In the latest “flash-crash” episode for the market, the Turkish Lira suffered a sharp and sudden fall overnight plunging around 13% against the US Dollar. TRY has been under increasing pressure this year as a stronger US Dollar and domestic economic concerns have weighed on prices, with the CBRT seemingly unable to stop the declines with their policy adjustments this far.
This latest fall in TRY, which is now down more than 30% against USD on the year, comes as the US imposed fresh sanctions against the state, following the failed negotiations to release the imprisoned US Pastor Andrew Brunson. Brunson was imprisoned in the country two years ago for his alleged ties to the Gulen movement run by Islamic cleric Fethullah Gulen who was accused of organizing the failed military coup in 2016.
There have been increased concerns voiced over the continued fall in TRY. The most recent concern was voiced by Europe’s Chief financial watchdog and refers to the contagion faced by Turkey’s biggest lenders namely BBVA, UniCredit and BNP Paribas. The Single Supervisory Mechanism, which is the branch of the ECB was tasked with monitoring the activity of the Eurozone’s largest banks and has been investigating links between its key lenders and Turkey.
Goldman Sachs Highlights Concerns
Although the SSM does has not classified the situation as critical, it notes the aforementioned banks as being particularly exposed which is creating concern given the dramatic collapse in TRY this year and the inability of the CBRT to halt it. The main concern for the ECB is that Turkish borrowers will not be hedged against TRY declines and could, therefore, begin to default on foreign currency loans which account for around 40% of the assets of the Turkish banking sector. Indeed, in a note released earlier in the week, Goldman Sachs indicated that the depreciation in TRY “could largely erode bank’s excess capital” and the level mentioned was TRY7.1 against USD.
The fall in TRY is also creating a high level of domestic concern, which has not been properly addressed yet by the government or the CBRT. Speaking briefly on Thursday night, President Erdogan touched on the currency issue to lambaste those who he accuses of waging “various campaigns” against Turkey saying that “if they have Dollars, we have our people, our righteousness, and our God”.
Market Awaits Turkish Response
The country’s finance minister Berat Albayrak is scheduled to speak today to announce a “new economic model” for the country which will reportedly outline steps to reduce the budget deficit, reduce debt and close the large current account gap.
For now, the market awaits the response of the government and the CBRT. Many are expecting a rate hike to come imminently, though given the lack of efficacy in recent hikes it is questionable whether this will be enough to address this issue.
The line chart above shows the extent of the TRY flash crash with USDTRY surging from 5.8824 to 6.2096 in just 60 seconds. Prices have since retraced and fallen back down to around where they had started, though the fear now is of further losses. With USDTRY having printed fresh all-time highs on the move there are no further topside levels to look for and so, for now, traders wait to see if the high mark will be tested again.