Head of FX Strategy
The rout in the Turkish lira has worsened over the last couple of sessions; the currency is down another 1.5% and more today on top of similar losses yesterday versus the greenback. USDTRY has hit a new all time low at 4.66 to the USD in today’s trade.
Adding to the negative sentiment today was a Fitch warning that Turkey’s debt could be in for a downgrade on the other side of the June 24 presidential election if this leads to the Ankara government threatening central bank independence. In recent weeks, Erdogan – seen an easy victor in that election – has explicitly warned of political involvement in setting interest rate policy.
The wait until the election seems unbearable as it is over a month away and investors may fear drastic measures to stem the outflow of capital. Turkey’s credit spreads have vaulted wider far more quickly than other emerging market peers recently and continued to worsen over the last week or more even as the outlook for other EM’s improved slightly, as we covered in our most recent EM FX Weekly publication.
The next regularly scheduled Turkish Central Bank meeting is more than two weeks away on June 7 and it is hard to imagine the central bank can maintain silence until then at the current pace of TRY devaluation (spot exchange rate has declined some 20% versus the USD since March and the pace of depreciation accelerated over the last two to three weeks). Without firm central bank action and/or reassuring words from Erdogan, an ongoing negative spiral in TRY is a prominent risk for the near term.
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Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
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