Is The Turkish Lira Doomed?

[Swordsmyth]

Just days after we exposed the possibility that Turkey is misrepresenting its dollar reserves (using swaps to inflate its levels), Bloomberg reports that the Erdogan administration has imposed soft capital controls on large retail dollar purchases to stem outflows.
The lira has been rallying all day amid chatter of heavy bank-buying (at the suggestion of authorities to support debt auctions), but as headlines hit about the capital controls, the lira began to slide.
Bloomberg reported that, in the latest sign of their increasingly interventionist approach to policy-making, Turkish authorities asked some of the nation’s primary dealers to support the government’s borrowing drive last week, according to three people with direct knowledge of the matter.
And now banks should settle all retail transactions valued at $100,000 or higher one working day later, according to a document the banking regulator sent to lenders on Monday, which was seen by Bloomberg and verified by three bankers.

​

This is a major red flag suggesting that Turkey (and/or its banks) are running dry of dollars to stem the capital flight.

More at: https://www.zerohedge.com/news/2019...es-soft-capital-controls-retail-dollar-buyers

 

[Swordsmyth]

What do you do if you have borderline hyperinflation coupled with accelerating capital flight and a collapse of international confidence in your country's institutions? In Turkey, the answer is apparently to cut rates.
That's what the Turkish central bank did early on Tuesday when it effectively rolled back a limited tightening of monetary policy which it delivered just days prior in the latest policy flip-flop by an increasingly chaotic monetary authority, hammering the lira - which is desperate for higher rates - just weeks before President Erdogan’s party seeks to regain control of Istanbul in a bizarre and controversial rerun of local elections.
Two weeks after the Turkish central bank tightened monetary policy, a move which did nothing to boost confidence in the lira, the regulator went for broke and on Tuesday said that it will offer funds at its cheapest rate of 24% through the repo auction, 150 basis points lower than the overnight rate of 25.5% it used for almost two weeks. Today's announcement came less than a week after Turkey re-introduced a 0.1% tax on most large foreign-currency transactions, a sign the authorities are trying to stem the dollarization of the economy before municipal elections in Istanbul in June.
The panicked decision follows a slew of failed measures meant to prop up the currency before next month’s elections. As Bloomberg note, "some of these steps have raised concern that the government is taking on a larger role in managing the market", which is a polite way of saying Turkey is preparing to implement capital controls next. Officials have repeatedly said Turkey would adhere to free-market policies.
The implicit easing comes even though Nomura's economist Inan Demir said that Turkey had no need for monetary loosening at this stage, although clearly Erdogan disagrees. "The pace of domestic economic activity may argue for easier monetary conditions but clearly the FX market stress is too big to allow that,” Demir told Bloomberg.
The problem is that Turkey is now in all-out currency defense mode and has tried everything, including both tightening and easing monetary conditions, with the erratic moves now prompting nothing but more selling of the currency. Here are some of the recent measures by Turkish authorities:

• May 21: Lenders are told to wait one day before settling some large foreign-currency purchases. Some of the nation’s primary dealers were also asked to support the government’s borrowing drive last week, according to three people with direct knowledge of the matter
• May 15: A 0.1% tax is reintroduced on some foreign-currency transactions to prevent speculation in foreign exchange and bolster the state’s income
• May 9: The central bank ceased to provide liquidity at its cheapest rate of 24% by suspending one-week repo auctions
• May 6: A new swap instrument is implemented by the central bank that will allow it to bolster its reserves by borrowing gold from commercial lenders

Rabobank's Piotr Matys summarized the non-stop chaos coming out of Ankara best:

"At the time when Turkey needs to restore confidence in the lira among households, corporates and foreign investors, contradicting measures have been announced. Such conflicting measures make Turkey increasingly unpredictable to foreign investors who will remain reluctant to deploy their capital despite an attractive valuation of Turkish assets."
​

The Turkish lira tumbled as much as 0.9% after the bizarro rate cute before eventually stabilizing some 0.4% against the dollar.

Unfortunately for Erdogan, the fat lady has already sung: since the beginning of the year, residents - who know the local economy best - have bought around $20BN of hard currency, driving their holdings to a near record of more than $181b. The purchases were a key source of strain on Turkey’s currency, the worst performer in emerging- markets this quarter, and suggest that only a wholesale confiscation of FX holdings can save the lira. Judging by Erdogan's prior actions, that is very likely his next step.



https://www.zerohedge.com/news/2019...tion-turkey-bizarrely-cuts-rates-lira-tumbles

 

[Swordsmyth]

The Turkish Lira tumbled as much as 1% against the dollar, leading a decline across emerging markets...

... while Turkish stock market losses accelerated as the Borsa Istanbul 100 Index falls 1.5%, declining for a 6th day and 13 of the past 14, to touch the lowest level since January 2017, effectively entering a bear market, having tumbled 20% from the March highs.

While there wasn't a specific event behind today's mauling of Turkey, which to many investors has become the canary in the emerging markets coalmine, the selling picked up after Turkey said soldiers had been dispatched for training in Russia ahead of the delivery of the S-400 missile-defense system. As Defense Minister Hulusi Akar said additionally, as the deadline of S-400 system delivery looms, Turkey will send more personnel for training in the coming months.

More at: https://www.zerohedge.com/news/2019...-bear-market-after-us-issues-ultimatum-russia

 

[Swordsmyth]

Friday the US decided to stop accepting any additional Turkish pilots who were set to come to the United States to train on F-35 fighter jets, officials told Reuters in a clear sign of the escalating dispute over Ankara’s plans to purchase Russian air defenses. The NATO member states have sparred publicly for months over Turkey’s order for Russia’s S-400 air defense system, which Washington says poses a threat to the Lockheed Martin Corp F-35 stealthy fighters, which Turkey also plans to buy.

The US position is simple: Turkey cannot have both, but has avoided taking steps until now to curtail or halt planned training of Turkish pilots in the program, a reprisal that could be seen as an embarrassment in Turkey.
Reuters sources said that the decision could still be reversed, if Turkey altered its plans, however so far Erdogan has refused to do so, oblivious of the escalating war of words from the US, which may soon resort to implementing fresh tariffs on Ankara, whose economy has seen a sharp contraction ever since the issue first came to a head last summer. The sources said the decision so far only applied to upcoming rounds of Turkish pilots and maintenance crews who would have normally come to the United States.
According to Reuters, there has not yet been a formal decision to halt the training of the Turkish pilots and maintenance crews now at Luke Air Force Base in Arizona, although a separate report last week said that the step was being seriously considered.


The announcement of the decision on the pilots follows signs that Turkey is moving ahead with the S-400 purchase. Defense Minister Hulusi Akar said on May 22 that Turkish military personnel were receiving training in Russia to use the S-400, and that Russian personnel may come to Turkey. Separately, president Erdogan said on Tuesday it was “out of the question” for Turkey to back away from its deal with Moscow.
Kathryn Wheelbarger, one of the Pentagon’s most senior policy officials, said last week that Turkey’s completion of the transaction with Russia would be “devastating,” dealing heavy blows to the F-35 program and to Turkish interoperability within the NATO alliance.

“The S-400 is a Russian system designed to shoot down an aircraft like the F-35,” said Wheelbarger, an acting assistant secretary of defense. “And it is inconceivable to imagine Russia not taking advantage of that (intelligence) collection opportunity.”
​

News of the escalation sent the lira sliding, ending a whopping 10-day streak of gains for the Turkish currency, the longest since May 2014, as traders returned from the 3-day Eid break.

Not helping the currency was an announcement by the country's finmin (and Erdogan son-in-law) said inflation may fall to single-digit levels (which is impossible unless the government gives the "China" treatment to its economic data), which however would suggest the central bank would be more likely to cut rates sooner.

More at: https://www.zerohedge.com/news/2019...er-us-refuses-accept-more-turkish-f-35-pilots

 

[TheTexan]

Lira... is that like a Liger?

 

[Danke]

I trained Turkish fighter pilots, they are pretty bad.

 

[Swordsmyth]

When it rains, it pours for Turkey, which already saw its currency slump earlier in the day when its foreign minister, Murat Cavuosglu, said that Ankara is ready to retaliate to any US sanctions imposed upon the NATO member state by the US over Turkey's purchase of a Russian S-400 missile system. And then, with markets set to close for the day and today's pounding of the Turkish lira put in the history book, Warren Buffett's favorite rating agency, Moody's, delivered what tomorrow will surely be called an act of aggression and prompt Erdogan to expel any Moody's employees from Turkey and confiscate any office they may have in the country, namely a downgrade of Turkey deeper into junk territory, cutting its credit rating by one notch from Ba3 to B1, outlook negative.
As Moody's explained "today's downgrade reflects the view that the risk of a balance of payments crisis continues to rise, and with it the risk of a government default." Pretty self-explanatory.
The news spiked the lira - which continues to be inexplicably bid after every incremental piece of bad news by "unknown" traders - as much as 300 pips lower, before the loss was cut in half, and the USDTRY closed the day at 5.8951. Of course, now that not only is Turkey's sale of sovereign debt going to be that much more expensive, but once Trump does in fact hike tariffs on Turkey, there will be the usual bevy of "traders" angrily asking how they failed to sell the lira at the current extremely generous levels when they could. And if they don't, we will remind them.

More at: https://www.zerohedge.com/news/2019...s-downgrades-b1-warns-government-default-risk

 

[Swordsmyth]

Turkish president Erdogan has decided that the best way to respond to Trump's threats is with threats of his own, and on Thursday, Erdogan said that Turkey will retaliate against any U.S. sanctions imposed when it takes delivery of the Russian S-400 missile-defense system from Russia, refusing to back down from a dispute that has roiled the NATO alliance.
"We would have our own sanctions against them,” Erdogan said in a meeting with foreign journalists on Thursday, without elaborating. While relations with U.S. President Donald Trump “are really good,” he said, “our ties with people working under him are far more different."
Additionally, ending any debate over whether Turkey will terminate the deal with Russia as Congress has demanded, he said that delivery of the S-400 missile system to Turkey may start in the first half of July and the Turkish military has already decided where to deploy it.


Washington has warned that Turkey would be expelled from Lockheed Martin Corp.’s F-35 program and face sanctions under two pieces of legislation that allow the punishment of entities doing business with parts of the Russian state.
Erdogan responded in typical fashion, saying “it’s not the end of the world” if Turkey can’t get F-35 fighter jets from the U.S. “Turkey can purchase similar jets from other countries in the world,” he said, clearly referring to the rising China-Russia axies, while warning that "We will get our money back first through international arbitration." Turkish companies were set to produce parts worth billions of dollars for the jet, and the air force planned to buy about 100 of the planes. Deliveries of F-35 equipment to Turkey have been suspended.
As Bloomberg notes, Turkey has dug in on buying the Russian missile-defense system because trust in Washington has broken down on multiple fronts in recent years, and because Ankara is convinced the U.S. can’t replace it strategically with another ally, people familiar with official thinking have said. The U.S. views Turkey’s grievances much differently.
News of Turkey's proposed retaliation did not help risk sentiment, and with the lira trading near session highs on the day following Powell's dovish reversal, the headline sent the TRY plunging by as much as 14 big figures as a bevy of stops were taken out, sparking a mini flash crash, before stabilizing near 5.78

More at: https://www.zerohedge.com/news/2019...reatens-us-retaliation-against-any-us-missile