22 March 2019 by jbchevrel
Turkey went under pressure today with its currency depreciating about 6% vs USD intra day and its CDS closing more than 50bp wider. This is following a succession of developments. 1/ The main factor is speculation the CBT might be using reserves to support the currency before local elections on March 31. According to Bloomberg, the central bank’s weekly balance sheet reported that net international reserves fell -$6.3B in the two weeks through March 15 to $28B. That decline was unexpected and unexplained. 2/ The macro backdrop is that growth concerns cast doubts in EM sentiment, despite more dovish DM central banks’ stances. In particular, the US rates curve inverted between the 3m point and the 10y, for the first time since…2007! 3/ Comments by Erdogan criticizing Trump’s stance on Golan Heights could have been expected, realistically, but are still a sign of divergences between Turkey and the US, on the geopolitical front. 4/ With the elections approaching (Mar 31 / mayors and municipal councilors will be elected), demand for USD has picked up significantly from both local and offshore accounts. 5a/ Snowball effect: this PM, brokers including JP Morgan advised clients to go long $TRY targeting 5.90, although that’s now just 2.5% from us. They argued that political authorities will pay less attention to lira stability post Mar 31 elections, and that the pace of FX reserve consuming is unsustainable. 5b/ The rating agency Fitch added said that they expect Turkey to contract in 2019. In reaction to these market developments, the CBRT tightened supply by effectively suspending its 1-week 24% repo facility for an unknown period of time. A hike at this point in time would probably not please Erdogan much. CBT also argued that the drop in reserves was not due to an extraordinary situation, and that they remained committed to accumulating FX reserves. Adding to this, the Minister of Finance Albayrak said that Turkey will post a CAS in summer, that 2019 GDP growth would surpass the 2.3% expectation and that inflation would slow down back to single digits in Q3. Those ‘reassuring’ comments failed to stop the lira from weakening, post CDS effective close. The last time I entitled a comment about Turkey ‘Roasted’ was on August 10. For reference, back then, Turkey CDS was 40bp wider, TRY was 17% lower vs USD, TRY 1w repo rate was 625bp lower, 10y US yields were 40bp higher.