the liquidity crunch as “taking a page of the Chinese currency manipulation playbook” accounting for a comparable degree of state influence over the banks; but the salient difference being the TCMB (Turkey’s central bank) has far less ammunition than the PBoC in terms of FX reserves. The TCMB had already been perceived to be propping up the lira pre-election following data last week that it had drawn-down on foreign exchange reserves
After a 3-day bounce the lira resumed its weakening, today spiking back up above 6.3, and now hovering around 6.08. Some BIS data, and the restrictions on short selling the lira, drew attention away from the currency as a barometer to a more fundamental assessment of the Turkish debt problem. This of course reminded markets that Spanish, French and Italian banks – greedy for returns – have cut themselves too thick a slice of Turkey.
Intervention reverses lira decline for now, but wider market contagion point to likely further deterioration.
In August alone the Turkish lira depreciated from 5 against the dollar to above 7 earlier this week (it’s always exciting when you can talk about European FX moves in integers) but has today retraced somewhat, dipping below 6 momentarily whilst remaining choppy.
Away from the hard/soft Brexit talks and Trump hiring his son-in-law as a top senior advisor, Turkey appears to have crept back into the headlines as political uncertainty mounts, social and security instability ensue, and the country’s economic outlook looks increasingly bleak.
Politically, the country’s parliament yesterday voted ~⅗ in favour of a constitutional amendment - and can thus hold a referendum in Q2’17 - which could see President Erdogan gain even more presidential power and potentially increase his term to as far out as 2029.
Happy Thanksgiving to those of you celebrating today. Donald Trump’s call for unity in his Thanksgiving holiday address was well received; we do hope that divisions globally begin to heal.
Today should be a typically quiet market day with the US out feasting on ~46 million turkeys. Obama performed his last ever turkey pardon as president with Tot and back-up ‘vice-turkey’ Tater living to fight another day. Meanwhile back in the UK, one of our colleagues is still trying to track down a Meleagris gallopavo.
As was widely expected, rating agency Moody’s downgraded Turkey’s Baa3 long-term rating by one notch to junk, Ba1. Moody’s cited 'The increase in the risks related to the country’s sizeable external funding requirements' and 'the weakening in previously supportive credit fundamentals particularly growth and institutional strength' as the main drivers for the downgrade. A report from Moody's also highlighted the country’s susceptibility to event risk as ‘high’ adding its concerns over the country’s vulnerability to political instability and geopolitical risks emanating from ‘Syria’s ongoing civil war and the crisis in Iraq.’ After the failed coup in July, Standard and Poor’s swiftly downgraded the country’s rating to BB, however Moody's said it would take time to review the situation later stating, ‘The risk of a sudden disruptive reversal on foreign capital flows, a more rapid fall in reserves and, in a worst-case scenario, a balance of payments crisis has increased”. Fitch is the only major rating agency to maintain an investment grade rating on the country; at BBB-.
After the failed coup attempt last weekend, yesterday S and P downgraded Turkey’s sovereign credit rating from BB+ to BB adding that the outlook has also became negative. In a statement after the downgrade the rating agency said, "Following the attempted coup in the Republic of Turkey on July 15, we believe the polarisation of Turkey's political landscape has further eroded its institutional checks and balances" adding that there would be “a period of heightened unpredictability that could constrain capital inflows into Turkey’s externally leveraged economy”.
Back in April we wrote about the inflated concerns over the decline of Chinese foreign exchange reserves. Since then China’s reserves seem to have stabilised around the USD 3.2tn level. As we argued, this should be more than sufficient to counter capital flight and attacks on the currency due to China’s overall creditor position, relatively low levels of liability dollarization, diversified export economy and exaggerated level of M2 money supply and liquidity. Given such considerations the simplistic IMF formula for estimating the adequacy of emerging country reserves should be adjusted substantially lower for China. Combining such an adjustment with the stabilising trend of the last 6 months should provide confidence that Chinese officials have the financial and policy resources to achieve their objectives as they move towards becoming an official global IMF reserve currency in 3 months’ time and beyond.
With the Fed having finally started raising rates, one of the major uncertainties is now behind us. The extent of future rate hikes by the Fed will depend on the evolution of economic data throughout 2016 with the median consensus forecast being 1.25%. Our own forecast is for a lower Fed funds rate with 1% being the most likely outcome given the significant downside risks to global growth.