FX Update: Turkish whiplash

2021年3月22日

Summary: The Turkish lira suffered an enormous gap lower on the opening of trade this week after Turkish president Erdogan fired the hawkish former central bank chief and replaced him with someone more sympathetic with his own views on interest rate policy and inflation. Lira longs are suffering a brutal case of whiplash after the bigger than expected rate hike just last week. Elsewhere, little collateral damage was felt across EM, while sterling and commodity currencies are struggling for further upside inspiration.

FX Trading focus: Turkish whiplash on another central bank chief firing

We had a USDTRY move for the ages on the open of trading this week after Turkish President Erdogan fired the orthodox central banker Agbal who just last Thursday had ordered up a larger than expected rate hike last week to help further boost the lira from a prior bout of weakness. Replacing Agbal is Sahap Kavcioglu, a prominent critic of Agbal’s policy, as well as a former legislator and party comrade of Erdogan. The whiplash was profound for TRY traders, coming as it did just after the hawkish move last week, as the presumption is that Kavcioglu will want to unwind some portion of the 875 basis points of policy tightening carried out by Agbal. Some further thoughts and questions on the situation from here:

• Turkey has very little leeway to deal with a new currency crisis without either defaults or capital controls, as it already has a “net negative reserves” position in foreign currencies, i.e., the country’s leadership has dipped into private sector foreign currency holdings to defend the Turkish lira
  
• Could Erdogan use Turkey’s debt load as leverage to wring concessions or aid from abroad, from Europe and elsewhere? The saying goes that if I owe you a million dollars it is my problem, but if I owe you a billion it could be your problem. Turkey owes over $400 billion in external debt, with a significant portion of that owed to foreign denominated currency terms to banks (especially European banks) and investors. That is more than 50% of Turkey’s GDP, far short of levels that have triggered EM crises in the past. Select EU banks were under some pressure today, but the market looks somewhat complacent on the risk. This is merely asking the question, by the way, not saying this is the route President Erdogan will take.
  
• Capital control risk if the default route not taken. Capital controls are a last resort and can take many forms, and the Turkish authorities asserted that they will continue to allow the free market to function. But at some level of distress, capital controls, on a sliding scale from soft measures like making speculation in the currency difficult, to harder measures becomes a risk.
  
• The pressure on the lira, even at a level of 8.00 in USDTRY, is very much to the downside for the lira, which could be on the course to 10.00 if left up to market forces and if the central bank now follows through with
  

Odds and ends

US Treasury yields are easing lower in what looks like a critical week for treasuries after last Thursday’s peak in yields. Were it not for the Turkish lira sending a few shockwaves in JPY crosses (TRY longs popular among Japanese carry traders), and into the Euro and EM, the US dollar might be more offered than we have so far seen today. The critical level for EURUSD remains 1.2000, while the pressure on some commodities prices has taken other USD pairs away from important levels – like 0.7850 in AUDUSD. We have a veritable parade of Fed appearances on tap for this week, including Fed Chair Powell and Treasury Secretary Yellen testifying on the CARES act before a House Panel tomorrow and a Senate panel on Wednesday, although we will likely fail to find new information or impressions in the mix after Powell fairly well spelled out the Fed’s stance on the policy rate and its attitude on treasury yields for now. More important will be the Treasury auctions this week, particularly the 5-year auction on Wednesday and the 7-year auction on Thursday. Among Fed speakers, I am more interested in hearing what Vice Chair Clarida has to say on Thursday (Q&A inclusive) for any whiff of how the Fed views the longer-term dynamics of the treasury market vis-à-vis its asset purchases later this year when treasury issuance will have to pick up pace considerably. He will doubtless try to avoid saying anything worth hanging our hats on.

GBP ready to consolidate some more? Sterling feels a bit heavy since late last week after two recent rejection of approaches on 1.4000 by GBPUSD and below 0.8600 in EURGBP. Nothing more than a consolidation, perhaps driven by a too one-sided market and little further, if anything that the UK can wring out of its faster pace of vaccination which will allow a fuller opening up months before much of the EU. Thoughts on technicals in the chart below.

Chart: EURGBP – time for a consolidation
We are noting a number of recent pronounced trend in consolidation and wonder whether sterling could be in for another round of weakness versus the euro after a very long run with little in the way of consolidation. Next important levels for EURGBP include the pivot high near 0.8730 and then the 38.2% retracement of the last large sell-off wave right near 0.8800. Patient and under-positioned sterling bulls will look to scale into positions a s long as the pair remains below perhaps 0.8900 or the old pre-2021 range low near 0.8860.

Commodity FX looking a bit tired? – last week, oil consolidated sharply, and iron ore futures were on the defensive and posting multi-week lows overnight as China widened steel production cuts (amidst a bad breakout of polluted air in major cities). Lockdowns in Europe (and one might add rising case counts in some US states) are likely raising concerns at the margin that the economy will be slower to recover from the pandemic than hoped – certainly a growing percentage of the tourist season in Southern Europe this year is going to be a bust. Still, it is encouraging that US vaccine production is set to triple this month relative to February and that vaccine exports for the rest of the world are likely to ramp aggressively soon from there, once the problem in the US switches to convincing skeptics to take the vaccine rather than any limitations in doses or healthcare workers to administer them.

John Hardy
Head of FX Strategy

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