Lira Collapses Again as White House Turns Screws and Analysts Eye New Record Lows

-TRY hits ropes again as Trump lashes out and Mnuchin Turn Screws.

-Analysts forecast record highs for the USD/TRY and GBP/TRY rates.

-Turkish state "on its way to the IMF" if Erdogan doesn't change course.

Image © Adobe Stock

The Lira hit the ropes again Friday after President Donald Trump condemned Turkey's detention of Pastor Andrew Brunson and Treasury Secretary Steven Mnuchin said the US is preparing further sanctions against the government, which could tip the currency over the edge ahead of the weekend.

Turkey's Lira was left sitting on an -82% 2018 loss last Friday due to an escalating dispute between Ankara and Washington and fears of what a politically compromised central bank might mean for the currency and economy further down the line. 

Above: USD/TRY rate shown at hourly intervals. Captures price action to Friday, 10 August.

But it rose close to 30% this week after Qatar announced a substantial investment in the country and following intervention by the Central Bank of the Republic of Turkey (CBOT).

However, President Trump's latest remarks about Pastor Brunson and Mnuchin's admission that further sanctions are in the pipeline sparked renewed losses this Friday. 

Turkey has taken advantage of the United States for many years. They are now holding our wonderful Christian Pastor, who I must now ask to represent our Country as a great patriot hostage. We will pay nothing for the release of an innocent man, but we are cutting back on Turkey!

— Donald J. Trump (@realDonaldTrump) 16 August 2018

"As you know, we were very clear with our counterparts there — both Secretary Pompeo and myself — on the release of the pastor. We’ve put sanctions on several of their cabinet members. Working with you, we have more that we’re planning to do if they don’t release him quickly," says Treasury Secretary Steven Mnuchin, in a cabinet briefing of President Trump.

The USD/TRY rate was quoted 5.23% higher at 6.13 during early trading in London Friday and is up 65.49% this year, while the Pound-to-Turkish-Lira rate was 5.25% higher at 7.85 and is up 56.2% in 2018.

Above: Pound-to-Lira rate shown at daily intervals.

Ankara and Washington have locked horns over the detention of US pastor Andrew Brunson, who is being held in Turkey over alleged terrorism offences connected with the failed 2016 coup. 

President Trump has spoken out in favour of Brunson and authorised an increase in steel and aluminium tariffs against the country, while the US Treasury has imposed sanctions on two Turkish ministers responsible for Brunson's incarceration.

Analysts warned this week that, without "sharply higher interest rates" and a credible commitment to central bank independence among other things, it was only a matter of time before the Lira collapse resumed.

Turkey's interest rate is at 17.75% but its inflation rate rose from 15.3% to 15.8% in July and President Recep Tayyip Erdogan is preventing the CBOT from raising rates any further. He told a rally of supporters last weekend; “If we don’t minimise this interest rate, it is a vehicle of exploitation that will make the rich richer and the poor poorer.”

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On its Way to the IMF?

Strategists at Skandinaviska Enskilda Banken (SEB) say the Turkish state could be "on its way to the International Monetary Fund (IMF)" unless the government changes course. The 2018 fall in value of the currency has significantly increased the Lira cost of servicing and repaying Turkey's foreign currency debts. 

As a result, not only will the Turkish state find its budget under increasing pressure from the rising cost of servicing government debt, it may also be called upon to bail out the financial system because Turkish banks also have high levels of foreign currency debts. 

That puts President Erdogan between a rock and a hard place given the centrepiece of his 2018 election campaign was a pledge to boost Turkish economic growth.

It is not clear whether the Turkish government would even be able to borrow sufficient funds from markets to cover the cost of any potential bailouts. And then there's the global implications. After all, the Euro also tumbled last week as financial markets fretted over the exposure the region's fragile banking sector might have to Turkish borrowers.

"Turkey is in trouble partly because its central bank’s independence is undermined by the country’s autocratic president. The Turkish central bank cannot credibly commit to its 5% inflation target as long as Erdoğan rails against the necessary rise in interest rates," says Holger Schmieding, chief economist at Berenberg Bank. "Turkey suffers the fallout from a credit binge that has gone too far. [It] has a ballooning current account deficit (so far on course for 6.5% of its GDP) that it needs to finance through capital inflows."

The SEB team say the USD/TRY rate will reach a record high of 8.80 in 2018. If at that time the Pound-to-Dollar rate traded at the 1.2708 level it was quoted at Friday, this would put the Pound-to-Lira rate at 11.18, which would also be a record high.

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