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 #USD
Almost across the board #USD has been trending or being bearish for the last few months. There were exemptions and the most notable one was #USDTRY.
With the upcoming FED rate decision in December, which the market expects to provide the long awaited rate hike, #USD is expected to pick up pace in most of its pairs. On top of that, more rate increases are considered very probable during 2018.
The effect of the upcoming and of any further rate hikes on the pairs of #USD with weak and vulnerable currencies is expected to be greater.
The fundamentals of the US do not justify any sort of major downtrend for the #USD.
Lastly events of international impact such as the North Korean crisis, as long as they remain in rational levels, have minimal and short lived effect on the #USD ,and they do not affect it in the long term.
In the long term #USD is not expected to enter any sort of major downtrend. On the contrary, it is expected to get stronger due to the increase of the FED rates.
The effects of a stronger #USD are expected to be greater in #USDTRY due to #TRY weaknesses and vulnerabilities. On the other hand the effects of any #USD mishaps, will probably have a lesser effect on #USDTRY for the same reasons.
Technical Indicators
As expected there is no sign of change in trend in the medium or long terms.
Based on the above #USDTRY positioning remains long.
There is no indication and no justified reason to expect that #TRY will reverse its trend and enter an enduring and stable appreciation cycle. On the contrary, it is highly probable that its depreciation will continue. The rate of it will be defined by Turkey's internal and external politics primarily and its economic data (in which no dramatic positive changes are expected) secondarily.
The market is well aware of all that and #TRY will continue to sustain speculative pressure.
A meltdown is not probable but cannot be excluded.
A switch to realistic politics, accompanied with positive economic data is not probable but cannot be excluded. However, even if it happened its effect on #TRY would be gradual since it is a slow and lengthy process.
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