Fundamental factors that will be affecting #TRY in the medium and long term.
An unstable economy. Growth is slowing and predictions are not positive. Current account deficit is large with no immediate expectations for improvement. Credit growth is weak. Corporate financing is becoming more expensive. Business climate is weak. NIIP is expected to be come more negative. Debt rating is non-investment graded with two out of the Big Three rating agencies giving it a negative outlook, and the third stable. Tourism has been hit hard because of political instability and security concerns. Inflation is far from accepted levels.
Lastly, it must be pointed out that the main drive behind the Turkish economy is domestic consumption backed by a huge increase in public expenditure and a hike in minimum wages. An increase in rates (as expected) could have a negative effect in domestic consumption.
Political instability and uncertainty. The political situation is turbulent to say the least, and as described by most western policy makers, far away form a functional democracy. This has been much more evident after the failed coup attempt. There is wide spread corruption in the public sector as well as in the business relations between the public and the private sector. Despite the fact that these facts are obvious to everyone now, this is not something new in Turkey and it is definitely not a creation of the current ruling party. This is the reality of the whole of the political elite. And this makes substantial changes and a gradual turn to a western standard economy a hard and lengthy process.
Relations between Turkey and the EU have hit an all time low and there is no signs of improvement. This affects the business climate and foreign investments as well as tourism and many other economic factors.
Relations with the US have also hit an old time low despite expectations that there would be an improvement with the Trump administration. In fact they got worse.
A tightening of the ties with Russia cannot provide any positive economic influence in any direct or indirect way.
The geopolitical situation is uncertain and there are internal and external factors that affect economic stability. Turkey is heavily involved in many hot areas in its eastern borders. The Kurdish issue remains unresolved. There have been many violent attacks internally during the last years. This last factor has devastated the tourism industry.
Lastly but not least, the impression to most investors (and probably the reality) is that in Turkey economics and politics seem to be going their own separate ways.
Whenever there is worsening economic data, terrorists, insurgents, Gulenists or "market speculators" are to blame.
The Central Bank is widely believed not to be independent and that its policies are dictated by politicians.
In general, it seems that policies internal or external are drawn and executed without any concern for their economic impact.
All the above factors do not provide a positive outlook for #TRY. They will continue to apply pressure on the currency in the medium and long term. Moreover, it will remain vulnerable to any political, geopolitical or internal negative developments, since it is under speculative pressure.
Rate hike by the CBRT
A rate hike has been long awaited and is expected by the markets during the CRBT meeting in December. Politicians have been resisting this move, but it is perceived by the markets that this resistance has been curbed by the decline of #TRY and rising inflation.
A rate hike could provide a short term reversal in the current downtrend of #TRY, as well as increased volatility in the related pairs.
However, in the medium and long term it might serve only as a break that could slow down the depreciation of the currency and not as a factor that could reverse its trend. The current trend is driven by economic data and the political situation.
In the unlike event that the rate is not increased as anticipated, the most likely outcome is that the pressure to #TRY will increase dramatically. This might force CRBT to take unscheduled action. This could happen without any notification as an economic adviser of the President has stated to Reuters. Hence great caution is needed when positioning in the market.
The #EUR
#EUR is currently in a long term uptrend. The data for the EU support that, and so does the data from Germany, France and other countries.
The dovish stance of the ECB as announced in its last meeting had little effect on the long term trend. This is expected to end and turn to hawkish sometime towardss the end of 2018.
Political fears that existed in the past that the monetary Union might be at risk have evaporated, and the EU is looking at greater integration in the long term.
Populist anti-EU politicians are on a decline across the Union and have lost credibility.
BREXIT is a factor of concern, but no significant changes should be expected in the coming months. Trade talks and the exit process will last for a long time. During that time #GBP will be far more vulnerable to speculation and volatility than the #EUR.
#EUR is in a fundamental uptrend that is expected to last. This is supported both by political and economic fundamentals.
This strength of the #EUR is expected to have a negative effect on the already weak and vulnerable #TRY when paired with the #EUR.
The FED rate hike
The anticipated rate hike by the FED during December, and the highly probable further hike (s ?) during 2018, will have a negative effect for #TRY on #USDTRY.
This effect is most likely to affect #EURTRY as well.
Technical Indicators
As expected, all long term technical indicators show no signs of reversal of the current trend.
As a result of the above, positioning on #EURTRY remains long in the medium and long term. Caution should be taken during the announcement of the rate decision. In case of a rate hike, an opportunity will arise to enter the market in low price.
The depreciation of #TRY is very probable to continue during the coming months. The opposite is very unlikely. Hence the uptrend of #EURTRY will continue.
A meltdown of #TRY is not likely in the immediate future but cannot be excluded in the foreseeable future.
Having said that, a stabilization of the economic data and an outlook for improvement, accompanied by a turn to realistic an stable politics cannot be excluded but it is considered highly unlikely by most analysts. Even if it happens it would be a slow and lengthy process that will have a gradual effect on #TRY.
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