The international credit rating agency, Moody, downgraded 20 Turkish financial institutions on Tuesday, citing an increase in risk due to a deteriorating economic scenario. The downgrade sparked another round of selloffs leading the lira to 6.5145 against the greenback, down from the close of 6.1200 on Monday. The Turkish currency weakened as investors assessed the country’s efforts to manage its dispute with the US.
Berat Albayrak, Turkey’s Finance Minister, has opined that the US trade sanctions against Ankara could destabilize the Middle-East. So far this year, the currency has lost about 40% of its value. The issue began with Turkey refusing to heed to America’s demand of unconditional release of an evangelical Christian pastor who is being held captive by the Turkish government on charges of terrorism.
Turkish behavior angered US President Donald Trump who slapped duties of 25% and 50% on aluminum and steel imports from the country. Turkey retaliated with namesake import duties on US products. Furthermore, the Turkish central bank announced a number of measures to halt the currency from sliding further, but investors are not convinced that these proposals will strengthen the fiscal situation of the country.
On the broader spectrum, investors are concerned about the direction of fiscal and monetary policy under President Erdogan. The President, a self-proclaimed “enemy of interest rates” has been increasing the pressure on the central bank to keep the interest rates down. To strengthen his position, Erdogan appointed his son-in-law Albayrak as finance minister.
The Wall Street Journal had reported on Tuesday that Germany is considering providing emergency financial aid to Turkey on contagion fear, however, it was denied by a German official who stated: “You can’t do much from the outside but to stress that Turkey must reform itself.”
Later that day, Moody’s announced a downgrade of the country’s financial institutions and stated that there is a “substantial increase in the risk of a downside scenario. Turkish banks are highly reliant on foreign currency funding.”
Moody’s senior analyst and vice president, Carlo Gori, and Managing Director, Sean Marion, have also warned of an impending funding crisis in Turkey: “In the next 12 months around USD77 billion of foreign currency wholesale bonds and syndicated loans, or 41% of the total market funding, needs to be refinanced. The Turkish banks hold around USD48 billion of liquid assets in foreign currency and have USD57 billion compulsory reserves with the Central Bank of Turkey, which would not be entirely available.”
The analysts further stated: “In a downside scenario, where investor sentiment shifts, the risk of a prolonged closure of the wholesale market would lead most banks to materially deleverage or to require external funding support from the government, or the Central Bank.”
Investors are also concerned about the US Treasury investigation into Halkbank (HALKB.IS), a state-owned Turkish lender. Many investors fear that the bank could face a substantial fine over allegations of breaking sanctions on Iran. The bank has denied the charges and has said that it has acted within legal boundaries.
Turkey and the US are at loggerheads over their conflicting interests in Syria, and the US is also unhappy about Ankara’s plan to purchase Russian defense systems.
Data released yesterday shows that Turkey’s economic index has plunged to 83.9 in August, from 92.2. Commenting on the decline, Tim Ash, an economist at BlueBay Asset Management, stated: “I think [this is] a pretty clear reading of a very hard landing.”
Ash further stated: “At this point in time, Turkey has become pretty much un-tradable. The market wants to see specific delivery on policy whether that is monetary, fiscal or action to clear up problems in the banking sector.”
To recover from the blow, Turkey is trying to renew its relationship with Europe, despite disagreements on a range of issues. Albayrak, who met his French counterpart in Paris on Monday, stated that the US sanctions could encourage terrorism and increase the refugee crisis.
The Turkish Prime and Finance Ministers are also planning to go to Germany at the end of September. However, Nigel Rendell, an analyst at Medley Global Advisors LLC, London, believes that the problem is within the system and can not be resolved through outside assistance. Nigel Rendell said: “The change in banks’ overnight borrowing limits is aimed at trying to ease pressures on the banking system, rather than tackling Turkey’s underlying problem, which remains persistently high inflation.”
Rendell further stated that the decline of the Turkish lira would continue until the monetary policy is set right. He opined that if the central bank is seriously interested in solving the inflation problem, it should raise interest rates by at least 500 basis points. So, a combination of all these factors is expected to keep the lira in a downward trend.
When uncertainty increases, demand for the greenback, yen, Swiss Franc, and gold increases. Additionally, the US economy is expanding at a much rapid pace than the rest of the developed nations. Therefore, the greenback is expected to further strengthen against the lira.
Technically, the USDTRY pair is in a long-term uptrend, as shown in the image below. The currency pair is moving along the ascending channel, with strong support at 4.78. Therefore, traders can expect the greenback to gain further ground against the lira.
Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.
