Chart of the Week : Turkey 5Y CDS
Head of Macro Analysis
Summary: Our 'Macro Chartmania' series collects Macrobond data and focuses on a single chart chosen for its relevance.
Click here to download this week's full edition of Macro Chartmania.
Today’s edition focuses on Turkey. The country’s 5-year CDS has receded from its peak of mid-March, but it is still elevated at 441bp, which is way above its long-term average of 345bp. This relative improvement is mostly due to U.S. dollar weakness which is typically favorable to EM markets and especially the Turkish market. However, upward risk remains as political interventionism is still driving monetary policy and preventing the CBRT from committing to hike interest rates. Facing a balance of payment crisis, in our view, Turkey has little choice but to increase rates. The strategy which has consisted in using state banks as front line in defence of the TRY exchange rate has been a complete failure. The Turkish lira has dropped another 0.76% last week, bringing YTD depreciation to 24.18%. This makes the TRY the 2nd weakest emerging currency, just after the Brazilian real which has decreased by almost 35% versus the USD over the same period. Turkey should follow Kazakhstan’s example. In March, the country decided to let the FX rate go and hiked aggressively rates by 275bps in one shot and since then the tenge exchange rate has stabilized and the central bank has been able to cut rates back down to 9% to stimulate the economy. This is the only correct and rational path to choose if the CBRT wants to avoid more drastic measures in the near future, i.e. capital controls and debt restructuring.
Latest Market Insights
Outrageous Predictions 2023: The War Economy
- The constantly growing global need for energy drives the world's richest to huddle up and launch a R&D project in a size the world hasn't seen since the Manhattan Project gave the US the first atomic bomb.
French President Macron resignsThe political stalemate in France and the rise of Marie Le Pen following the 2022 elections corners President Macron, forcing him to give up on politics and resign from his position. At least for now.
Gold rockets to USD 3,000 as central banks fail on inflation mandateAs markets and central banks realise that the idea that inflation is transitory is wrong, and that prices will remain higher for longer, gold is sent through the roof, hitting a price tag of USD 3,000
EU Army forces EU down path to full unionWith continued challenges in the region and a US military that isn't aggressively enacting its former role as global policeman, the European Union agrees to create its own armed forces, bringing the whole region closer.
A country agrees to ban all meat production by 2030In an effort to become one of the global leaders on the path to net-zero emissions, one country decides to not only put a heavy tax on meat, but to ban domestic production entirely.
UK holds UnBrexit referendumFollowing a recession and domestic pressure, the United Kingdom is thrown into political turmoil that will end with a vote to wind back Brexit.
Widespread price controls are introduced to cap official inflationHistory tells us that with the war economy comes rationing and price controls. And this time is no different, as policymakers introduce strict price controls that lead to a range of unintended consequences.
OPEC+ & Chindia walk out of the IMF, agree to trade with new reserve assetSanctions against Russia have caused widespread turmoil due to US Dollar moves in countries across the globe that don't consider the US an ally. To relieve themselves from this, they leave the IMF and create a new reserve asset.
USDJPY fixed to the USD at 200 as Japan overhauls financial systemFollowing the challenges that faced the Japanese Yen in 2022, the Bank of Japan attempts to keep the currency from sliding. Unsuccessful on the long-term, Japan will launch a reset of its entire financial system.
Tax haven ban kills private equityWith the war economy comes an increased focus on national interests and sovereign nations' ability to assert themselves. In that regard, the OECD countries turn their attention on tax havens and pull the big guns out, banning them altogether.