap in its current account deficit to 5.85% of its GDP from a disquieting 9.66% back in 2011, further improvement is necessary and needed to reassure the financial stability and reduce dependency to external factors. Turkish firms carry an important amount of foreign debt on their balance sheets; hence Turkey’s private sector is very vulnerable to external factors. Given the volatility vis-à-vis the Fed policy, the high energy dependency and the sensibility to US dollar and US treasuries, the accumulation of carry positions in lira assets – in other words, hot money – is a threat to Turkish assets’ values and price stability.

Turkey’s inflation figures are due tomorrow. The overheating consumer prices remain a growing concern for the central bank; however the heavy political pressure keeps the CBT’s hands tied regarding its rate policy. It has been months that investors are looking for simplification in Turkey’s three-rate monetary policy. Potential Fed normalisation by December could accelerate reforms in the monetary policy toward a simple and investor-friendly framework. This could be a positive development regarding the investor confidence. It is however not a done deal with the AKP government taking back the reins.

Happily though, the expansive ECB policy takes some off the pressure off the shoulders of the Central Bank of Turkey. The Eurozone stands for 44% of Turkey’s total exports. A cheaper lira provides a good competitive advantage to Turkish companies.

The rally in the lira and lira assets could be tempered by good macro news out of the US this week. The 2.85 level (Fib 50% on July – September rise) is key in the short-run. Below 2.85, the post-election momentum could well bring the USDTRY down to 2.75/2.60 band.

In the mid-long term, the lira depreciation is unavoidable, as the inflationary pressures and the current account deficit could only drive the lira cheaper. The pace of depreciation depends on the combination of Central Bank strategies and the evolution in rate differentials.

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